An Ontario court has recently certified a class action against CIBC bank on behalf of customers in Canada (except those living in BC and Quebec) who held mortgages with the bank and paid prepayment penalties after 2005. Customers in BC and Quebec were excluded because class action claims have already been certified in those jurisdictions.

A mortgage prepayment penalty is an agreement between the borrower and the bank or mortgage lender that regulates what the borrower is allowed to pay off and when.

For instance, an open mortgage is one that permits a borrower to pay down all or part of the principal amount of the mortgage loan at any time without penalty. This case, however, dealt with closed mortgages. A closed mortgage is one that limits the amount that can be paid over and above the monthly payment due; for example, no more than 10% in each year. In the case of a closed mortgage, the borrower may have to pay a penalty for early payment of an amount above that permitted by the contract.

Who Is Covered in the Class Action?

The class action was brought on behalf of any person in Canada, except persons in the provinces of British Columbia and Quebec, who were or are mortgagors under mortgages issued by CIBC as mortgagee, who prepaid part or all of the principal amounts secured by those mortgages from 2005 onward, and who:

(1) had a mortgage containing either a “Discretion as to Calculation Clause” or a “Discretion as to Comparison rate Clause” or both, and paid any prepayment penalty; or

(2) had any mortgage issued by CIBC and paid a prepayment penalty based on an interest differential.

What Does the Class Action Allege?

The statement of claim alleged that CIBC applied terms and conditions to certain mortgage contracts to allow it unfettered discretion for calculation of mortgage prepayment penalties. It was further alleged that the quantification of prepayment penalties applied by CIBC were in breach of the mortgage contracts.

The plaintiffs pled that the prepayment penalty clauses were illegal, contrary to public policy, unconscionable and void for uncertainty. They further alleged that even if those clauses are not illegal or void, the prepayment penalties were miscalculated. This miscalculation resulted in overcharges which breached the bank’s obligation to act honestly, fairly and in a commercially reasonable manner. As a result of these two allegations, the plaintiffs claimed CIBC was unjustly enriched.

Additionally, the plaintiffs pled that CIBC’s conduct constituted a breach of fiduciary duty owed to its customers.

Certification

The judge rejected most of the arguments, with one exception. The class action was certified and allowed to proceed on the argument of miscalculation. The judge was satisfied that the statement of claim had disclosed a cause of action for unjust enrichment as it related to the use of shortened amortization period – one that is shorter than that specified in the mortgage contract and/or applicable under the contract rate – when calculating the notional amount of interest payable under the comparison rate. The use of the shorter amortization period affected the interest rate differentialcalculation and, ultimately, the amount paid by mortgagors.

Additionally, the judge found that the pleadings relating to the unconscionability argument were inadequate, but did not reject them outright. Instead, he gave leave to amend to plead the missing constituent elements.

Get Advice

For more than 25 years, the experienced litigation lawyers at DBH Law in Calgary have advised clients on a wide range of mortgage and foreclosure issues. We represent both borrowers and lenders in this highly technical and generally complex area of law. Our goal is to always resolve mortgage disputes and foreclosure issues quickly and efficiently and to bring them to the most satisfactory end for our clients. Our knowledgeable team of lawyers and staff will be with you every step of the way, providing perspective by focusing on what’s important and working to keep your property in your hands. Please contact us online or by phone at 403.252.9937 to see how we can help you today.