Corporate watchdog ASIC bans banks from double-dip mortgage exit fees

BANKS that charge to establish a mortgage no longer able to apply contentious exit fees, ASIC says.

The corporate regulator will not allow home-loan exit fees if banks also charge clients to establish mortgages. Picture by John Donegan

AUSTRALIAN banks that charge customers to establish a mortgage will no longer be able to apply contentious exit fees, ASIC said today.

The Australian Securities and Investments Commission today revealed sweeping changes to bank fees, The Australian reported.

The corporate regulator said it would sue banks that consistently charge customers ‘unfair’ fees when they exit mortgages within the first four years.

The reforms, foreshadowed by Prime Minister Julia Gillard on the weekend, will intensify the current political scrutiny of the major Australian banks.

ASIC chairman Tony D’Aloisio said exit fees - which range between $700 and $900 for the top four banks - had to reflect the true losses that banks incurred from customers leaving a mortgage contract early.

The banks will also be stopped from ‘double-dipping’, where customers are charged to set up a mortgage and then slugged with exit fees.

The banks normally charge about $600 to establish a new home loan.

The changes could land a significant hit on Australian banks' earnings, given that $500 million worth of fees have already been cut in the past year.

“The longer the consumer has had the loan, the smaller the exit fee should be,” Mr D’Aloisio said.

“Lenders that charge establishment fees must ensure they don't charge consumers a second time through an early termination fee.”

The Australian banks argued that exit fees are essentially deferred establishment fees, and are only levied if a customer leaves a mortgage within the first four years.

Commonwealth Bank of Australia, the nation’s largest home-lender, and ANZ charge their customers $700 exit fees while both NAB and Westpac charge $900.

The fees are higher among non-bank lenders. The Australian banks have argued that exit fees were ‘pioneered’ when non-bank lenders became popular about a decade ago.

Mr D’Aloisio said the changes, which are part of the National Credit Code, were aimed at injecting more competition into the Australian banking market.

“The law limits these fees to the recovery of a lender's loss caused by the early termination. Lenders cannot use exit fees to discourage a borrower from switching their loan or punish them for doing so,” he said.

“We will challenge lenders who charge high fees to justify how their fees reflect actual losses caused by earlier termination.

“Where an exit fee cannot be justified by the lender, ASIC will take compliance or enforcement action.”