Exit fee ban now law

On 23 March 2011 the National Consumer Credit Protection Regulations were amended to include a ban on exit fees.

The new Regulation 79A provides that a credit fee or charge is prohibited if:

• it is provided for in a credit contract entered into on or after 1 July 2011; and
• it is to be paid on or in relation to the termination of the credit contract; and
• any of the amount of credit provided under the credit contract is secured over residential property (including residential investment property).

The ban is not limited to deferred establishment fees but extends to any other type of fee payable on loan termination.

The prohibition does not apply to the following exit fees:

• a break fee that relates to early repayment of a fixed rate component of the loan;
• a discharge fee which reimburses the credit provider for the reasonable administrative costs of terminating the credit contract;
• exit fees in a credit contract that is not secured by residential property;
• exit fees contained in a credit contract secured by residential property that is not regulated by the National Credit Code;
• exit fees such as deferred establishment fees, early repayment fees, and LMI recoupment fees contained in credit contracts entered prior to 1 July 2011.

The ban on exit fees has been widely opposed by industry bodies. There is potential for some exemptions to be made by ASIC class order. It would appear that a class order is appropriate for certain fees payable at the end of a credit contract, particularly relating to special types of loans.

Although some industry lobbying may continue, it seems unlikely that the government will retreat from its stated position despite almost unanimous opposition to the initiative. The ban creates particular problems for smaller lenders. Industry bodies maintain that in the end the consumer is the loser.

As Gadens Lawyers has noted before, if Telcos were banned from charging an exit fee, few people would have a mobile phone. Perhaps we will see fewer people having home loans, especially those who struggle to meet the lending criteria of the big lenders.

Lenders should contact Gadens Lawyers now to arrange for amendment to their credit contracts to remove any type of fee which is payable on discharge, except for break fees or discharge fees, and to discuss other appropriate amendments to credit contracts.

For more information, please contact:

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.