Excessively large exit fees for home loans may actually be illegal because they do not represent a reasonable proportion of the debt borrowed, two legal experts warn.
They also say the Australian Securities and Investments Commission should investigate the use of exit fees among lenders and determine whether any action can be taken.
Melbourne University professors Ian Ramsay and Neil Ashton argue excessive exit fees, which are sometimes worth up to $14,000, are too high for mortgage payers who attempt to make their payments early.
A paper published through the Melbourne Law School’s Centre for Corporate Law and Securities Regulation, authored by the two professors, has found some borrowers are charging exit fees above $10,000 in some instances.
Lenders outside the main banks and credit unions charge an average of $1,900 for a $250,000 variable rate home loan, the paper found – but this is much higher than the $420 and $680 average fees charged by credit unions and banks respectively.
The paper comes after recent Reserve Bank of Australia figures shows revenue to the banks from business fees increased by 13% during 2009. Ramsay’s research claims exit fees have actually grown out of proportion compared to these other charges.
“There is evidence that exit fees have increased relative to other fees so that they constitute a larger percentage of total fees charged. A lack of competitive restraint may be a reason for this.”
“According to 2008 research by ASIC, from 1995 to 2007 exit fees increased from 19.31% of total fees to 41.83% of total fees charged for home loans.”
Ramsay also says the very nature of exit fees makes them a target for banks, because they can be inflated quite easily compared to other types of fees.
“They are contingent, they’re not up front. Combined with the fact that over 60% of the loans we looked at have exit fees, we think this is quite a widespread problem.”
Ramsay says ASIC will have new powers under the upcoming consumer credit protection laws, and as a result, it should investigate whether these excessive fees are actually legal.
“At the end of the day, excessive exit fees are just anti-competitive. They will lock someone into a particular provider, and there have been some staggering stories we have heard.”
“We think ASIC should issue some strong guidance to home loan providers. Australians pay higher exit fees than in a number of different countries. One reason we think that is the case is because over there, regulators have issued strong guidance. We think that’s important.”
Ramsay says ASIC should also put pressure on banks to either reduce exit fees, or publish documentation justifying them.
“It’s hard to justify an exit fee that’s an excessive amount of the principle. We’ve seen fees that are sometimes 2-4% of the principle, and that can’t be justified. There needs to be more pressure on providers to reduce these fees.”
Patrick Stafford is a freelance journalist and a former deputy editor of SmartCompany.
