‘Excessive’ loan discharge terms slammed

This issue was addressed in the Australian Competition and Consumer Commission’s (ACCC) final Home Loan Price Inquiry report released last year, which examined how the home loan market works and potential improvements that could be made.

The report found that the issues of a lack of price transparency and higher interest rates for existing loans continue to pervade the lending sector, while the difficulty in changing loans was preventing borrowers from doing so.

In addition, the report found that the discharge process can be “unnecessarily difficult and lengthy for borrowers” and often involve “unclear and/or complicated steps for borrowers, including Discharge Authority forms that are difficult to access and complete, or administrative hurdles such as lenders requiring in-person contact before processing a discharge request”.

The ACCC warned that difficulties in the discharge process were deterring switching, resulting in costs to market participants, including mortgage brokers, borrowers and lenders.

As such, it recommended that all lenders should be required to provide a standardised Discharge Authority form to borrowers to complete and allow for “appropriately authorised third parties” (for example, a settlement agent, mortgage broker or new lender) to complete and submit discharge forms on borrowers’ behalf.

As well, the ACCC recommended that all lenders should be subject to a maximum time limit of 10 business days to complete the discharge form.

However, Ms Giovinazzo cited the example of the Commonwealth Bank of Australia (CBA), which she said had advised that a minimum of 36 business days’ notice was required from customers wanting to leave, adding that other lenders were also making it more difficult for their customers to exit them.

Ms Giovinazzo said that this is almost four times the limit recommended by the ACCC.

“Some of these lenders are effectively holding their customers to ransom by increasing the minimum time required to close an account,” she said.

“There are also other tricks to deter customers from leaving such as failing to provide discharge forms or delays in processing them. These sort of tactics I believe contravene anti-competitive behaviour guidelines of the consumer watchdog, the ACCC.”

“Thirty-six business days is a massive deterrent to a customer looking to change banks when there has actually been a recommendation from the ACCC for discharge forms to be standardised and processed within 10 business days.”

Ms Giovinazzo argued that the prolonged discharge period could result in borrowers paying a higher interest rate for a longer period of time if they are switching lenders to secure a lower interest rate. She said it could potentially cost a borrower an additional $600 to $1,000 in a two-month period, depending on how much interest they would be saving by switching their home loan.

“Banks are potentially profiting off this delay across tens of thousands of clients,” she said.

Ms Giovinazzo added that the ACCC inquiry report also found that mortgagors with older home loans were continuing to pay higher interest rates (by more than 100 bps in some instances) than borrowers with newer loans.

She concluded: “The ACCC recognises the wide range of home loan interest rates available and wants it to be as easy as possible for borrowers to switch lenders and has made recommendations to make this process faster, less confusing and less frustrating.

“But it’s extremely disappointing that we are actually seeing the opposite taking place with the behaviour of some banks making it harder for their customers to shop around and seek a more competitive offering.”

At the time of the release of the ACCC home loan inquiry report, both the Finance Brokers Association of Australia (FBAA) and the Mortgage & Finance Association of Australia (MFAA) welcomed the ACCC’s recommendations around the speeding up of loan discharges.

While the FBAA said that it has been publicly calling for standardised authorities, such as discharges, the MFAA said it particularly welcomed the moves around making discharges clearer and more swift.

As well as being placed under the microscope for their loan discharge speeds, the major banks have recently been scrutinised for slower turnaround times in the broker channel compared to the direct channel.

Indeed, the Commonwealth Bank of Australia (CBA), National Australia Bank (NAB), Westpac and ANZ told Parliamentary hearings last week that turnaround times would be within one or two days in the proprietary channel but between around 10 and 12 days in the broker channel.

Meanwhile, MoneyQuest compliance manager Tim Donahoo recently told The Adviser that there is “no justification” for the delays in processing broker-lodged loans by the major banks, and urged the sector to be “more vocal” in demanding “meaningful action”.

[Related: Profit stopped banks from passing on full rate cuts: ACCC]