Legislation sets out that a FRFI that enters into a credit agreement for a loan shall disclose to all borrowers:
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
Furthermore, this information must be made in language and presented in a manner that is clear, simple and not misleading.3
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
FRFIs are expected to incorporate the following into their mortgage prepayment disclosure documents5:
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.
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 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:
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.
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:
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:
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.
1. The Bank Act, 452(1)(a)(ii) and 570(1)(a)(ii); The Trust and Loan Companies Act, 438(1)(a)(ii); The Cooperative Credit Associations Act, 385.18(1)(a)(ii); and The Insurance Companies Act, 482(1)(a)(ii) and 601(1)(a)(ii)
2. Cost of Borrowing Regulations, 8(1)(l)
3. Cost of Borrowing Regulations, 6(4)
4. Cost of Borrowing Regulations, 14(1)
5. Initial mortgage disclosure statements and mortgage renewal disclosure statements