A B.C. Supreme Court judge has certified a class-action suit against CIBC Mortgage Inc. in connection with its prepayment penalties.
In a June 30 judgment, Justice Jeanne Watchuk ruled that Erin Sherry is a “very appropriate” representative plaintiff in the case after she was hit with a $47,868.91 prepayment fee when she paid off her mortgage in full.
Watchuk’s decision also stated that “the certification is conditional on the plaintiff establishing for the court an identifiable class which is not overbroad.” She instructed lawyers for both parties to set a schedule to determine how to define which customers would be eligible to be included as plaintiffs in the class-action suit.
Sherry’s lawyer, Kieran Bridge, told the Georgia Straight by phone that the case involves mortgage prepayments made from 2005 onward. He pointed out that CIBC owns CIBC Mortgage, which offers mortgages through the FirstLine Mortgage and President’s Choice brands.
“I would estimate that across the country, CIBC probably has in the nature of 500,000 mortgage customers,” Bridge said. “There is information that we tendered to the court about the proportion of their total book of mortgage business that gets prepaid every year. But we’re certainly into the tens of thousands [of potential plaintiffs] if you look at it nationwide.”
CIBC lawyer Herman Van Ommen was unavailable by deadline to say whether or not CIBC Mortgage will appeal the ruling.
In 2005, Sherry and her then husband obtained a closed, 10-year fixed-rate mortgage from FirstLine to buy a home in Prince George, according to Watchuk’s ruling. The judge noted that almost three years later, the couple notified their lender that they wanted to discharge the mortgage and arrange new financing so they could buy property in Victoria.
FirstLine then offered a 5.89-percent closed mortgage on a seven-year term. The judge wrote that as part of this arrangement, the company was willing to waive any fee for early prepayment on the mortgage linked to the Prince George home.
Sherry and her husband declined the offer and chose a closed 10-year mortgage at a higher interest rate—6.2 percent—from FirstLine.
“Closed ten-year fixed rate terms are relatively rare because the borrower is committed to a lengthy term,” Watchuk wrote. “However, they are attractive to some borrowers because they offer the certainty of a known interest rate for an extended period of time.”
But when the couple decided to discharge their other mortgage, FirstLine imposed a prepayment fee. The contract stipulated that fees could be charged for prepayments exceeding 20 percent of the principal in any given year. Watchuk noted that under the contract, the lender would calculate the amount owing.
Sherry’s legal team argued that the prepayment-penalty clause in her mortgage was “void and unenforceable” because the contract included clauses concerning a “discretion to calculation” and a “discretion as to comparison rate”. Sherry’s lawyers also maintained that even if the prepayment clauses weren’t void or unenforceable, the maximum penalty that could have been charged would have been three months’ interest.
The judge has not issued a ruling on Sherry’s claim, only noting that she has proposed a “reasonable litigation plan”.
“A litigation plan need not be perfect; it will be adapted as the litigation proceeds,” Watchuk wrote. “The purpose of the litigation plan is to demonstrate that the plaintiff and her counsel have considered how the action may proceed in an orderly manner and be resolved.”
The ruling noted that CIBC did $29 billion worth of mortgage business in B.C. in 2011. CIBC revealed to the court that between 11 percent and 15 percent of mortgages involved prepayments each year between 2008 and 2011.
“Assuming an average mortgage principal of between $250,000-$500,000 results in there being between 58,000 and 116,000 CIBC mortgages in British Columbia,” Watchuk wrote. “Assuming a 10% rate of prepayment each year (which is lower than CIBC’s reported prepayment rate as set out above) there would be between 5,800 and 11,600 prepayments made in British Columbia each year.”
The judge added that it’s unclear how many of these mortgages were entered into after 2005, which is the date from which borrowers would have had to sign contracts to have a chance of being eligible to join the class.