ASIC has released Regulatory Guide 220 Early termination fees for residential loans: unconscionable fees and unfair contract terms (RG220) to give guidance for mortgage lenders on how the unconscionable fee provisions in the National Credit Code and the ASIC Act unfair contract terms provisions apply to mortgage early termination fees (exit fees).

RG220 sets out ASIC’s views on:

• what costs and types of loss can be included in exit fees
• types of loss that should not be recovered through exit fees
• the limited circumstances in which a lender may vary exit fees during the life of a mortgage.

ASIC regards any fee payable on early termination of a residential loan (eg in the first three to five years of the loan), including deferred establishment fees and break costs on a fixed rate loan, as an early exit fee.

An early termination fee does not include any fee or charge that is payable regardless of whether the loan is repaid early or not (e.g. standard discharge fees and charges).

In respect of deferred establishment fees in particular ASIC states it will:

• administer the law on the basis that terms imposing deferred establishment fees are not setting an upfront price and are covered by the unfair contract terms provisions.
• administer the law on the basis that generally a deferred establishment fee is a ‘fee payable on early termination’, to which the test in s78(4) applies.
• consider that for the purposes of the test in s78(4), a loss arises from the early termination of a loan only if it is caused by the early termination: examples are given in RG 220.30 and include unrecovered establishment costs arising from a lender’s inability to recover establishment costs during the shortened period the loan was on foot. Examples of unrecovered establishment costs that, if not recovered from other parties or the customer, could be a loss caused by the early termination of a loan are listed in RG 220.33.

ASIC states that it is more likely to take action if a fee payable on early termination includes a component covering the following types of loss:
(a) loss of profits that would have been received if the loan proceeded to the expected term or if the loan had lasted beyond the time at which the customer terminated the loan;
(b) marketing costs and other costs associated with obtaining new customers; and
(c) costs associated with developing new products and product features.

ASIC also thinks that a term in a loan agreement that permits the lender to vary an early termination fee is more likely to be unfair if the fee is a deferred establishment fee or includes a component which is a deferred establishment fee, and there is an increase to this fee or the component dealing with unrecovered establishment costs. This is because a lender should know what the costs of establishment are at the start of the loan.