10-137AD ASIC consults on mortgage early exit fees
Sunday 27 June 2010
ASIC today released a consultation paper on new laws regulating mortgage early exit fees which are unconscionable or unfair.
Under the National Credit Code, early exit fees which are unconscionable can be annulled or reduced by a court. Under the Australian Consumer Law, an unfair term requiring an early exit fee to be paid can be declared void. ASIC also has a number of new enforcement powers under the new consumer law provisions in the Australian Securities and Investment Commission Act 2001 (ASIC Act).
ASIC’s Consultation Paper 135 Mortgage early exit fees: Unconscionable fees and unfair contract terms (CP 135)contains proposals about our expectations for compliance with provisions in the National Credit Code and ASIC Act that apply to setting the price of and explaining mortgage early exit fees.
‘These new provisions strengthen ASIC’s ability to challenge unfair early exit fees. Excessive early exit fees may deter consumers from switching to another mortgage’, ASIC Commissioner, Dr Peter Boxall said.
‘We strongly encourage stakeholders to provide feedback on our proposals, as this will assist us to further refine our guidance where necessary’, Dr Boxall said.
ASIC will continue to meet with industry, consumer representatives and other interested stakeholders to discuss the application of the National Credit Code and unfair contract terms provisions to mortgage early exit fees.
Under the National Credit Code at Schedule 1 of the National Consumer Credit Protection Act 2009, a fee or charge payable on early termination of the contract is unconscionable if it appears to a court to exceed the lender’s loss arising from the early termination.
Such fees will also be unfair under the ASIC Act if the term requiring the early exit fee to be paid:
would cause a significant imbalance in the parties’ rights and obligations arising under the contract;
is not reasonably necessary to protect the legitimate interests of the lender; and
would cause the borrower detriment (whether financial or otherwise) if it were applied or relied on.
Both provisions commence on 1 July 2010. The National Credit Code provisions will apply to existing home mortgage contracts. The ASIC Act provisions will apply to contracts entered or renewed on or after 1 July 2010 as well as terms in contracts varied on or after 1 July 2010.
ASIC will administer the National Credit Code and unfair contract terms provisions in the ASIC Act in a way that helps consumers avoid paying early exit fees which are unnecessarily high while also taking into account a lender’s right to recover their reasonable costs and be flexible with their charging. ASIC has formulated the proposals in CP 135 in light of this objective.
Once the laws commence, if a borrower thinks that an early exit fee they have been charged is unconscionable or unfair, they can:
complain to their lender and, if needed, take the dispute to the lender’s External Dispute Resolution Scheme;
complain to ASIC; and/or
challenge the fee in court proceedings.
Making a submission
This consultation paper seeks the views of stakeholders, including industry members, industry associations, consumer groups and consumers. Submissions on the proposals contained in CP 135, published today, close on Monday 9 August 2010. Details on how to make a submission are contained in CP 135.
ASIC’s credit website and subscription service
ASIC will continue to publish information on its website about the new consumer credit regulatory framework including the legislation, licensing process, general obligations and the timeframe in which the changes will take effect.
To receive information from ASIC about the National Consumer Credit Protection reforms, subscribe to the ASIC Credit Reform Update.