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B.C. lawyer tackles CIBC over mortgages

Garry Marr, Financial Post · Oct. 21, 2011

You just made the largest purchase of your life based on borrowing more than you ever have before. Are you really going to bother reading that 25-page contract with all the rules on your mortgage?

The answer is usually no. The truth is you should.

The ambiguity in mortgage contracts has landed more than one consumer in trouble they didn’t anticipate and now it has spawned a classaction lawsuit against one of Canada‘s largest banks.

Kieran Bridge, a Vancouverbased lawyer with the Construction Law Group, has filed a lawsuit against Canadian Imperial Bank of Commerce over what he describes as vague language over early payment of mortgages. The suit was filed in British Columbia and Ontario this month.

Traditionally, if you want to break your mortgage, you have to pay three months’ interest or the interest rate differential (IRD), which is supposed to reflect how much money your financial institution will lose by you backing out of your contract.

“The rub with a lot of lenders is how do you calculate the interest rate differential,” Mr. Bridge says. “There is always something in the contract.”

However, Mr. Bridge says starting in 2005, CIBC used vague-enough language in contracts that allows it to calculate the IRD “as they see fit,” leaving the consumer with no way to challenge that penalty.

CIBC has yet to respond to the lawsuit in court, but did respond in an email. “CIBC believes this suit to be without merit and we intend to defend ourselves vigorously,” spokesman Rob McLeod.

The lawyer maintains that in addition to deciding the rate on which the penalty is paid, CIBC is asking clients to pay the penalty in present-day dollars – again, something not spelled out in the contract.

“The mathematical formula is invalid. What they do is future value. They add up the stream of interest payments over, say, the next three years if you are two years into a fiveyear mortgage,” Mr. Bridge says, adding you are then asked to pay it all up front.

These are not small amounts.

The representative plaintiff is a single mother in Vancouver whose marriage broke up, forcing her to get out of her mortgage. The penalty was $47,000 on a $450,000 mortgage that had eight years left on it.

His case is only about the two issues – the vagueness of the contract language and the mathematical way interest is being calculated – but Mr. Bridge concedes they are two of many issues that have sprung up over the years when it comes to mortgage-contract interpretations.

One ongoing issue that has occurred relates to variablerate mortgages that allow you to lock in at any time during the term, which is usually five years. How do you calculate that rate? Is it the posted rate that is usually well above the discounted rate, or are you guaranteed a certain number of basis points off the posted rate if you lock in? If the bank promises to give you its best rate if you decide to lock in, what does that mean?

“That’s the problem, these are contracts of adhesion, like an insurance contract with a bunch of boiler plates that you can’t negotiate. It’s like ‘here are our terms,’ ” says Mr. Bridge, who understands why clients don’t all read the details. “I don’t know many lawyers who read [the contracts] either.”

Vince Gaetano, a mortgage broker with Monster Mortgage, says mortgage-contract language has been at the centre of a number of disputes.

He says consumers should pay close attention to the prepayment clauses in their contracts. If you have, say, a $300,000 mortgage with terms that allow you to prepay up to 20% a year, you could pay that prepayment first and any IRD penalty would only apply on the $240,000 left.

“When a penalty is applied, they should be discounting the penalty by that 20%,” says Mr. Gaetano, adding consumers can just prepay that amount by using another source of capital like a line of credit.

On a $300,000 mortgage with a 4.79% interest rate, the three-month penalty – what people usually pay – would be $4,790. If you can pay the 20% first, you save $958.

“I don’t know about you, but I have to make $2,000 to save $900, so it’s a lot of money,” Mr. Gaetano says.

Saving some money at some point should be more than enough motivation to read your contract.

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