A leading academic believes The National Consumer Credit Protection Act which comes into effect on 1 July has the potential to provide lawyers with more litigation work.
Professor Ian Ramsay and Neil Ashton from Melbourne Law School's Centre for Corporate Law and Securities Regulation have just released a study that compares exit fees for variable home loans in March 2010 with data from ASIC in 2008.
From 1 July 2010 exit fees will be regulated by the National Consumer Credit Protection Act 2009, replacing the Consumer Credit Code. The report found that an important question for the new national Act was whether exit fees that exceed a reasonable estimate of the credit provider's loss arising from the early termination of the loan are in fact legal.
The report found that in the United Kingdom, which has compulsory licensing of consumer credit providers, home loan exit fees are lower when compared to Australia. With the new national Act in Australia also providing for compulsory registration, Ramsay thinks the rights of consumers will be enhanced and exit fees increasingly challenged.
"That could result in more litigation work for lawyers," Professor Ramsay told Lawyers Weekly.
"I think it is really important for the Australian Securities and Investment Commission (ASIC) to show some really strong guidance with regard to exit fees. This is a great opportunity for ASIC to act in the interests of consumers as the new credit consumer regulator."
The report found that exit fees charged by non-Authorised Deposit taking Institutions (non-ADI) on a $250,000 variable rate loan were on average $1900. Non-ADI's are from non-banks or credit unions.
By comparison, large banks charged an average exit fee of around $6800 for a $250,000 variable rate loan, other banks charged approximately $590 and a credit union or building society just under $420. The study found that around 58 per cent of home loans carried exit fees.
The report only looked at variable home loan rates.
"It is hard to justify exit fees that are a percentage of the principal rate," Professor Ramsay said. "Banks have been under pressure to reduce exit fees, but the non-ADI's have not had that pressure. The message to consumers is that they need to be aware of exit fees when taking out a variable home loan, as the fees themselves can be anti-competitive and limit the ability of consumers to switch between products or re-finance."
The study found that in February 2010, loan refinancings constituted about 27 per cent of all financing for established dwellings.