by clicking the arrows at the side of the page, or by using the toolbar.
by clicking anywhere on the page.
by dragging the page around when zoomed in.
by clicking anywhere on the page when zoomed in.
web sites or send emails by clicking on hyperlinks.
Email this page to a friend
Search this issue
Index - jump to page or section
Archive - view past issues
MFAA Prosper : Mortgage and Finance Brief 05
warned that the increased risks of an unconscion- ability finding could cut the availability of DEF options to borrowers and increase the overall amount of fees borrowers pay. Non-bank lenders have successfully used DEFs to offer competitive interest rates, and the MFAA says the crackdown would affect competition in the home loan market by punishing smaller lenders. "By driving lenders to recoup costs at or prior to loan settlement, ASIC's proposals risk favouring larger lenders with the ability to absorb discounts and are likely to constrain competition," the MFAA submission says. MFAA cites the example of Aussie Home Loans, which used DEFs to provide consumers with loans with no establishment fees and competitive rates. "This type of innovation is only possible when there is freedom to design products with a significant degree of commercial certainty," the submission says. "Business start ups (or re-entrants) cannot risk borrowers repaying loans without paying appropriate fees to compensate the lender for establishment and repayment costs." MFAA also said the need to justify DEFs is not being consistently applied. It asked why a lender offering a 7.5% variable interest rate with a DEF needed to justify its costs, but a lender that offered a higher rate of 8.5% variable rate with no DEF is not required to justify its costs. The cost of a customer Steve Sampson, Head of Distribution -- Lending at Provident Capital, says while Provident supports reducing exorbitant fees to consumers -- including exit fees -- ASIC's harder line on early exit fees needs to take into account specific loan details and the lender's lending circumstances. "We must acknowledge that a deferred establishment fee actually reduces the initial costs of providing a loan," he says. Sampson says that, like any other business, lenders need to forecast margins and profitability on loans. He says to set up a loan, banks charge on average $600 upfront, plus some legal and valuations costs. "But it costs a lot more to put clients on the books," he says. "Lenders can recoup profitability and reduce upfront fees to borrowers by deferring upfront costs through DEFs, so long as they hold onto borrowers for a period of time." This is no different from a pay television company providing a cheap set-top box, or a phone company giving a free handset, on the condition a customer sign up for two years, Sampson says. "With a phone plan, or a similar contract, the phone is free, providing the plan is profitable for the service provider," he says. "If the phone plan is exited early, the remaining plan is paid out too." Sampson agreed the removal of DEFs would lessen competition in a market that is dominated currently by two major banks. "This flies in the face of the Government's rhetoric to create more competition in the home loan market," he says. "It would mean fewer choices for consumers and therefore create a risk to the relevance of mortgage brokers in what would be a very contained market." MFAA has also warned that the ASIC crackdown on exit fees could see fees broken up into smaller components -- such as an establishment fee, annual fee, risk fee, and discount recovery fee -- which would increase credit contract complexity. ASIC is currently reviewing submissions and MFAA will alert members to any important developments. To download a copy of MFAA's submission to ASIC, visit www.mfaa.com.au and click on 'News Centre'. 30%-35% Typical percentage of mortgage refinances each month for established dwelling finances. Source: Australian Bureau of Statistics Steve Sampson from Provident Capital says lenders need to recoup their set-up costs for a loan if a borrower exits early. “ This indicates that borrowers can switch lenders with relative ease. There is no evidence of a need to change market conduct.” MFAA in its submission to ASIC. 30 | Mortgage & Finance brief InDepth
Mortgage and Finance Brief 06