Cost of borrowing — Failure to disclose all of the necessary information used to calculate a pre-payment penalty for a mortgage
Cost of Borrowing Regulations, subsection 6(4) and section 7
A federally regulated financial institution self-reported a consumer complaint to the Financial Consumer Agency of Canada (FCAC). The complaint concerned the prepayment penalty on her mortgage. As a result of the self-reporting by the financial institution, FCAC undertook a review of the institution’s mortgage prepayment penalty clauses.
The complainant disagreed with the institution’s calculation of her mortgage prepayment penalty. After reviewing the prepayment disclosure documents that the institution had provided to the consumer, FCAC determined that the prepayment penalty clause in the institution’s disclosure documents did not contain all of the information required to calculate the penalty.
As set out in legislation, federally regulated financial institutions are required, before entering into a loan agreement, to provide the borrower with a description of the formula they use to calculate a rebate, a charge or a penalty, in case the borrower wishes to exercise the right to repay the amount borrowed before the loan matures. Furthermore, the Regulations stipulate that the disclosure must be in plain language that is clear and concise. The disclosure must also be made in a manner that is logical and likely to bring to the borrower’s attention the information that the Regulations require to be disclosed.
The Acting Commissioner requested that the federally regulated financial institution enter into a Compliance Agreement with the Agency, which would include a commitment by the institution to undertake a full review of the mortgage disclosure documents it uses, to ensure full compliance with the Regulations. 1
This case reflects FCAC’s ongoing work with the financial institutions to improve the quality of disclosure in their mortgage documents. The Agency had previously undertaken a review of the disclosure documents on prepayment penalties in the mortgage documents of several financial institutions, and subsequently worked with these institutions to improve their disclosure statements as quickly as possible. In this case, the financial institution had no other violation on record and agreed to enter into a compliance agreement with FCAC, to improve the quality of its disclosure.
Measures taken by financial institution
The federally regulated financial institution has entered into a Compliance Agreement with FCAC and has made a commitment to update its disclosure documents so that they comply with the Regulations.
The intent of the Regulations is to ensure that consumers receive fair, accurate and timely information about the cost of borrowing. This will enable consumers to evaluate their credit options more effectively and to find the most economical credit for their needs. The purpose of timely disclosure is to give consumers ample opportunity to make financial choices in their own best interests.
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