Regulation of mortgage exit fees

ASIC has released Consultation Paper 135 Mortgage early exit fees: Unconscionable fees and unfair contract terms (CP 135) which contains its proposed guidance for compliance with provisions in the National Credit Code and Australian Securities and Investment Commission Act 2001 (ASIC Act) that apply to setting the price of and explaining mortgage early exit fees.

Under the National Credit Code (Schedule 1 of the NCCP Act, sections 78 and 79), early exit fees which are unconscionable can be annulled or reduced by a court. Under the Australian Consumer Law, which amended the ASIC Act, an unfair term requiring an early exit fee to be paid can be declared void (Section 12BF). ASIC also has a number of new enforcement powers under the new consumer law provisions in the ASIC Act.

ASIC considers that a contractual term providing for an early exit fee which is unconscionable under the Code is likely to also be unfair under the ASIC Act. However, its opinion is that it does not necessarily follow that a fee that is not unconscionable will be fair for the purposes of the ASIC Act, as the relevant tests under the Code and ASIC Act are different.

Both provisions commence on 1 July 2010 and will be administered by ASIC.

The National Credit Code provisions in respect of unconscionable fees are unchanged from the Uniform Consumer Credit Code and will therefore apply to pre-1 July 2010 home mortgage contracts as well as new home loans and residential investment loans made on or after 1 July 2010.

The ASIC Act provisions will apply to contracts entered or renewed on or after 1 July 2010 as well as terms in contracts varied on or after 1 July 2010.

Once the laws commence, if a borrower thinks that an early exit fee they have been charged is unconscionable or unfair, they can:

  • complain to their lender and, if needed, take the dispute to the lender’s External Dispute Resolution Scheme;
  • complain to ASIC; and/or
  • challenge the fee in court proceedings.
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