November 09, 2011
The Americanization of Canadian Credit
I suppose it was inevitable that some of the more aggressive U.S. lending practices would make their way north of the border after our Big Five banks started buying up regional U.S. banks.
It’s probably just too tempting when two-thirds of Canadian mortgage borrowers still walk into their local branch and sign the mortgage contract put in front of them with few questions asked about the fine-print terms and conditions. That kind of blind loyalty has been very profitable for the Big Five over the years.
So why are Canadians always surprised when they learn later that the terms and conditions in their unread Big Five mortgage contracts are so heavily tilted in the bank’s favour?
I’ve provided many examples of what to watch for in previous posts (the whole Borrower Beware section of my blog is devoted to this subject), and today’s post will serve as my latest instalment. I’ll quote two new sections that were recently added to a Big Five lender’s standard charge terms, and then comment on each. (As an added bonus, I’ll also use a legible-sized font that can be read without a magnifying glass.)
Addition # 1: Bank May Appropriate Payments to Any Debt
It is hereby agreed that the bank shall have the right at any time to appropriate any payment made as a temporary or permanent reduction of any portion of the Indebtedness whether the same be represented by open account, overdraft or by any bills, notes or other instruments and whether then due or to become due and may from time to time revoke or alter such appropriation and appropriate such payment as a temporary or permanent reduction of any other portion of the Indebtedness as in its sole and uncontrolled discretion it may see fit.
Translation: This new clause allows the bank to take any payment you make on any one of your accounts and apply it to any of the other accounts you hold with them instead.
Implications: Let’s assume that the euro zone crisis blows up the global economic recovery and you lose your job. Without enough money to pay all of your bills, you decide to let an unsecured line-of-credit lapse while continuing to make regular payments on your mortgage. If both of these products are sourced from this bank, they can now take the payment you made on your mortgage and use it to pay your unsecured line of credit instead. This transfers the shortfall to your mortgage account, which has your house secured against it as collateral.
Now this Big Five lender can decide which of your accounts won’t get paid if you fall behind. If push comes to shove, they can basically force your mortgage into default and sell your house because you didn’t have enough money to pay your unsecured line-of-credit.
How many borrowers were aware that they were pledging their house as collateral against every credit product they have with this bank? And if this new clause means that your unsecured products (credit cards, lines-of-credit) are effectively being secured by your family home, why are you still being charged much higher interest rates for these products? Isn’t this a clear case of “Heads I win, tails you lose”?
Addition # 2: Charge Continuing Security
It is hereby agreed that this Charge may secure a current or running account and shall stand as a continuing security to the Bank for the payment of the Indebtedness and all interest, damages and Costs which may become due or payable to the Bank notwithstanding any fluctuation or change in the amount, nature or form of the Indebtedness or in the bills, notes or other obligations now or hereafter representing the same or any portion thereof or in the names of the parties to the said bills, notes or obligations of any of them.
Translation: When a lender gives you a mortgage, they register a first charge on your property’s title to ensure that if you ever sell your property, your real estate lawyer can’t cut you a cheque until their mortgage had been paid in full. Fair enough. But this new clause means that this Big Five bank can now insist that all of its accounts be paid in full before any sale proceeds are subsequently paid to you – even unsecured accounts that you never thought would be tied to your house.
Implications: Let’s assume that you are going through a divorce and your spouse racks up huge credit card bills during the separation period. When you sell the matrimonial home this bank can now legally insist that the money from that sale be used to pay off all of each borrower’s accounts, including your spouse’s supposedly unsecured credit card balance, without any additional authorization or consent by you. All for one and one for all!
The defence against both new clauses is the same. Don’t get your mortgage where you borrow for any other purpose if your real estate lawyer identifies these clauses, and confirms their implications, in your standard charge terms.
It’s clear that all of the talk about slowing growth and rising recession risks has some of the Big Five battening down the hatches by very quietly altering their mortgage terms and conditions. While each change may seem to affect only a small subset of borrowers, why take the chance that you might be one them when you can find better (or at least the same) rates at other lenders who don’t stack the deck against you?
Borrower beware, indeed.