Monoline penalty frustrates broker and client

One industry player is frustrated by a hefty prepayment penalty his client was saddled with – one that made his homebuyer regret choosing the broker channel over a big bank.

“The issue at hand is the customer ends up feeling like they should have gone to a bank, and if they have a bad experience they will tell 30 of their friends,” Gregory Campbell, a broker with Campbell Mortgage Brokers told MortgageBrokerNews.ca. “The whole thing is just bad optics.”

Campbell had a client who, recently, was selling his home to purchase a new one – and the closing date couldn’t be pushed back. The original mortgage had 32 days left on the term, and Campbell argues his client was forced to pay too much in prepayment penalties.

“The lender insisted on my client paying a full three month penalty,” Campbell said. “I called the lender and they said they charge the full three months even if there is one day left on the mortgage.”

According to his calculations, Campbell says his client owed a daily rate of $26.48 in interest which, over the 32 days left on the contract, would have meant $847.36 in earned interest for the monoline lender.

But the client was forced to pay $2,416.28.

Brokers often cite superior monoline IRD calculations, noting that the banks often use posted rates to calculate fees, as opposed to the client’s signed rate. However, in this case, Campbell believes the fee would have been waived had the mortgage been with a big bank.

And while Campbell acknowledges the lender is within its legal right to charge the full three months – since it was in the contract – he argues it’s a short-sighted tactic that harms the broker industry in the long run.

“In the borrower’s eyes it’s predatory lending; they’re being legally ripped off,” he said. “I was disgusted by it.”

IRD calculations have been a hot topic this summer – and it’s a problem among a number of lenders, including the big banks, according to industry players.

That frustration has forced several brokers to call for standardized penalties across the industry.

“There are so many different ways lenders calculate penalties – certain lenders will use the posted rate and not the discounted rate that was offered to the client,” Narish Maharaj, a broker with Dominion Lending Centres Mortgage Mentors, recently told MortgageBrokerNews.ca in July. “Others will subtract the client rate from the T BILL rate and subtract the client’s rate to determine the penalty.”

MBN