Victory on exit

Early exit fees have been banned on home loans taken out from July 1 last year, but property buyers who took out loans before then with early exit fees might not have to pay the fees after all.

In a review of 20 lenders, the Australian Securities and Investments Commission (ASIC) found that they charged an early termination fee on 75,000 occasions between July 1, 2010, and February 15, 2011.

Although fewer than one in 100 consumers who were charged an early termination fee made a complaint, more than half of those who did complain ultimately had this fee waived or reduced.

The regulator has been making lenders better aware of the factors that increase the likelihood of an early termination fee being declared unconscionable.

Many lenders are likely to have changed their early exit fees to make them reflect the true costs they have incurred. But many consumers are likely to have paid or are liable to pay exit fees that are unfair.

Exit fees apply when a loan is terminated within the first three to five years, though the periods when exit fees apply could be longer, the regulator says.

Early termination fees go by a variety of names, including deferred establishment fees, early repayment fees, deferred administration fees and deferred settlement fees.

Indeed, early exit fees are different from the standard discharge fees charged on the termination of a loan and break fees that are charged on the early termination of fixed-rate residential loans.

Even though variable interest-rate mortgages entered into before July 1 last year are not covered by the banning of exit fees, these fees are still subject to the National Credit Code that came into force on July 1, 2010.

Grounds for having fees waived or reduced include when they do not reduce over time, are calculated by reference to the loan amount, and do not account for lenders' recovery of commissions paid to mortgage brokers when a loan is terminated early.

The regulator found 13 lenders had early termination fees that did not reduce during the period the fee was payable. This increases the likelihood of lenders recovering more than their actual losses arising from the early exit. Fifteen lenders had early termination fees that were calculated by reference to the loan amount, which also increased the chances of having the fees declared unconscionable. That is because the regulator says losses to lenders from early termination are fixed and do not increase relative to the size of the loan. A fee that is proportionate to the loan size is more likely to exceed the losses that the lender is entitled to recover.

As a result of complaints to the regulator, in July RHG Mortgage Corporation, formerly known as RAMS Mortgage Corporation, agreed with ASIC to refund more than $3.3 million in early termination and discharge fees on loans terminated since July 1, 2010, when the National Credit Code and ASIC's powers took action and the code began.

More than 6400 affected customers will receive refunds ranging from $50 to more than $10,000, with the most common refund being $400.

RHG also agreed to reduce its discharge fees on existing loans and to the staggered removal of early termination fees for thousands of customers. In early 2008, Westpac acquired mortgage lender RAMS and RHG has no association with RAMS or Westpac.

ASIC says borrowers who think they have paid an unconscionable or unfair fee should contact their lender in the first instance. If consumers are not satisfied with the outcome from their lender, they can make a complaint to an external dispute-resolution service of which the lender has to be a member.

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