Bank errors when arranging a mortgage transfer lead to costly penalties for borrower

Key lessons:

• Financial institutions are responsible for harm caused by their administrative errors and delays. If delays or missed deadlines are predictable or unavoidable in the circumstances, this possibility and the consequences should be clearly disclosed to the consumer.
• Consumers can protect themselves by ensuring that arrangements for time-sensitive transactions are finalized well in advance and carefully reviewing all paperwork to ensure it matches their expectations.

Consumer decides to transfer mortgage to a new lender

Mr. G held a mortgage at Bank A that was maturing. A few weeks before the maturity date, he met with a mortgage specialist at Bank B and decided to transfer his mortgage to Bank B when it matured.

On the last business day before his mortgage matured, Mr. G met with the Bank B mortgage specialist to complete the transfer paperwork. The mortgage specialist faxed the transfer request to Bank A later that day, but outside of regular business hours.

Delayed paperwork triggers automatic renewal and prepayment penalty charge

Bank A received the transfer request on the maturity date, by which time Mr. G’s mortgage had automatically renewed for a 6-month term.

Because the mortgage had already been renewed, when Bank A processed the transfer request and issued the mortgage discharge statement for Mr. G’s mortgage, it included a prepayment penalty of $1,892. Within a few days, Bank B paid Mr. G’s mortgage in full but did not advise Mr. G that Bank A had charged him a prepayment penalty.

Bank’s response

Weeks later, Mr. G noticed that his mortgage balance was higher than he expected and learned of the prepayment penalty that Bank A had charged him. He approached Bank B to better understand why he had been charged a prepayment penalty when he had completed the paperwork to transfer his mortgage to Bank B before the renewal date. Bank B told Mr. G that the penalty was the result of a business decision by Bank A, so the issue was outside of Bank B’s mandate.

Mr. G was upset by Bank B’s response because he felt that he had followed the terms and conditions of his mortgage with Bank A and signed all the paperwork required by Bank B. He turned to OBSI for help.

Our findings

We reviewed Bank A and Bank B’s procedures and policies as well as Mr. G’s mortgage documentation. We concluded that:

• When Bank B’s mortgage specialist faxed the discharge paperwork to a Bank A branch outside of regular business hours, she had effectively sent it on the next business day and not followed Bank B’s policies and procedures.
• Bank B’s mortgage specialist should also have been aware of Bank A’s requirement that all requests for payout and discharge statement requests be sent via their online portal, not faxed to a bank branch.
• Bank A did not receive renewal instructions before the maturity date and appropriately followed its policies by automatically renewing Mr. G’s mortgage.
• The prepayment penalties charged to Mr. G were caused by Bank B’s delay in sending Bank A the transfer paperwork.
• Mr. G trusted Bank B’s mortgage specialist to carry out the mortgage transfer in a timely manner and appropriately followed her instructions. He did not share responsibility for the delay in sending the documentation to Bank A.

The outcome

Based on our findings, we recommended that Bank B reimburse Mr. G $1,892 to cover the full amount of the mortgage prepayment penalty. Bank B agreed with our recommendation, and Mr. G accepted their offer.