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Questions to be answered over exit strategies

An open letter to Michael Coogan of the Council of Mortgage lenders.

You will recall the FSA statement on mortgage exit administration fees on January 26, to which the Council of Mortgage lenders was a party. In this statement, lenders were given several options to amend or not their admin fee for the Meaf and had until February 28 to make their decision.

The statement raised many questions about the Meaf and apart from the issue of if customers were being treated fairly, it questioned if the current and recent fees charged by your members were lawful based on the unfair terms in consumer contract regulations of 1999.

You have yourself referred to the Meaf as an administration charge that was not a penalty for leaving a lender and it should be a legitimate cost which relates to the service – the admin which has been undertaken. Money Box June 24, 2006

Coogan: It is a legitimate cost which relates to the service, the admin which you’ve undertaken. And clearly if you are simply closing a mortgage contract, then that is a set series of activities, which has a certain price and a cost in terms of staff, etcetera. If you are broadening that out to cover other transactions or other aspects of the mortgage relationship, you need to explain to your customers what it covers. If you are not clear, then the FSA would argue and it seems the law indicates quite clearly that you should have a clear statement as to what the charge is for. If you plan to change it and you do not make clear why you are changing it, then you are not going to be able to do so. It would be unfair.

Paul Lewis: So, if they are open-ended, if a lender simply says that can put them up at any time, effectively for any reason, that would be unfair and should not be in the contract?

Coogan: You can’t have a valid reason you just want to increase your profit levels. I think what you do is the need to explain each of your costs as and when they increase and you have the ability to do that so that’s why you have some fees which a re variable.

Lewis: The people who pay these exit fees, by definition they are ex-customers. Is that the problem – that your members just think they can sting them on the way out as a penalty for leaving and finding a better deal somewhere else?

Coogan: I don’t think it is at all to do with a penalty. Penalties are not allowed if you are charging a fee for the admin service.

Having passed February 28, your members have made very little effort to lower their Meafs to reflect this as an admin fee as you have agreed it is. In fact, when lenders have been challenged to define how this admin charge is calculated, none to my knowledge have done so.

My questions, therefore, for you, Mr Coogan, are as follows:

Do you agree with your statement of June 24 that the Meaf is an admin cost and it should reflect this? Yes or no?

Do you still agree with your statement of June 24 that lenders need to explain each of their costs? Yes or no?

If you still do agree with your statements above, why is it then that lenders will not disclose the basis of their calculation of their Meafs?

If the latest Vertex survey on mortgage processing costs of lenders conducted in consultation with the Council of Mortgage lenders showed that the entire processing costs of a mortgage were currently on average £132.85, do you agree that this is a longer admin process than the closing of a mortgage? Yes or no?

Do you agree that the Defaqto estimate of the true cost of closing a mortgage of around £35 is likely to be about right? Yes or no?

Therefore, if you agree with your own survey of processing costs conducted with Vertex is correct and you agree that the Defaqto figure is about right, can an admin cost of on average around £200 by lenders be an honest admin cost?

Danny Lovey
The Mortgage Practitioner

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