Break fees holding firm
Lenders are likely to find they have a lot of latitude in setting break fees and other fees on home loans once the National Credit Code and lew laws on unfair contracts come into force later this week.
ASIC - a not so independent regulator timing its policy announcements to suit the news cycle of the government of the day - yesterday published a consultation paper on how the commission might go about starting court proceedings to set aside or modify fees on loans under the code.
The key points of the consultation paper are that ASIC does not regard the loss of opportunity to earn a profit, or business development expenses, as being reasonable expenses when working out break fees.
Break fees, sometimes known as deferred establishment fees, are a fairly common feature of home loans in Australia. They usually apply in the first three years of a loan, though sometimes five years, and allow a lender to recover some of the up-front costs of setting up the loan that were not charged to the customer at the time of taking out the loan.
Consumer law in Australia has, since the mid 1990s, at least in theory, obliged lenders to align break fees with actual costs incurred. The present law, adopted by the Australian parliament last year, is an updated version of the same principles.
As before, however, the regulator will be pretty toothless since it is up to courts (at the request of borrowers or the regulator) to intervene and modify borrowers' contracts.
Break fees have not dropped much over the last couple of years in spite of industry knowledge that the Labor government was agitating for change. The government first asked ASIC to look at the issue in early 2008.
The most egregious break fees are those of lenders with aggressive growth strategies prior to the GFC and which are no longer in the market, principally RHG, formerly Rams Home Loans, and GE Capital, including its former subsidiary Wizard Home Loans.
Data compiled by the Reserve Bank of Australia and published earlier this month found that the increase in housing loan fee income across all banks in 2009 was driven by establishment and early exit fees.
However, the RBA noted that "the available information suggests that break fees on fixed rate loans accounted for a significant proportion of the overall growth in fees." Break fees on fixed rate loans are usually less controversial than those on other loans because the lender's losses (and tied to the cost of term funding) are easier to work out.
The most common dispute referred to the Financial Ombudsman Service is over break fees, though the number in dispute is in the low thousands, compared with hundreds of thousands of new loans taken out each year.