12-231MR ASIC reports on review of early termination fees for residential loans entered into before 1 July 2011
Tuesday 18 September 2012
ASIC today released a report on early termination fees for residential loans entered into before 1 July 2011. ASIC’s review covered 20 lenders – including both authorised deposit taking institutions (ADIs) such as banks and credit unions, as well as non-ADIs.
ASIC Commissioner Peter Kell said the review was conducted to assess industry's compliance with the law in this area following the publication of ASIC's guidance in Regulatory Guide 220 Early termination fees for residential loans: unconscionable fees and unfair contract terms (RG 220).
‘While early termination fees have been prohibited on new loans from 1 July 2011, it is important that lenders comply with the law for old loans on which such fees are still payable,’ Mr Kell said.
The 20 lenders reviewed charged an early termination fee on approximately 75,000 occasions between 1 July 2010 and 15 February 2011 and there were approximately 1.5 million loans on which an early termination fee would have been payable as at 15 February 2011.
ASIC’s report identifies factors that increase the likelihood of an early termination fee being declared unconscionable, and makes recommendations for lenders on how they can reduce the likelihood of this happening. Fees identified as being at increased likelihood of being declared unconscionable included fees which:
did not reduce over time;
were calculated by reference to the loan amount; and
did not account for lenders' recovery (or ‘clawback’) of commissions paid to mortgage brokers when a loan is terminated early.
As a result of the review, several lenders made changes to their fee structures. Some lenders also indicated they will be reviewing early termination fees to be charged in the future on a loan by loan basis to ensure that no individual consumer is overcharged.
ASIC also reviewed complaints data. While less than 1% of consumers who were charged an early termination fee made a complaint, over half of consumers who complained ultimately had their early termination fee waived or reduced.
ASIC continues to follow up specific issues with some of the lenders involved with the review and encourages other lenders to review their early termination fees in light of the report's findings.
On 19 July 2012 ASIC announced that RHG Mortgage Corporation would refund over $3.3 million in early termination and discharge fees (refer: 12-169MR).
The National Credit Code, which commenced on 1 July 2010, provides that a fee payable upon early termination will be unconscionable if it exceeds a reasonable estimate of a credit provider's loss from early termination including the credit provider's average reasonable administrative costs. This is consistent with an earlier provision in the State and Territory based Uniform Consumer Credit Code.
New laws which commenced on 1 July 2011 prohibit early termination fees on variable residential loans entered into after 1 July 2011. Loans entered into before 1 July 2011 may still have early termination fees, however, these fees are subject to the National Credit Code restrictions.
In November 2010, ASIC provided guidance on the circumstances where early termination fees may be unconscionable or unfair in Regulatory Guide 220 Early termination fees for residential loans: unconscionable fees and unfair contract terms (RG 220).
Consumers who think they have paid an unconscionable or unfair fee should contact their credit provider in the first instance. If consumers are not satisfied with that outcome they can make a complaint to an external dispute resolution service – either the Financial Ombudsman Service or the Credit Ombudsman Service, depending on the credit provider.
The review did not examine break fees on fixed rate loans or other discharge fees.