Cost of Borrowing: A Definition in Mortgage Financing

COST OF BORROWING
Calculation of the APR

APR = {C / (T x P)} x 100

For the purpose of section 7.2 of the Act, the cost of borrowing for a mortgage is the annual rate on the principal as calculated using the formula, in which,
"APR" is the annual percentage rate cost of borrowing,
"C" is the cost of borrowing within the meaning of section 5 over the term of the mortgage,
"P" is the average of the principal of the mortgage outstanding at the end of each period for the calculation of interest under the mortgage, before subtracting any payment that is due at that time, and
"T" is the term of the mortgage in years, expressed to at least two decimal points of significance.
For the purpose of subsection (1),
the APR may be rounded off to the nearest eighth of a per cent;
each instalment payment made on the mortgage must be applied first to the accumulated cost of borrowing and then to the outstanding principal;
a period of,
one month is 1/12 of a year,
one week is 1/52 of a year, and
one day is 1/365 of a year;
if the annual interest rate underlying the calculation is variable over the period of the mortgage, it must be set as the annual interest rate that applies on the day that the calculation is made;
if there are no instalment payments under the mortgage, then the APR must be calculated on the basis that the outstanding principal is to be repaid in one lump sum at the end of the term of the mortgage; and
a mortgage for an amount that comprises, in whole or in part, an outstanding balance from a prior mortgage is a new mortgage for the purpose of the calculation.
The cost of borrowing for a line of credit or credit card secured under a mortgage is,
if the mortgage has a fixed annual interest rate, that annual interest rate; or
if the mortgage has a variable annual interest rate, the annual interest rate that applies on the date of the disclosure.

Included and excluded charges

Subject to subsection (2), the cost of borrowing for a mortgage, other than one that secures a line of credit, consists of all the costs of borrowing under the mortgage over its term and including the following charges:
Administrative charges, including charges for services, transactions or any other activity in relation to the mortgage.
Charges for the services, or disbursements, of a lawyer or notary that the lender required the borrower to retain.
Insurance charges other than those excluded under clauses (2) (a) and (f).
The mortgage broker's charges, if they are included in the amount borrowed.
Charges for appraisal, inspection or surveying services provided directly to the borrower in relation to the property that is security for a loan.
The cost of borrowing for a mortgage does not include,
charges for insurance on the mortgage,
if the insurance is optional, or
if the borrower is its beneficiary and the amount insured reflects the value of an asset that is security under the mortgage;
charges for an overdraft;
charges paid to register documents or obtain information from a public registry about security interests related to property given as security;
penalty charges for the prepayment of the mortgage;
charges for the services, or disbursements, of a lawyer or notary, other than those mentioned in paragraph 2 of subsection (1);
charges for insurance against defects in title to real property, if the insurance is paid for directly by the borrower;
charges to maintain an account that are required for a high-ratio mortgage or that are optional;
any charges to discharge a security interest; or
default charges.

Canadian Banks & Real Estate Fraud

Banks defend home-fraud record
Industry says lenders are `prudent, conscientious,' perform `due diligence'
Nov. 5, 2006. 07:48 AM
HAROLD LEVY
TORONTO STAR STAFF REPORTER

In the face of recent blistering criticism of their mortgage-lending practices by a Toronto judge, Canada's banks have countered that that they are constantly on the lookout for fraud.
They say it is unfair to single them out when other parties, such as lawyers and real estate agents, have a critical role to play in ensuring that real property transactions are clean.

Superior Court Justice Randall Echlin sent shock waves through the Canada's finance industry last week in the case of a North York couple whose luxury condominium was stolen by identity thieves.

Echlin blasted the TD bank for failing to make the most basic inquiries — such as having an appraiser knock on the couple's door to see if they had actually put the mortgage on the property — before advancing $250,000 to the thieves who took the money and ran, leaving the innocent couple on the hook.

He found instead that the bank had delegated responsibility for checking out the loan to a mortgage broker, "important tell-tale signs of the fraud" had been ignored," and that "if any of these simple matters had been noticed, the fraud might have come to light."

Echlin's blistering decision is being widely seen as a warning to the banks that if they don't do a thorough job of checking out the loan themselves, the courts are not going to treat them as innocent victims of fraud.

It has also led to criticism that the banks are too focused on competition and keeping shareholders happy to take needed steps to stem what the judge bluntly called, "a serious mortgage fraud plague" in Ontario.

But the Canadian Bankers Association (CBA) insists that its members, which include all of Canada's major banks, are intensely concerned about the harm caused by mortgage fraud, that they work closely with the police, and that they are doing their utmost to prevent it.

"I can say very generally that banks are prudent and conscientious mortgage lenders and that mortgage defaults are incredibly low," CBA spokeswoman Maura Drew-Lytle told the Toronto Star.

"Before granting a mortgage, banks complete a thorough due diligence process."

"Nobody wants to see any fraudulent activity going on."

Drew-Lytle says that "each application is looked at on an individual basis, that bank officials look for the "red flags" that may indicate further investigation is required and that the banks are playing an active role in working with other groups, "to collectively stop mortgage fraud."
She also stressed that the banks are not Canada's only mortgage lenders — they represent about 60 per cent of the mortgage lenders in Canada — and that banks are only one of the "many parties" involved in real property transactions.

Other parties, such as lawyers, real estate brokers, mortgage insurers, and appraisers "have to
do their due diligence, too."

But Ontario's real property appraisers say the banks are contributing to the plague of mortgage fraud sweeping Ontario by relying on computers — instead of human beings — to make their funding decisions.

The machines, computers using "automated valuation model" technology," come up with a probable value for the property, based on inputted public record information relating to sales of properties in the neighbourhood.

Brent Williams, president of the Ontario Association of the Appraisal Institute of Canada, says reliance on this technology "to get a quick turn around on mortgage transactions" removes a key element from the loan approval process: "the personal contact that takes place if a third-party appraiser conducts an on-site valuation."

Toronto appraiser Michael Roman says the automated valuation systems may be effective in subdivisions where homes tend to be carbon copies of each other, but can break down in older, more complex neighbourhoods in a city like Toronto, where renovations have an impact on the value of aging properties.

"The bank's computer will confirm a value which may support a higher value than the property's actual worth if inaccurate data, and possibly "embellished listings by a friendly real estate agent" have been used. Roman points out that computer programs are cheaper, at $50 to $75 per valuation, than human appraisal costs that can run up to $250.

Banks also know that computers offer quicker turnarounds than using an appraiser.

Roman believes banks feel the need to provide "a more user-friendly service to their customers in a very competitive market."

Bankers association spokeswoman Drew-Lytle acknowledges that Canadian banks use the automated service but says banks rely "on many factors before approving loans."
Joe Barbera, a communications consultant with extensive banking industry experience, said in an interview that, "in the past, decisions on mortgages were paper-driven by local bankers and mortgage specialists in their neighbourhoods."

But now, "more decisions are technology-based, driven by computer models and data bases, away from local communities" as financial institutions are "pressured to drive sales."

(as seen in The Toronto Star)