Could high exit fees be illegal?

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The exit fees charged by some lenders may be illegal, according to a report published by the Melbourne Law School's Centre for Corporate Law and Securities Regulation.

The research paper, which examines exit fees for variable rate mortgages, is arguing that the average fee charged by lenders that are non-authorised deposit taking institutions (ADIs) dwarf those of other institutions. The report estimates that the average exit fee charged by a non-ADI for a $250,000 variable rate loan terminated within three years totals $1,900, in contrast to the rates charged by large banks ($680), other banks ($589) and credit unions ($420).

It adds that these high exit fees could even be illegal, as the charges levied may exceed ‘a reasonable estimate of the credit provider’s loss arising from the early termination or prepayment’ as stated in the Consumer Credit Code. They may also be in breach of the responsible lending requirements contained within The National Consumer Credit Protection Act 2009.

The report concludes that the compulsory licensing regime brought in by the Act may exert downward pressure on exit fees so that they accurately reflect credit providers’ actual losses, as has been the case in the UK. Even so, the report still calls on ASIC, which has responsibility for consumer credit under the Act, to issue guidance about how exit fees charged by a credit provider should be calculated.

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