Homeowners who paid off their mortgages early within the last seven
years and got zapped with a prepayment penalty, could be in line for a
refund if a series of class actions now underway is successful.
The litigation began when Stewart Gregg, a civil servant in Ottawa,
claimed he was over-charged on a prepayment penalty after paying off his
mortgage before its maturity date. He approached Ottawa real estate
lawyer John Farah.
Most mortgage contracts allow the borrower to prepay 10 or 20 per cent
of the principal without penalty once a year. But when most banks
provide discharge statements for early payouts, they calculate the
penalty on the whole amount outstanding. Typically, they do not allow
the borrower to prepay the 10 or 15 per cent before the penalty is
In effect, the penalty is calculated on all of the principal outstanding
rather than the balance after allowing the borrower to prepay part of
the mortgage without penalty.
Farah and Kirk Baert, of Toronto's Koskie Minsky, have launched 11 class
actions against Canadian banks and financial institutions for
overcharging borrowers on prepayment penalties.
Named as defendants in 10 of the class actions are Bank of Montreal,
CIBC, Scotiabank, National Bank, TD Bank, Canada Trust, Laurentian Bank,
HSBC Bank Canada, Industrial Alliance and London Life. None of the cases
has gone to trial yet, and none of the allegations has been proven in
Conspicuously absent from the list is Royal Bank, which correctly
charged borrowers a penalty based on the balance after the prepayment
privilege amount was deducted.
Last week, the Civil Service (CS) Co-op in Ottawa settled the case
against it rather than go to trial. The Co-op has agreed to pay $147,329
to about 775 customers who were overcharged on early mortgage payouts.
Before any of the remaining cases goes to trial, they have to be
certified as a class action. Baert and his team are handling the
certification applications, which are expected to be heard in the fall.
Farah estimates about 200,000 Canadians were overcharged on their
mortgages since 1997. Payments made before that are past the limitations
period and are ineligible for refund. If other banks follow the lead of
the CS Co-op in Ottawa, refunds could exceed $100 million.
"This settlement is good news for Canadian homeowners," Farah says.
"It's right in the contract that customers are entitled to pay off a
part of their mortgage without a penalty. It seems that unless you
remind the bank or ask them for your credit when you pay out your
mortgage in full, the savings are lost. I don't think that's right."
Banks usually calculate prepayment penalties based on whatever is
greater: three months' interest or an interest rate differential between
the rate the borrower is paying and what the bank could reinvest the
money at when the prepayment is made.
The difference to homeowners can be substantial. For example, if a
homeowner had $200,000 owing on a mortgage, and a mortgage interest rate
of 7 per cent, the three-month penalty charged by the financial
institutions would be $3,500. However, if the bank credited the
homeowner with the 15 per cent penalty-free prepayment, the balance
owing would be reduced to $170,000 and the three-month interest penalty
would be just $2,975 a savings of $525.
Those penalized since 1997 are automatically included in the lawsuits.
The banks have all the records it's not necessary to sign on as a
It would be wise, however, for potential participants to contact their
lenders (or former lenders) and advise them of current contact
information. As well, interested consumers can sign up for free e-mail
updates at http://www.bankclassaction.com.
Samples of the statements of claim by the representative plaintiffs and
the statements of defence by some of the banks are posted on the Web
site of the plaintiff's counsel. Visit http://www.farahandassociates.ca
and click on Class Action.
Anyone planning to pay off a closed mortgage before its maturity date in
the future should carefully review the discharge statement to ensure
that the penalty was calculated on the balance after the penalty-free
discount was deducted.