ASIC has released RG220 dealing with early repayment fees for NCCP regulated loans.
ASIC or a consumer may take action on the basis that an early termination fee is unconscionable under the National Credit Code or unfair under the unfair contract terms provisions in the ASIC Act.
ASIC acknowledges that there is significant diversity in the mortgage industry around pricing and structuring early termination fees, and so whether an early termination fee is unconscionable or unfair is largely dependent on the individual circumstances. The guidance is there for design to apply flexibly, be high level and principal based.
- All exit fees are likely to be assessed under the NCCP test for early repayment fees, rather than the more generous test for establishment fees.
- Lenders must be able to demonstrate that their exit fees recover costs and do not contain a profit element.
- Information about exit fees should be shown prominently in credit contracts, and also discussed early in the loan application process.
- There should be a warning that the loan may not be suitable if the borrower intends to repay during the period the exit fee applies.
- Statements (at least annually – we recommend all statements) should warn that the loan balance is not a pay out figure and that exit fees may apply.
- Provisions allowing the lender to unilaterally vary exit fees should be removed or qualified.
These rules are in line with the advice Gadens Lawyers has been providing clients for many years.
The rest of this article highlights the key aspects of RG220.
Unconscionable under the NCC
ASIC recognises that the test for early termination fees is different from the test for establishment fees. The test for early repayment fees provides that a fee that exceeds a reasonable estimate of the lender's loss arising from the early repayment is unconscionable - s.78(4). The test for establishment fees is that the court must have regard to the lender's reasonable costs of determining an application for credit and the initial administrative cost of setting up the loan or the lender's average reasonable cost for that class of contract.
RG220.29 says that ASIC will administer the law on the basis that generally a deferred establishment fee is a fee payable on early termination to which the stricter test in s.78(4) applies.
RG220.30 indicates the kind of costs that can be taken into account:
- administrative costs for calculating the payout figure
- administrative costs for processing the early termination
- third party costs arising from the early termination (eg if a function associated with processing an early termination is outsourced)
- costs that have not been recovered because a loan with a honeymoon or introductory interest rate is terminated early
- unrecovered establishment costs.
RG220.33 indicates the kind of costs classified as 'unrecovered establishment costs':
- evaluating and processing the loan application
- preparing the loan agreement and other documentation
- disbursements (eg valuation, legals)
- costs of obtaining funding
- commissions paid to originators (brokers, mortgage managers and aggregators)
- a component for overheads for evaluating and processing the loan application and establishing the loan.
Loss of profits, marketing costs and costs associated with developing new products and product ventures should not be taken into account (RG220.36);
Lenders are expected to keep records on how they calculate fees.
Early termination fees should be disclosed prominently (RG220.42).
Unfair contract terms under the ASIC Act
Upfront prices cannot be challenged as an unfair contract term. ASIC considers that early termination fees are not part of the upfront price for a loan no matter how they are described in the credit contract, so they can be reviewed for unfairness (RG220.54)
Normally an early termination fee which is unconscionable under the NCC is also likely to be unfair under the unfair contract terms provisions.
A term allowing the lender to unilaterally vary early termination fees is likely to be unfair.
ASIC considers that the requirement for transparency is relevant to information given to a consumer before the credit contract, such as brochures and pamphlets on the conduct of brokers (RG220.103). Transparency is one of the considerations in assessing whether a contract term is unfair. Transparency on its own account, will not necessarily overcome underlying unfairness in the contract term.
Where possible, the early repayment fee should be stated in an amount of dollars (RG220.106) If that is not possible, the method of calculation is acceptable. Transparency may be assisted by:
- a prominent warning that the loan may not be suitable for the consumer if they plan on terminating the loan within the time that the early termination fee would be payable
- if an early termination fee is payable, mentioning the amount of the fee as at the date of the statement in account statements at least annually, or if the fee cannot be stated as an amount, general information about how the amount of the fee can be ascertained should be set out. (RG220.110).
Mere compliance with the disclosure requirements of the NCC may not be sufficient for transparency under the unfair contract provisions (RG220.123).
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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.