The National Consumer Credit Protection Amendment Regulations 2011 (No. 3) amend the Subregulation 79A(3)(c) definition of break fee inserted by the National Consumer Credit Protection Amendment Regulations 2011 (No.2) (the exit fee regulations) by removing the prescription of the method of calculation of the break fee.
Under Reg 79A(2)(a)(i) of the exit fee regulations, break fees on fixed rate loans are exempt from the prohibition on exit fees on new home loans which commences on 1 July 2011.
Break fees recover a loss incurred (whether realised or not) by credit providers from the early repayment of a fixed rate loan.
Following the making of the exit fee regulations, it was argued by industry that paragraph (c) of the definition of “break fee” was ambiguous. That paragraph previously required that a break fee relate to the difference between the fixed interest rate under the fixed rate loan and the prevailing rate at which credit is provided by the credit provider under the relevant class of credit contract.
The ambiguity related to whether paragraph (c) required break fees to be calculated by reference to the interest rate that credit providers charge customers for home loans (commonly referred to as the retail rate) or enabled calculations based on other interest rates. Many credit providers calculate break fees with reference to their funding costs or wholesale interest rates known as “swap rates”. Such calculations are consistent with guidelines issued by the Financial Ombudsman Service.
The Regulations substitute a new paragraph (c) into the definition of “break fee” in the exit fee regulations to remove the ambiguity. The substituted paragraph only requires break fees to relate to the part of the credit provider’s loss, arising from the early repayment of the fixed rate loan, that results from differences in interest rates.
The amendment ensures that credit providers and borrowers can contract to calculate break fees in a variety of ways for the purposes of the exit fee regulations, including by reference to retail or wholesale interest rates or the credit provider’s costs of funds.
Even though break fees are not absolutely prohibited they must not breach section 78 of the National Credit Code which relates to unconscionable fees and charges.