Class Action Related to Vancouver Home Mortgage Contracts

Class Action Related to Vancouver Home Mortgage Contracts

One the primary reasons for consumer complaints against prepayment penalties is that most people simply don’t understand them. This case may help shine light on exactly how calculations for prepayment penalties are performed.

Specifically, the allegations are that penalties were calculated improperly for clients who violated their mortgage contracts between 2005 and today.

Per the allegation, “CIBC applied terms and conditions to certain mortgage contracts to allow it unfettered discretion for calculation of mortgage prepayment penalties.”

According to Kieran Bridge, lead counsel in the class-action, the funny business began in 2005 when CIBC started to use extremely vague wording as to the calculation of prepayment penalties on Vancouver home mortgages.

In legal language, such a thing can be termed “unenforceable”.  This results in a situation where such a clause should not be able to exact penalties.

Penalties should be limited to less than 3 months of interest, even if they are enforceable, asserts Bridge.

According to Bridge, CIBC should be charging penalties that are, “adjust(ed) for present value”. “Any actuary or accountant will tell you, you have to present value or you’re not talking about actual value received.” But instead, per the suit,  CIBC is using the future value of the amount owed when calculating its interest rate differential.

Bridge asserts that the majority of CIBC mortgages fall within the scope of this class action. This includes mortgages originated from other entities related to CIBC, including Presidents Choice Financial and FirstLine Mortgages.

Among residential Vancouver home mortgage lenders, CIBC is one of the biggest. It may have approximately half of a million mortgages on its books (in Canada), according to an estimate by Bridge.  Bridge also estimated that the case could be worth upwards of ten million dollars. Typically, cases like this end up being settled outside of court; it’s not common that they go through a full trial.

Bridge added that substantial precedent exists relating to “uncertain contract provisions” and contracts for mortgage prepayment.

Bridge claimed that his legal firm had dedicated several hundred man-hours to doing research for this case, even before anything had been filed. “You don’t start a class action lightly,” he went on to say.

Class actions aren’t new to Bridge. According to him, he successfully won a different class action in the past related to prepayments against RBC. RBC “paid 100 cents on the dollar”, in addition to legal fees, said Bridge, which is “about the best you could possibly do.”

Its important to note that the facts in the previous case were quite different than the facts in the current case Bridge is now leading.

The current class action originated when a parent in British Columbia divorced, was forced to sell the family’s home and ended up with a $47,000 penalty due to the mortgage lender’s interest rate differential calculation; the lender was CIBC.

Supposedly,  the practices of other lenders have been reviewed by Bridge, and he has been unable to find any others that are improperly calculating interest rate differential penalties.

When it comes to the big 6 banks, language regarding mortgage penalties is notoriously difficult to understand. It’s rare for banks to make calculations for interest rate differential penalties intuitive. If CIBC is found to be calculating IRD penalties for Vancouver home mortgages in a way that is substantially different from its peers,  it is possible that this class action will change how banks explain their penalty calculations.

Since this class action began, hundreds of individuals have come forward, interested in joining.

According to Bridge, a hearing will likely be scheduled in early fall; this will be with a case management judge in BC. At that time, a date will be decided for the certification hearing. Bridge has stated that the current case is merely an “intended” class action; it will not be a class action until it is certified.

Bridge predicts (and hopes) that the hearing for certification will be in either early 2013 or late 2012.

Post-certification, it is not easy to predict the amount of time required to reach a resolution, he says.

CIBC’s current position on this case is unknown as it has yet to file any affidavits, or a statement of defense. A defendant is not required to file a statement of defense in a class-action before the certification hearing has occurred.

The Financial Consumer Agency of Canada has previously stated that mortgage penalties are among the most common banking complaints. Many believe that the government has been slow to implement regulations about how banks disclose their IRD penalties. Maybe this case will change that.

Note that this class action is not against CIBC, but CIBC Mortgages Inc. The abbreviation, CIBC, has been used for ease of reading. Also note that at this time nothing has been established proving that CIBC acted wrongly in any way with regard to Vancouver home mortgages.