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Exit, pursued by regulator

The FSA report on mortgage exit fees addresses all the concerns we and many others have raised over the last few years.

It reviewed lenders’ policy on exit fees on the basis of the Unfair Terms in Consumer Contracts Regulations 1999 so there is little room for lenders to argue as the regulator has used existing law to formulate its conclusions.

The FSA stated: “In our view, this statement does not place any new obligations on lenders.” Thus, where lenders reduce their exit fee or meet a claim for compensation on mortgages already redeemed, this is because they were previously acting illegally, not because the law has changed.

It was only about four years ago that lenders generally started imposing excessive increases on exit fees and so it is unlikely that borrowers who redeemed their mortgage before 2003 would have been charged an unfair fee. But many borrowers who have redeemed a mortgage in the last four years will have a good case for compensation.

The terms under which exit fees can be varied must be fair and if they are not, they cannot be enforced. If the terms of the exit fee are “drafted to enable the lender to recover the cost of administration services when a customer exits the mortgage” the lender is likely to be in breach of contract if the exit fee they charge does not represent the cost of their administration services.

The report confirms that if the exit fee quoted in the original illustration has been increased unfairly, the lender cannot charge anything more than the exit fee originally quoted, even if a smaller increase might not have been unfair and hence could have legitimately been charged. As many lenders have imposed huge percentage increases over the last few years, way above inflation, many will have little option but to reduce the exit fee for current customers to the amount quoted in their latest illustration.

The FSA makes it clear that in general it will expect lenders either to charge the exit fee originally quoted, charge a lower exit fee than originally quoted or, if the terms of any exit fee were unclear and the customer could not reasonably have been aware they would have to pay an exit fee charge, no fee. No doubt, most lenders will adopt the first option.

In response to this report, the Council of Mortgage Lenders said: “We welcome the FSA statement as a practical way forward. Transparency in fees and charges is unequivocally a good thing in terms of ensuring that consumers understand what they will need to pay at various stages.”

Quite right, who could possibly disagree with that statement? Answer, obviously many of its members who, despite being aware of this long-running FSA investigation had to be forced by the FSA to adopt that principle.

Ray Boulger is senior technical manager at John Charcol.

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