Times up on excessive exit fees

Posted on 31 July 2007 by Ray Boulger

No Comments

With the deadline now on us for lenders to decide what they are going to do about their exit fee to meet the Financial Service Authority’s (FSA) requirements we are still waiting this evening to hear from several major lenders, which indicates some are going to tough it out with the FSA.

Most lenders are either:

1. Abolishing their exit fee completely
2. Reducing it
3. Abolishing it but replacing it with another fee of the same amount but with a different mane
4. Doing nothing

One lender (Principality) has increased their exit fee by £17 to £152.

Cheltenham & Gloucester/Lloyds TSB lead the pack in the first camp by being the first major lender to announce they were abolishing the fee and were followed by:

• Standard Life Bank
• HBOS Group (Halifax, Bank of Scotland, BM Solutions, Intelligent Finance and  The Mortgage Business)
• RBS Group (Royal Bank of Scotland, NatWest, First Active and One Account)
• Northern Rock

The second group have generally reduced their fee to between £125 and £145 and include:

• Basinghall Finance
• Coventry
• Edeus
• GE Money (First National and igroup)
• Portman/The Mortgage Works
• Kent Reliance
• Skipton
• West Bromwich

Perhaps the most cynical group, which nevertheless are meeting the FSA’s requirements, are those lenders which have abolished the exit fee but replaced it with a new fee for an identical amount but called it something different, so that either it no longer refers to the costs of closing the mortgage or if it does it is also stated to cover something else difficult to measure. This group includes:

• Abbey
• Bank of Ireland/Bristol & West
• Bradford & Bingley
• Yorkshire Building Society

Barclays/Woolwich have conformed they are leaving their exit fee unchanged at £275.

Those lenders who have abolished the exit fee are saying that customers who received their mortgage offer before the fee was abolished will have to pay the fee quoted on the most recent mortgage. This is fair enough on the basis that borrowers accepted that mortgage offer.

However, there is an interesting point here, which is relevant to most lenders who have either abolished their exit fee, whether or not they have replaced it with another fee of the same amount, and those who have reduce it by a significant amount. The only conclusion one can draw as to why they have done any of these is that they did not feel able to justify the size of the fee to the FSA. This seems to me to be tantamount to admitting that the now abandoned fee was unfair. If it was unfair it may well have contravened the Unfair Contract Terms Regulations. If it did it is probably unenforceable. It may therefore be that lenders do not have the legal right to collect this fee, even from borrowers who accepted it because it was part of their mortgage offer.

This may be unfair on lenders, but many (although not all) got themselves into this mess by being cavalier with the ramping up of the exit fee over the last few years at a time when their costs in relation to redeeming the mortgage must have fallen as a result of the Land Registry now holding property deeds electronically and lenders therefore no longer having to obtain, store, insure and ultimately return the physical mortgage deeds.

If only lenders had simply increased the arrangement fee more and not claimed that the exit fee was to cover the cost of redeeming the mortgage they would not have found themselves in this position. Arguably a similar situation occurs in relation to CHAPs fees, which most lenders charge at between £25 and £35, whereas the actual cost is far less, and the fee for not taking the lender’s building insurance, typically also £25 - £35, which not all lenders charge but where it is charged it is claimed to be for checking the alternative (cheaper) insurance the borrower has chosen is adequate, but in reality these checks are often not done.

It would be so much easier and transparent for all concerned if lenders amalgamated all these fees into one single fee, the arrangement fee, but because that fee is often the subject of media attention and used for comparison purposes, whereas that doesn't apply enough to the other fees, there is an understandable desire to not increase it by lumping other fees into it. Competitive forces will mean that most lenders will be reluctant to go down this route unless the FSA forces them to, so that it is done on the basis of a level playing field. The FSA should consider this. They are not an economic regulator and so will not specify how much a fee should be but they could insist these fees are all wrapped into one on the basis it would be a much better way of meeting their legitimate requirements for transparency.

Lenders will not take the loss of income from the elimination of, or reduction in, their exit fee lightly. Profit margins on most mainstream mortgage lending are very thin and the only question is how the lost revenue will be recovered. The three most obvious ways are:

• Increase one of more existing fees.
• Introduce a new fee but don’t claim it relates to something specific like the cost of closing down a mortgage.
• Increase some or all interest rates (if applied across the board this would only need to be by about 0.05% to recover the average revenue lost even when the exit fee has been abolished).

Finally a thought on the lenders who have not reduced their exit fee and therefore still charge a fee well above the £125 - £145 level other lenders have reduced there’s to. Presumably, having decided where to reduce the fee to those lenders are comfortable that they can demonstrate to the FSA the new lower amount is reasonable in relation to their costs when a mortgage is redeemed. This would suggest that lenders whose fees are well above this level, in some cases double, are either charging much more than a realistic cost for what the fee is claimed to be for or they are very much more inefficient, at least in carrying out this particular function, than other lenders. It will be interesting to see whether any lender tries to prove to the FSA that a high exit fee is justified because they are very inefficient!

 

 

Category: Mortgages, Regulation

• Save to del.icio.us
• Digg this story