Mortgages: Aus's ASIC takes aim at exit charges

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.

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 the 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.’

For more information on ASIC's position, see www.asic.gov.au.

The restrictions on exit fees may have a higher impact on smaller institutions which often provide loans to less creditworthy customers or at lower rates in return for a guaranteed minimum loan period, typically three or five years. Sometimes these are "low start" loans under which repayments ramp up annually. In many countries, low-start loans have been churned by unscrupulous brokers who repeatedly sell new loans to existing clients, keeping them in the low-start period in loan after loan.

However, the penalties are rolled into the new loan and that has proved to be financially dangerous as property prices have fallen to below the outstanding balance on the loan and as borrowers have focussed on the monthly payment and not the total liability.

ASIC is looking to protect customers against at least part of this problem area by constraining exit fees. Action has already been taken to reduce the level of borrowing by those who are more hopeful than realistic when it comes to planning their financial future with the restriction of "low-doc" loans.