On March 4, 2012, the Canadian federal government released a voluntary code of conduct regarding the mortgage prepayment information that financial institutions should provide, and the Financial Consumer Agency of Canada (FCAC) introduced related guidance. Both the code and the guidelines are intended to enhance the transparency of the calculation of mortgage prepayment penalties and to enable borrowers to more clearly understand their prepayment options.
The Code of Conduct for Federally Regulated Financial Institutions (the Code) is an addition to existing legislation on the cost of borrowing;1 the CG-8 Mortgage Prepayment Penalty Disclosure (the Guidance) provides guidance on compliance with that existing legislation.
Federally regulated financial institutions (FRFIs) are expected to comply with the first three elements of the Code (listed below) within 12 months of the Code’s adoption, and the last two elements of the Code within six months of the Code’s adoption. FRFIs should consult their FCAC correspondence for the timing of a required response to the Guidance.
The Code consists of the following five policy elements, which are essentially categories describing specific actions to be taken by FRFIs (FRFIs should consult the Code for details):
- Prepayment information to be provided to borrowers annually;
- Information to be provided when a borrower is paying a prepayment charge;
- Access to the FRFI’s toll-free telephone lines through which borrowers can obtain the actual prepayment charge that would apply to their mortgage;
- Information about prepayment generally, to be made available on the FRFI’s website and provided to borrowers at the FRFI’s place of business upon request; and
- Financial calculators to be posted on the FRFI’s website.
The Guidance indicates that the FCAC expects FRFIs to incorporate the following elements into their mortgage prepayment disclosure documents (FRFIs should consult the Guidance for details):
- Disclosure of the manner in which a mortgage prepayment charge or penalty is actually calculated;
- In relation to element #1, a description of all the components included in the calculation of the mortgage prepayment penalty;
- Disclosure made in language, and presented in a manner, that is clear, simple and not misleading; and
- Disclosure of a complex calculation accompanied by a simplified method to estimate the mortgage prepayment penalty.
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); Cost of Borrowing Regulations, 8(1)(l), 6(4) and 14(1).
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