Retail Financial Services Forum 2008

Banks face-off against non-bank lenders as ASIC reviews exit fees
10th April 2008

Non-bank lenders have suffered another blow to their competitiveness with the release of ASIC’s review of mortgage entry and exit fees. The report reveals non-ADI lenders are slugging customers an average $3,267 in fees for loans terminated within three years, compared to $2,255 for their large bank counterparts, and $1,388 for credit unions and building societies.

Australian Bankers’ Association chief David Bell says the findings are no surprise since “it was non-banks that pioneered the use of deferred fees”.

Dig a little deeper however and it becomes clear the major banks have also embraced early termination (aka deferred establishment) fees.

ASIC’s review reveals of the 16 home loan products on offer by the major banks, 15 have early termination fees. Less than 50 per cent of credit union and building society loans come with early termination fees.

Comparing such fees is a challenge for the average consumer, given deferred establishment fees fall outside of comparison rate legislation.

Infochoice’s Denis Orrock says early termination fees are “meant to cover the economic cost to the lender but what is the economic cost? Sometimes the fee is questionable”.

Treasurer Wayne Swan says the ASIC report will help shine light on high exit fees and boost competition in the banking sector. He also says it will underpin future efforts to ensure full disclosure of fees.

The Council of Australian Governments is developing a national regulatory framework for mortgage lending, but to ensure better fee disclosure it will need to revisit the comparison rate.

Orrock says the comparison rate was actually a contributor to deferred establishment fees. “If you went back to the day before the comparison rate was launched it wasn’t a fee that was common in prime lending. It was a fee that was common in the sub-prime mortgage market, but now we’ve seen it explode so that everybody has one.”

Orrock argues: “If these fees aren’t being captured in the comparison rate then what’s the use of it? Isn’t the whole point that it gives you the true cost of borrowing?”

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