CG-9 Mortgage prepayment penalty disclosure
The new Financial Consumer Protection Framework (FCPF) in the Bank Act and the Financial Consumer Protection Framework Regulations (collectively: “FCPF Requirements”) come into force on June 30, 2022. The FCPF Requirements apply to banks, authorized foreign banks and federal credit unions. This guideline will be reviewed, including for purposes of reflecting the FCPF Requirements, and will be reissued in due course as is appropriate. Starting June 30, 2022, this guideline is to be read by banks, authorized foreign banks and federal credit unions in conjunction with, and subject to, the FCPF Requirements. If there is any inconsistency between the FCPF Requirements and this guideline relating to banks, authorized foreign banks and federal credit unions and their conduct post June 30, 2022, the FCPF Requirements prevail.
Publication date: August 15, 2012
(Effective Date: March 4, 2013)
Legislation sets out that a Federally Regulated Financial Institution (FRFI) that enters into a credit agreement for a loan shall disclose to all borrowers:
- whether they have the right to repay the amount borrowed before the maturity of the loan
- any terms and conditions relating to this right
- the manner in which a charge or penalty, if any, will be calculated if the borrowers exercise this right.1
In addition, FRFIs are required to provide a description of any components that comprise a formula to calculate a charge or penalty in the event that the borrower exercises the right to repay the amount borrowed before the maturity of the loan.2
If a credit agreement for a loan secured by a mortgage is to be renewed on a specified date, the institution must, at least 21 days before the date, provide the borrower with a subsequent disclosure statement that contains the information required to be disclosed by Section 8 or Section 9 of the Cost of Borrowing Regulations (the Regulations). 4
1. FRFIs must disclose the manner in which a mortgage prepayment charge or penalty is calculated.
The disclosure must include a description of the process used to arrive at the prepayment charge or penalty. The process may be described either through the use of words or a formula.
Some FRFIs currently use an inherently complex manner to calculate the prepayment charge or penalty. In these cases, the disclosure must describe the process applied by the FRFI to calculate the charge or penalty.
For example, if the FRFI calculates its prepayment charge using an interest rate differential and applies the time value of money to the calculation, this aspect should be included in the description provided. However, the disclosure must include general information about how the charge is calculated and need not include the lengthy algorithmic calculation.
The use of a toll-free number where the borrower may gain access to the full algorithm may also be included.
2. FRFIs must provide a description of any components included in the calculation of the mortgage prepayment charge or penalty.
The components to be disclosed should be the most important or highest-level variables that make up the formula used by the FRFI to calculate the mortgage prepayment charge or penalty.
For example, if when calculating the interest rate differential:
- the FRFI uses the posted rate at the time the mortgage was initiated instead of the borrower's contractual rate, the FRFI must ensure that the posted rate and/or discount that the borrower received are disclosed
- the FRFI uses a present value calculation to calculate the charge or penalty; the disclosed components should include variables such as renewal balance, payment, effective annual rate, number of payments remaining and outstanding balance.
The description of the components should provide the borrower with a basic understanding of each component. The description need not include any kind of underlying calculation undertaken to arrive at the numerical value of each component.
The description should include information to allow borrowers to understand how they can obtain the numerical value of each component disclosed. This may be achieved in the following ways:
- disclosing the value of any components that are known at the time of disclosure—for example, the discount the borrower received off the applicable posted mortgage rate
- providing a reference to where information regarding certain components could be found if they are not known at the time of disclosure—for example, a reference to a website where that value could be obtained
- providing a sufficient level of detail surrounding the components—for example, if there are 18 months remaining in a term, the FRFI must disclose whether this number is rounded up or down in order to determine the comparable rate
- providing a toll-free telephone number to access FRFI staff who are knowledgeable about mortgage prepayment penalties, and who would be able to orally provide the values for the components.
3. Disclosure must be made in language, and presented in a manner, that is clear, simple, and not misleading.
FRFIs must demonstrate that they meet Subsection 6(4) of The Cost of Borrowing Regulations. Any disclosure that is required to be made under these Regulations must be made in language, and presented in a manner, that is clear, simple, and not misleading.
The Financial Consumer Agency of Canada (FCAC) has published Clear Language and Presentation Principles and Guidelines to assist the industry in developing communications for consumers. Below are examples of some of the guidelines that should be taken into consideration when developing mortgage prepayment disclosure:
- use examples to explain a calculation.
- present information in a logical order.
- use consistent terminology.
- replace technical terms with equivalent everyday words wherever possible.
Some FRFIs use mortgage prepayment charge or penalty calculations that are inherently complex and that may not be easily presented in a manner that is clear and simple. In these cases, the inclusion of a simplified calculation (i.e. one that does not incorporate the time value of money) to assist borrowers in estimating their prepayment charge or penalty should be provided in the disclosure.
The simplified calculation should disclose:
- a description of any components included in the calculation
- information to allow borrowers to understand how they can obtain the value of each of the components disclosed
- that the simplified calculation will only provide an estimate of the prepayment charge or penalty, and
- that the estimate will be an amount higher than the actual charge or penalty calculated by the FRFI.
- Moreover, any worksheets or examples that would be developed by the FRFI to address clear language could be based on the simplified calculation to facilitate use by borrowers.
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