Although early termination fees have been prohibited on credit contracts secured over residential property entered into on or after 1 July 2011 (details here), such fees are permitted on residential loans entered into before 1 July 2011 provided they are not unconscionable.

ASIC has released a report on industry’s compliance with the law on early termination fees for residential loans entered into before 1 July 2011 (Report 300).

ASIC’s review covered 20 lenders – including both authorised deposit taking institutions (ADIs) such as banks and credit unions, as well as non-ADIs.

ASIC found that, on an average or portfolio basis, lenders’ early termination fees generally recovered less than their reported losses arising from early termination.

However, there were circumstances where some lenders were estimating losses in a manner that increased the likelihood of recovering amounts exceeding a reasonable estimate of their losses on individual loans.

ASIC identified the following problem areas for lenders:

• claiming items as losses which are not unrecovered establishment costs or losses arising from early termination e.g. servicing costs and trail commissions;
• failure to keep records of unrecovered establishment costs, or verification of unrecovered establishment costs, for the purposes of calculating losses from early termination;
• estimating their losses (and setting their early termination fees) on a portfolio basis rather than on an individual loan basis. This included averaging establishment costs across the whole loan portfolio even where these costs appeared to differ substantively between loans (e.g. distinct differences in costs between specific products or sales channels, or for unusually large or small loans) and setting off any funds recovered in relation to individual loans (e.g. clawbacks of commissions paid to brokers or lenders’ mortgage insurance premium refunds) against losses on a portfolio basis;
• early termination fees that did not reduce over the period the fee was payable;
• early termination fees that were calculated by reference to the loan amount (i.e. proportionate);
• failure to review each individual early termination to ensure that the early termination fee did not exceed a reasonable estimate of the lender’s losses;
• when a borrower refinances with the same lender, failure to ensure that the early termination fee takes into account any reduced establishment costs for the loan;
• failure to give consumers before loan settlement a worked example setting out in dollar terms the fee that would be payable on early termination of their specific loan.

ASIC has previously issued Regulatory Guide 220 Early termination fees for residential loans: unconscionable fees and unfair contract terms(RG 220).