Mortgage Broker

CMB MAGAZINE cmba-achc.ca summer 2016 | 21 legalease Clause Not Void Due to Discretion e borrower wanted to include in the class action lawsuit that the CIBC prepayment clause was void because it gave discretion to CIBC in the method with which it calculated the prepayment penalty. e BCSC had approved this claim to be part of the lawsuit. e BCCA said the claim was bound to fail and could not be part of the lawsuit. e prepayment clause gave CIBC the right to charge the greater of three months' interest or the interest rate differential (IRD). It gave CIBC discretion as to the method to calculate each. e BCCA said a mortgage clause is not void just because it gives one party discretion to affect the other party. e clause is to be interpreted either objectively (in accordance with how a neutral third party would exercise the discretion) or, if necessary, subjectively (that is, by requiring CIBC to exercise the discretion in good faith). e BCCA said the clause in this case was not void and the claim that it was could not proceed as part of the class action lawsuit. Calculation of Prepayment Penalty Not Relevant e borrower wanted to include in the class action lawsuit that CIBC had systematically miscalculated prepayment penalties and, accordingly, had breached the mortgage; had unduly collected prepayment penalties (or part of them); and had breached its fiduciary duty to the borrowers. e BCSC had approved this claim to be part of the lawsuit. e BCCA said the claim was bound to fail and could not be part of the lawsuit. e borrower's primary complaints were that in calculating the prepayment penalties, CIBC had not allowed for: n presently paid dollars having a greater value than the same amount of money paid in future periodic payments, and n mortgage payments having been structured so that each payment, as compared to the payment immediately before it, is applied less to interest and more to principal. e BCCA said both of these points are irrelevant because a prepayment penalty is not paid as compensation or indemnification for monies not earned by the lender due to early repayment; a prepayment penalty is a one-time payment the borrower pays for the privilege of ending the mortgage before the end of the closed mortgage term. Accordingly, the amount of the prepayment penalty need not take into account the matters raised by the borrower. e BCCA said the penalties had not been miscalculated and the claim that they had been could not proceed as part of the class action lawsuit. Unconscionability and Punitive Damages However, the BCCA did not totally disallow the class action from proceeding. It was permitted to proceed on the basis of the claims that CIBC may have unconscionably taken advantage of the borrowers and that it ought to pay punitive damages. For there to be unconscionability, there must have been inequality in the position of the parties – due to ignorance, need or distress on the part of the weaker – such that the weaker was le in the power of the stronger. Further, this difference in power must have resulted in the resulting transaction being substantially unfair. Punitive damages are awarded by courts not as compensation, but rather as punishment. e purpose of punitive damages is to discourage similar conduct. By allowing the class action to proceed on this limited basis, the BCCA is not saying that CIBC necessarily acted unconscionably or that punitive damages should be awarded; it is only saying that the claims can proceed. For the lawsuit to be a success, the claims would still have to be proven. The Takeaway e takeaway for mortgage brokers is that unless the BCCA decision is successfully appealed to the Supreme Court of Canada, the BCCA has: 1 given lenders considerable power to include mortgage clauses giving them discretion in determining the amount of prepayment penalties, and 2 the amount of prepayment penalties need not bear relation to the amount of money the lender has not earned due to the borrower paying the loan back before the mortgage due date. A prepayment penalty is not paid as compensation or indemnification for monies not earned by the lender due to early repayment.

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