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FEES that penalise borrowers for ditching their home loan during the first few years of a mortgage are under scrutiny by the corporate regulator, amid concerns some charges could breach consumer laws.

Early exit fees have been banned for all new loans signed from July 1. However, the ban does not apply to millions of loans issued before the new law came into force.

Some lenders were offering loans with exit fees of more than $5000 only months ago, and the Australian Securities and Investments Commission is reviewing whether these fees breach recent laws on unfair and unconscionable practices.

For those loans entered into before July 1, exit fees can only cover a lender’s costs that arise from terminating a loan. They cannot be used to make a profit from the borrower.

The changes are designed to make it easier for borrowers to refinance their loans and switch banks.

After vowing last year to get tough on unfair exit fees, ASIC told a Senate committee this month it was reviewing loans offered by 20 banks and non-authorised deposit-taking institution (ADI) lenders.

”This may bring to light potential unconscionable or unfair fee breaches,” the regulator said in response to a question taken on notice.

The review was welcomed by Ian Ramsay, director of the centre for corporate law and securities regulation at the University of Melbourne.

Professor Ramsay said last year’s consumer credit laws made it clear that exit fees could only be used to recover costs and not to make a profit. But where this boundary lies is up for debate.

”It’s timely for ASIC to do this review, particularly in the non-ADI sector. There’s still this sort of misunderstanding that exit fees for home loans have gone,” Professor Ramsay said.

”I think the government reforms are helpful, but there’s still going to be debate about what are reasonable administrative costs.”

Figures from the research company Canstar Cannex show one non-bank lender was charging an exit fee of up to $6250 on a $250,000 loan in March, months before the July ban. Another lender authorised to take deposits had an exit fee of $5500.

Mitchell Watson, a Canstar Cannex analyst, said it would take a borrower several years to save enough to offset a fee of this size.

”It’s a fairly significant fee when you look at the size of the loan being only $250,000. A fee of that size is really going to restrict people in their ability to save money by changing lenders,” he said.

Mr Watson said a few lenders were removing all exit fees retrospectively, but it was not clear how widespread this practice was.

The regulator said it had examined six instances where a bank fee may be unfair after the consumer credit laws came into force in July last year.


Posted by Clancy Yeates – The Age on 29th August, 2011