In this environment of rising interest rates, high inflation and an unpredictable housing market, it is imperative that consumers understand the true cost of borrowing so they can make an informed decision about their mortgage.

Mortgage professionals can help inform consumers by accurately calculating and disclosing the annual percentage rate of borrowing (APR).

FSRA’s recent examinations have uncovered cases where the APR has been calculated and disclosed incorrectly. Based on our findings, we are planning a compliance blitz in fiscal 2024-2025.

Calculating the APR

The APR intends to show the “true costs” associated with a mortgage. This includes the interest rate and certain[1] costs or fees incurred to secure the mortgage.

APR is an annualized percentage, which means it considers the cost of borrowing money over an entire year. While this may make the APR higher than the interest rate alone, it provides a more accurate picture of the overall cost of the mortgage.

When obtaining a mortgage, borrowers are faced with brokerage, lender, appraisal, legal and other fees. These fees can significantly increase the total cost of a mortgage. Because the APR includes most costs associated with a mortgage, a borrower can easily compare offers from different lenders to determine the best option.

Section 23 of the Mortgage Brokerages, Lenders and Administrators Act requires brokerages to disclose to borrowers the cost of borrowing. O. Reg. 191/08: Cost of Borrowing and Disclosure to Borrowers (O. Reg. 191/08) specifies how the cost of borrowing, expressed as APR, should be calculated and disclosed.

FSRA’s Findings

Through examinations, FSRA has noted cases where the APR has been calculated and disclosed incorrectly.

Miscalculations usually arise because of the following:

  • Excluding required fees (administrative, lender and/or brokerage fees, legal service and disbursement fees, appraisal fees).
  • Excluding required fees from the disclosure document – resulting in both non-disclosure to the borrower and incorrect APR calculations.
  • Adding incorrect fee amounts due to contradicting statements and disclosures.
    For example, lender fees listed in the commitment letter do not match those shown on the disclosure document (or vice versa), and the incorrect fee was used to calculate the APR.

Compliance blitz

FSRA will conduct a compliance blitz in fiscal 2024-2025 of APR disclosures made to consumers. We will focus on mortgage transactions completed in the 12 months leading up to the blitz.

Until then, brokerages and principal brokers should review internal practices and provide training when necessary.

We expect to take action against any brokerage exhibiting systemic or material deficiencies based on findings during the blitz.

Actions may include mandatory education for agents and brokers on the importance of accurately calculating APR and/or warning letters.

Depending on the severity, consumer impact and/or repeated non-compliance, FSRA may impose licensing conditions, restrictions, revocation and/or monetary penalties.

[1] The costs and fees that must be included in the APR calculation are outlined in O. Reg. 191/08: Cost of Borrowing and Disclosure to Borrowers.