The Bank of Montreal has announced that it will refund a total of $7.1 million to about 28,000 customers who overpaid penalties on certain mortgage transactions.

The bank issued an apology Friday, saying it made a mistake in some of its calculations. The average refund amounts to about $250.

"We regret this situation and apologize for any inconveniences it may have caused," Lynda Brochu, senior vice-president of personal and commercial products and distribution at Bank of Montreal (BMO) said in a written statement.

"We've taken the matter very seriously and once the error was discovered we conducted a thorough investigation to identify customers who may have been affected. We intend to fully reimburse any customers who are identified as having been negatively impacted."

The bank identified an inconsistency in the way mortgage contracts explained the calculation of interest penalties and the way the numbers were actually crunched.

The inconsistency affected some of the bank's fixed-rate, limited pre-payment residential mortgage customers who pre-paid or early-renewed their mortgage, as well as the some of the farm mortgage customers who early-renewed a fixed-rate mortgage within the last year of the term.

As a result, the bank said some customers paid less than they were supposed to while others paid more.

But BMO sought to assure customers it is not seeking to recover funds from those who were undercharged.

"The majority of customer overpayments occurred after 1997 and a small number of the early renewal overpayments date back to 1986," the bank said in a written statement.

The bank will automatically mail refund cheques to customers whose eligibility has been verified through its electronic database, which includes former customers who have been located by the bank.

Customers who believe they may be owed money but have not received a cheque by June 23, 2006 should contact the bank's customer service line at 1-866-895-3760. All requests must be received no later than September 30, 2006, the bank said

Customers who paid an interest penalty in the following instances may be eligible for a cheque:

• Residential mortgage customers who made a partial or full pre-payment to a fixed-rate, limited pre-payment mortgage between March 1997 and July 2005
• Residential mortgage customers who early renewed a fixed-rate, limited pre-payment mortgage between November 1986 and July 2005
• Farm mortgage customers who early renewed a fixed-rate mortgage within the last 12 months of the term between November 1986 and June 2006.

Bank of Montreal shares traded Friday at $61.62, down nine cents, at the Toronto Stock Exchange.