Rules on exit fees are clear
This article by ASIC Chairman Tony D'Aloisio originally appeared in the Herald Sun on 19 November 2010
Mortgage exit fees for variable-rate loans have had a lot of publicity in the last couple of weeks.
Consumers are disappointed if they discover, as happens from time-to-time, that they are up for thousands of dollars because they want to repay a variable-rate mortgage early and take their business to another lender.
The laws on exit fees – which are enforced by ASIC – are straightforward. Mortgage exit fees are acceptable provided they reflect – and are limited to – the lender's losses which can be directly connected to the borrower exiting the loan early.
Last week, ASIC published the components of exit fees that we say are acceptable under the new laws that came into effect on 1 July 2010. We think our guidance – which can be found at www.asic.gov.au – makes things clear for consumers and lenders.
We've also set out in the guidance what we think can't be included in an exit fee. A lender cannot try to recover profits they might have made if the loan had run full-term. Also, a lender can't try to recover marketing costs.
In our view, these legal requirements also apply to deferred establishment fees – sometimes lenders charge deferred establishment fees if a customer exits a loan early. Further, double-dipping isn't allowable – if the consumer was charged for a cost when the loan was set-up, the lender can't charge for it again if the consumer exits early.
Importantly, the law still allows lenders to be flexible in their pricing. Thus lenders might offer mortgages with no application fees. That can be attractive to some customers. However, if you take up a loan with that upfront concession and then re-finance soon after, the lender is likely to suffer a loss. It won't have had time to recover the costs of setting up the loan. In those circumstances, the lender would be able to justify charging a higher early exit fee.
Overall, exit fees can't be used to discourage consumers from switching from one lender to another, or as a means of punishing them for doing so. We think that the longer the loan has run, the lower the exit fee – so an exit fee in year three should be lower than an exit fee in year one.
Consumers who think they are being charged exit fees that are more than the lender's losses have a few different courses of action they can pursue. Initially, they should take their case up with the lender. Lenders are required to have proper internal dispute resolution processes and provide responses within set times.
Consumers who, having taken up the matter with the lender, still think they have a case can have it heard by one of the ASIC-approved external dispute resolution schemes (EDRS). There are two such EDRSs: the Financial Ombudsman Service and the Credit Ombudsman Service Limited. Lenders must belong to one of them. Consumers who take their case to an EDRS will have the case heard by an independent party.
Finally, consumers can complain to ASIC. Our job is to ensure lenders understand what the law requires, and that they apply that law. In instances where they don't, ASIC can take action against them, including proceeding to court.
Tony D'Aloisio is chairman of the Australian Securities and Investments Commission.