ASIC to crackdown on mortgage exit fees

Australian Securities and Investments Commission chairman Tony D'Aloisio expects lenders will review their practices and fees after the corporate watchdog released guidance on mortgage early termination fees.

Mr D'Aloisio said that the guidance, which sets out types of loss that should not be recovered through exit fees and the limited circumstances in which a lender may vary exit fees during the life of a mortgage, will ensure lenders are clear on ASIC's expectations.

"The law limits these fees to the recovery of a lender's loss caused by the early termination," he said.

"Lenders cannot use exit fees to discourage a borrower from switching their loan or to punish them for doing so," he said.

Mr D'Aloisio said ASIC will initially be focusing on the highest fees in the market because they create the biggest barriers to switching.

"We will challenge lenders who charge high fees to justify how their fee reflects actual losses caused by early termination.

"Where an exit fee cannot be justified by the lender, ASIC will take compliance or enforcement action."

Mr D'Aloisio also said that fees must be limited to the losses that occur at the time that the early termination takes place.

"Generally, the longer the consumer has had the loan, the smaller the exit fee should be.

"Lenders that charge establishment fees must ensure that they don't charge consumers for the same costs a second time through an early termination fee," he said.

See statement from ASIC below:

The Australian Securities and Investments Commission (ASIC) today released guidance for mortgage lenders that sets out how provisions in the National Credit Code and unfair contract terms law apply to mortgage early termination fees (exit fees).

This follows consultation leading up to and after the 1 July 2010 start date for the new legislation.

Regulatory Guide 220 Early termination fees for residential loans: unconscionable fees and unfair contract terms (RG 220) spells out ASIC's guidance on points including:
- what costs and types of loss can be included in exit fees

- types of loss that should not be recovered through exit fees

- the limited circumstances in which a lender may vary exit fees during the life of a mortgage.

A summary of key points in RG 220 is attached to this media release.

ASIC Chairman Tony D'Aloisio said the guidance would ensure that lenders are clear on ASIC's expectations of their conduct.

'The law limits these fees to the recovery of a lender's loss caused by the early termination. Lenders cannot use exit fees to discourage a borrower from switching their loan or to punish them for doing so.'

Mr D'Aloisio said he anticipated that - in light of the guidance published today - lenders would review their practices and their fees to ensure they comply with the law.

Mr D'Aloisio said that ASIC's initial focus will be on the highest fees in the market as they create the biggest barriers to switching. 'We will challenge lenders who charge high fees to justify how their fee reflects actual losses caused by early termination. Where an exit fee cannot be justified by the lender, ASIC will take compliance or enforcement action.'

Mr D'Aloisio also said that fees must be limited to the losses that occur at the time that the early termination takes place. 'Generally, the longer the consumer has had the
loan, the smaller the exit fee should be.' In addition, the law prevents double-dipping: 'Lenders that charge establishment fees must ensure that they don't charge consumers for the same costs a second time through an early termination fee.'

'ASIC is also aware that lenders may recover some losses from third-parties (e.g. a broker) when an early termination occurs. Any early termination fee must be reduced where this is the case.'

Mr D'Aloisio said that consumers who have concerns about exit fees can take a dispute to the lender's external dispute resolution (EDR) scheme, and have their specific case heard and resolved by an independent party. Consumers can also complain to ASIC on 1300 300 630 or online at www.asic.gov.au.

Importantly, the law and - ASIC's guidance on it - does not prevent lenders, including smaller lenders, from using flexible pricing, including by offering discounted establishment fees or honeymoon-rate loans.

Background
The applicable laws - under which an exit fee can be challenged in court - are:

- the National Credit Code which is part of the National Consumer Credit Protection Act 2009

- the Australian Securities and Investments Commission Act 2001 (ASIC Act).

The National Credit Code applies to home mortgages that were already in existence on 1 July 2010, or which have been established since then. The Code allows courts to review certain lender's charges - referred to the courts by ASIC or a consumer - on the grounds they are unconscionable.

Under the Code, a court can annul or reduce an exit or pre-payment fee if the court determines it exceeds a reasonable estimate of the lender's loss arising from early termination or pre-payment (i.e. the fees are found to be unconscionable under the National Consumer Credit Protection Act).

Under the unfair contract terms provisions of the ASIC Act, terms in a contract are unfair if:

- they would cause a significant imbalance in the parties' rights and obligations arising under the contract,

- they are not reasonably necessary to protect the legitimate interests of the party who would be advantaged by them, and

- they would cause detriment (financial or otherwise) if they were to be relied on.

In order to be 'unfair' under the unfair contract terms provisions, terms in a contract must meet all three tests. A court can declare terms void if the court finds the terms are unfair. The court may also make orders directed at redressing the loss suffered by consumers as a result of the unfair terms.

Under the National Consumer Credit Protection Act, lenders must be a member of an ASIC- approved EDR scheme. The two approved schemes are the Financial Ombudsman Service and the Credit Ombudsman Service Limited.
Today's guidance follows consultation - which included representatives of consumer interests and lenders - that began in June 2010 with a consultation paper (Consultation Paper 135 Mortgage early exit fees: unconscionable fees and unfair contract terms (CP 135)).