Lender Legal Fees Added to Your Mortgage Default: What You Can Challenge

You fall behind on your mortgage, and a letter or payout statement arrives with more than the missed payments on it. There may be lender legal fees, administrative charges, late-payment fees and extra interest, all added to what you are told you owe. It is hard to tell which of these are legitimate and which are simply padding.

This article explains in general terms what the law says about default charges and lender legal costs in Ontario, what you can ask the lender for, and how a dispute over the numbers can be raised. Every mortgage and every set of facts is different, so treat this as a map and not a verdict on your own bill.

What a lender may add when you are in default

A mortgage in default simply means you have not followed its terms, most commonly by missing a regular payment, and that can eventually lead to a forced sale of the home. Once that happens, lenders often add several kinds of charges to the amount they say is owing.

• Interest on the missed payments (arrears).
• Late-payment or default fees, such as the $50 default charge and $40 returned-payment fee shown in one regulator's sample mortgage disclosure box.
• Legal fees for letters, notices and any enforcement steps.
• Other administrative or professional fees, sometimes added to the discharge or payout figure.

The Court of Appeal for Ontario has allowed late-payment charges that were substantiated and did not offend the Mortgages Act or the Interest Act. The same court upheld the disallowance of unexplained professional and administrative fees that a lender had added to the discharge amount. The difference was proof and explanation, not the label on the charge.

Limits on interest charged on arrears

The federal Interest Act is the main limit on so-called default interest. It says no fine, penalty or rate of interest may be taken on arrears of principal or interest secured by a mortgage on real property if it increases the charge on the arrears beyond the rate payable on principal not in arrears. A mortgage may validly provide for interest on arrears at a rate not greater than the ordinary rate.

In plain terms, the lender can charge the regular contract rate on the missed amounts, but not a higher penalty rate on them. This rule is about the rate on arrears. It does not by itself stop a lender from relying on other contract charges, and outcomes depend on the facts and on what the lender can substantiate.

Another point can matter if your lender has declared the whole loan due. The Court of Appeal has held that the standard charge acceleration clause lets a lender accelerate the principal on default, but does not entitle it to future, unearned interest. The lender was entitled only to interest accrued to the date of default.

How to ask the lender for a breakdown

You do not have to guess what the lender is claiming. Under the Mortgages Act, a mortgagor can give written notice requiring the mortgagee to provide a written statement of the principal or interest in default, the nature of the default, and the amount of expenses necessarily incurred. The mortgagee must respond within 15 days after receiving the request.

If the lender fails to respond without reasonable excuse, or the statement is incomplete or incorrect, its enforcement rights are suspended until it complies. That suspension is limited. In a power of sale, the lender's non-compliance does not invalidate a purchaser's title, and the borrower's remedy is against the mortgagee for an improper sale. The suspension also does not remove the lender's substantive rights.

• Make the request in writing and keep proof of when it was delivered.
• Ask for the principal and interest in default, the nature of the default and the expenses incurred.
• Diarize 15 days from when the lender received it.
• Ask for the legal invoices or an itemized account behind any legal fees, since a lender must be able to justify them.
• Compare every line to your mortgage terms and to your own payment records.

Challenging charges you think are improper

The Court of Appeal has said that a mortgagee must be able to justify its legal fees and that the standard charge terms are not a blank cheque to incur and charge fees. If you are told a figure is owed and the lender cannot explain it, that is the starting point for a dispute.

In that same case the court rejected the lender's argument that an assessment under section 43 of the Mortgages Act was the only route for disputed charges. A judge hearing a court application had jurisdiction to decide all the issues, including whether the added fees were legitimate. So a borrower can dispute fees in a court application, and the section 43 assessment mechanism is also referred to in the decision.

How an assessment of costs works in practice, who can ask for one and by when, depends on the Act and the type of proceeding. This is a good point to have a lawyer confirm the current procedure before you rely on it. Disputing a bill does not make the underlying arrears disappear, so the dispute and the payment problem usually need to be handled together.

Where power of sale fits in

Added fees matter most when the lender starts enforcement, so it is worth checking the numbers early. If the mortgage has its own power of sale clause, the borrower must be in default at least 15 days before notice, and the lender must give at least 35 days' notice of intention to sell to everyone with an interest in the property.

If the mortgage has no power of sale clause, the statutory power of sale applies after three months' default in payment and 45 days' notice to persons with an interest in the property. The prescribed notice is Form 1, Notice of Sale under Mortgage. On a power-of-sale transfer, land registration requires declarations about the default date, service of notice on all persons entitled and compliance with the Mortgages Act.

Because notice periods are fixed, a charges dispute should be raised early. Waiting until a sale date is close leaves little room to correct the numbers.

What to do next

Start with the paperwork, then the lender, then advice. If your lender is a bank, relief measures may be available, and the regulator advises contacting the lender early. Relief can include special payment arrangements, extended amortization or capitalization of arrears. Extending amortization lowers payments but can mean thousands or tens of thousands of dollars more interest. Banks are expected to explain the new payment and total cost and to get your express consent. That guidance applies to federally regulated lenders, so it may not apply to a credit union or private lender.

• Gather the mortgage, the renewal or payout statements, default letters and all notices.
• Send a written request for a statement of the default and expenses.
• Ask for an itemized account of legal fees and other added charges.
• Check whether any penalty rate is being applied to the arrears.
• Note every date on any notice of sale, since timelines are short.
• Speak with a lawyer before paying a disputed amount, signing a relief agreement or letting a notice period run.

Frequently asked questions