The Opposition’s motions in the Senate to disallow the regulations banning exit fees have not been passed.
Regulation 79A of the National Consumer Credit Protection Amendment Regulations 2011 (No. 2) as amended by the National Consumer Credit Protection Amendment Regulations 2011 (No. 3) sets out the prohibition on exit fees effective from 1 July 2011.
A credit fee or charge is prohibited if:
(a) it is provided for in a credit contract entered into on or after 1 July 2011; and
(b) it is to be paid on or in relation to the termination of the credit contract, whether the liability to make the payment is incurred at that time or at an earlier time; and
(c) any of the amount of credit provided under the credit contract is secured over residential property.
Regulation 79A needs to be read together with Regulation 65C which excludes the application of the Code to credit provided for the purpose of investment in residential property if the credit is not provided for the purpose of investment in a single residence and the total amount if the credit provided, or to be provided, is more than $5,000,000. Otherwise the prohibition on exit fees for credit also applies to credit provided for residential investment property.
The prohibited fees are automatically unlawful. Borrowers do not need to make an application to challenge these fees.
What fees are permitted?
The effect of Regulations 79A(2), (3) and (4) is that the prohibition does not apply to the following exit fees (paid on or in relation to the termination of the credit contract, whether the liability to make the payment is incurred at that time or at an earlier time):
- a break fee that relates to early repayment of a fixed rate component of the loan and only to the part of the credit provider’s loss arising from the early repayment, that is a result of differences in interest rates, provided the fee is not unconscionable under Section 78(4) of the National Credit Code or sections 12CA, 12CB and 12CC of the ASIC Act;
- a discharge fee which reimburses the credit provider for the reasonable administrative costs of terminating the credit contract. Administrative costs of terminating a credit contract may include, for example, the cost of calculating the payout figure on termination, the cost of processing the termination, the cost of discharging a related mortgage, and third party costs that arise because of the termination. A cost is a reasonable administrative cost only if it does not exceed a reasonable estimate of the average reasonable administrative cost to the credit provider of terminating that class of credit contract;
- exit fees in a credit contract that is not secured by residential property;
- exit fees contained in a credit contract secured by residential property that is excluded by Regulation 65C;
- exit fees such as deferred administration and establishment fees, early repayment fees, and LMI, transfer cost and valuation recoupment fees contained in credit contracts entered prior to 1 July 2011;
- credit fees or charges incurred before the termination of a credit contract that is terminated before any credit has been provided under the contract.