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Don't gouge on fees, banks warned

by Staff Reporter13 minute read
The Adviser

Jessica Darnbrough

The FBAA’s chief executive officer Peter White has applauded ASIC’s review of Australia’s lenders’ early termination fee structures, but believes more should be done to ensure the banks don’t "double dip".

Yesterday, ASIC released a report which looked at the early termination fees charged by lenders on loans entered into before 1 July 2011.

The report, which analysed a broad cross-section of lenders including authorised deposit taking institutions and non-authorised deposit taking institutions, found less than 1 per cent of consumers who were charged with an early termination fee made a complaint.

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While the results were positive, the report found that all of the lenders estimated their losses 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 (eg 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 (eg clawbacks of commissions paid to brokers or lenders’ mortgage insurance premium refunds) against losses on a portfolio basis,” the report read.

 Speaking about this particular finding, FBAA’s Peter White said there is no doubt that pre-NCCP and pre-legislation, lenders would have charged higher early termination fees and ultimately taken more money than they should.

“Some lenders would clawback broker commissions and charge an early termination fee, which is effectively double dipping,” he said.

“In addition, in some instances, I think you would find the mortgage insurers have rebated the mortgage insurance premium refunds, however this rebate wouldn’t be taken into consideration by the lender, which also means they are pocketing more money.”

While Mr White said he was pleased to see ASIC “investigating" the early termination fees and putting up certain "road blocks" to ensure "double dipping" by Australia's lenders doesn't continue, more needed to be done to stop the banks from collecting termination fees and mortgage insurance premium refunds.

“By analysing their termination fees on a portfolio basis, rather than an individual loan basis, lenders will, in some instances, collect far more money than they are entitled to. We need to launch an inquiry to see how often this is happening and put a stop to it.”

Mr White said another way the industry could prevent lenders from collecting higher termination fees than they are actually entitled to is to allow the free transfer of LMI premiums between lenders.

However, this is unlikely to happen any time soon as the mortgage insurers have been quoted as saying this could do more harm than good.

In March last year, Treasurer Wayne Swan said LMI should be made transferrable for borrowers. However, his suggestion was shot down, with Genworth’s chief executive Ellie Commerford arguing that portability would “not work”.

“While nothing is impossible, we are regulated by the Australian Prudential Regulation Authority and they require us to hold capital on each loan. If a borrower was to refinance their whole loan dollar for dollar and retain the same LVR, we would have no problem making LMI fully portable,” Ms Commerford told The Adviser last year.

“However, this is rarely the case. Often borrowers refinance for more than the original loan and/or take out a higher LVR, which changes the risk profile of the loan. When the risk profile changes, we are required to hold capital against the loan.”

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