At least 52,200 British Columbians will be entitled to refund cheques from the Canadian Imperial Bank of Commerce (CIBC) if a recently certified class-action lawsuit succeeds, according to one of the lawyers involved in the case.
The representative plaintiff in the case is Victoria resident Erin Sherry, who wanted out of a CIBC (TSX:CM) mortgage when her marriage dissolved.
The bank hit her with $47,869 in fees because she was only two years into a 10-year mortgage and interest rates had fallen between the time Sherry had committed to the mortgage and when she wanted to break it.
Her argument to get out of paying those fees is twofold, her lawyer, Kieran Bridge, told Business in Vancouver.
Her first argument is that the language in the mortgage document from CIBC's CIBC Mortgage Inc. subsidiary was so vague that it rendered the contract legally unenforceable.
Bridge, principal at Kieran A.G. Bridge Law Corp., pointed out that CIBC has since changed wording in its mortgages, possibly indicating that even the bank realized that the wording was too vague.
If Justice Jeanne Watchuk, who certified Sherry's class action on June 30, disagrees and rules that CIBC's mortgage contracts are valid, Sherry has another argument.
“The mathematical formula that the bank used is improper,” Bridge said. “If an appropriate formula was used then the penalty would have been less.”
CIBC's lawyer, McCarthy Tétrault LLP partner Herman Van Ommen, declined to comment, and calls to CIBC were not returned.
Other lawyers with whom BIV spoke, however, agree that the mathematical formula that banks use to calculate penalties when customers prepay mortgages is extremely complicated.
The calculation uses the difference between the posted interest rate when someone takes out a mortgage and the interest rate when the customer prepays the mortgage. That percentage is applied to the outstanding balance of the mortgage. The amount of time remaining on the mortgage also affects the final tally as fees are much higher when longer time frames remain on the mortgage, explained Jeremy Bohbot Law Corp. principal Jeremy Bohbot, who specializes in real estate mortgage law.
Bohbot said that the calculation could be viewed as unfair given that the initial rate used in the calculation is the posted interest rate at the time of the mortgage and not the actual rate that the mortgage holder obtained.
“Nobody ever gets the posted rate,” he said. “It's a bit like the posted price of a car at a used car lot.”
Still, “complicated” is a better word than “vague” to describe language in mortgage contracts, he said.
Fasken Martineau LLP partner Andrew Borrell, who specializes in class-action lawsuits, agreed.
Borrell, who has seen plenty of mortgage-related litigation, said mortgage contracts vary between banks significantly, so just because the class-action lawsuit against CIBC was certified, it should not be presumed that other similar litigation will target other banks.
All those who obtained mortgages with CIBC Mortgage Inc., through its FirstLine Mortgages and President's Choice brands, after mid-2005 are automatically part of the class action unless they choose to opt out.
CIBC estimates that between 18% and 36% of mortgage holders prepay their mortgages in any given year. But even a far lower percentage would still amount to tens of thousands of people.
Watchuk relied on data from Bridge in her judgment, which noted that there are between 58,000 and 116,000 CIBC mortgages in B.C. each year. Watchuk noted that if there were a 10% prepayment rate, “there would be between 5,800 and 11,600 prepayments made in B.C. each year.” Over the past nine years, that would translate into between 52,200 and 104,400 mortgage prepayments in B.C.