New guidance on controversial mortgage exit fees could result in lenders being forced to pay back some of the money they have collected from ex-customers if those borrowers paid exit fees that were higher than originally stated when they took out the mortgage.
However, some commentators believe that the guidance from the Financial Services Authority (FSA) could also leave the way open for borrowers to demand back even more of their exit fees by claiming that the charges were unfair.
Mortgage borrowers could follow the precedents set in other parts of the financial services sector, such as with credit card providers and banks, including one businessman who successfully recovered almost £36,000 in charges from NatWest, the result of what he claimed were unlawful overdraft charges during five years as a customer with the bank.
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Although the bank maintained that the charges were fair and transparent, after the businessman began legal action via the government’s Money Claim Online service, NatWest decided to repay its ex-customer to prevent it from racking up legal fees, all the while refusing to admit to any liability.
Scrapping the fees
Already one mortgage broker has helped one of his clients get her entire mortgage exit fee scrapped when she challenged her former lender, Northern Rock, to explain how they had calculated the £250 charge they had levied against her.
The broker, Danny Lovey, who operates as The Mortgage Practitioner, explains: “My client, with my help, wrote to Northern Rock requesting a refund of the difference between the exit fee she had paid – which itself was higher than when she originally took out the mortgage – and the real costs of the admin of closing a mortgage.”
Lovey said the letter cited both the FSA’s new guidance, published in January this year after consultation with the Council of Mortgage Lenders (AML), as well as the Unfair Terms in Consumer Contracts Regulations 1999, a law referred to by the FSA in its guidance notes that means that even exit fees set before the implementation of mortgage regulation could still be challenged as unfair.
Northern Rock responded to Lovey’s client offering a settlement of £90. He says: “She rejected this and wrote to it again, reiterating that she wanted to know how the exit fees were calculated. Northern Rock’s next offer was for £70.”
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The client again wrote to the lender, enquiring whether the reduced offer was a result of her complaint, again requesting a breakdown of the exit fee, and informing it that she would take further action if Northern Rock did not respond to her request. “She said she would go to the Office of Fair Trading and the Financial Ombudsman Service,” Lovey explains. “Northern Rock offered her £250, equal to her full exit fee, as an ex-gratia payment because it ‘doesn’t like to see its customers upset’.”
Lovey has sent all his mortgage clients a newsletter explaining recent developments regarding mortgage exit administration fees (MEAF), along with a pro-forma letter for the borrower to send to their mortgage provider challenging the exit fee they were charged. A long-time campaigner against what he believes is the unfairness with which exit fees have been applied, Lovey reckons that more consumers will be chasing their lenders, possibly even with the threat of legal action.
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“Of course lenders have to make money, but it needs to be transparent and fair, not sneaky,” he says. “Lenders have not been prepared to come out and defend their exit fees – of course, how do you defend the indefensible? Do I think borrowers will take their lenders to court to challenge their exits fees? I think it is only a matter of time.”
Coming to light
The issue of MEAFs came to a head in January when the FSA published its ‘Fairness of Terms in Consumer Contracts – Statement Of Good Practice On MEAFs’. The statement essentially challenged lenders to justify their actions if they had increased an exit fee during the life of a mortgage, giving providers the option of dropping the MEAF altogether; reverting to the original MEAF; charging a revised MEAF; or sticking with their current increased MEAF. The FSA said that those lenders that maintained their higher MEAF or charged a revised fee that was still higher than that originally stated when the borrower took out the mortgage, would be likely to face further investigation.
The FSA said the lenders’ decisions on MEAFs should equally apply to current customers who had seen their exit fees increase, and former borrowers who had been forced to pay a higher exit fee than they had expected. This leaves the way open for retroactive claims by borrowers such as Lovey’s client.
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The FSA’s stance on MEAFs is seen as a warning to lenders to get their act together in the way they deal with consumers. This was reinforced by the FSA’s Clive Briault, managing director of retail markets, when he spoke at the CML Annual Lunch in April.
Speaking about the practice of increasing exit fees during the life of a mortgage, Briault said: “We have seen many examples of significant deficiencies in firms’ standard form consumer contracts. We see this as an example of how there remains much further to go in meeting the ‘Treating Customers Fairly’ agenda. I find it odd, for example, that no one in so many firms spotted and questioned the unfairness – a legal as well as more general unfairness – of raising these exit administration fees. Or if they did spot this, who overruled them, and why?”
Briault also revealed that 95 per cent of lenders have already confirmed they will now be charging a MEAF equal to, or lower than the original fee that applied when the customer took out the mortgage.
But the new guidance does not stop with current and previous customers because the FSA says that it also expects lenders to review, by the end of July, the mortgage exit fees they will charge in the future. Crucially the FSA statement says that if a MEAF is levied by the lender to cover its costs when closing a mortgage account, then ‘the lender should also ensure that the MEAF represents in fact the cost of the lender’s administration services. A failure to do so is also likely to be a breach of contract’.
More uncertain
This is where the subject of exit fees starts to become murky and more uncertain. According to estimates by Defaqto, the real cost of closing a mortgage is only £35. Given that MEAFs range anywhere from £50 to in excess of £300, even if lenders do return to charging pre-increase level exit fees, many of these are still likely to be a lot higher than Defaqto’s figures.
In theory, unless we see a widespread drop in the level of exit fees, the FSA should step into force lenders to show exactly how they calculate the way MEAFs are charged. It is unlikely that lenders will drop exit fees below their previous levels because this will obviously hit income and is essentially admitting that up until now their fees have been too high and unfair, which could provide the perfect ammunition for ex-customers to claim back even more exit fees, costing lenders millions.
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While again citing point 4.6 in its guidance that states that the FSA ‘expect lenders may wish to review their fees’ for future customers, the regulator has not said whether it expects exit fees to decrease, or to what level such a fall would be. FSA spokesperson Robin Gordon-Walker told Mortgage Introducer: “It is down to the lenders. We will be monitoring the situation to see what the lenders are doing with regards paragraph 4.6. The FSA will then come to a conclusion about the lenders’ stance and decide whether we should take further action.”
Gordon-Walker also stressed that its guidance on MEAFs had been drawn up following consultations with the CML and that the FSA wanted to continue working closely with the industry on the issue of MEAFs. The FSA has also reiterated that is it not a financial regulator and therefore should not dictate what charges lenders set, a stance that many critics believe worsened the MEAF problem because it allowed mortgage providers to impose whatever level of fees they liked, as long as they were not out of step with the rest of the industry.
The CML also says it does not know whether the guidance will trigger a wholesale drop in exit fees. Bernard Clarke, communications manager at the CML, says: “Firms have different costs and it would be wrong to expect a uniform cost MEAF. The key issue here has been about transparency of the fee that the borrower would pay when they took out the loan. That is what the regulator has addressed and the industry has responded.”
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Clarke said that if there were to be an influx of current and previous customers demanding a breakdown of their exit fee, this would actually result in more work and additional cost for the lender that would have to be passed on to consumers.
Not letting them off the hook
Other commentators are unwilling to let mortgage providers off the hook so easily. Simon Lambert, mortgage expert at consumer finance website This Is Money, believes lenders have brought the problem on themselves by charging high MEAFs in the first place, with their about-turn on the levies confirming that they were never actually linked to the cost of closing down a mortgage account.
Lambert says: “Lenders created their own problem with exit fees after ramping them up over a short space of time to profit from people remortgaging. By blatantly taking advantage of customers they drew a backlash and the attention of the FSA. They are now paying the price and have already started to drop their MEAFs to around £90 to £100. Arguably these are still too high and with research last year showing the real cost of processing a mortgage exit is around £35, they could be forced to drop them further.”
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Lambert also urges borrowers to challenge the fees they have paid previous. He explains: “This is Money campaigned against lenders hiking exit fees and encouraged people to complain and claim them back before the FSA investigation was announced. Thanks to the FSA’s intervention it became clear that anyone who paid £200-plus in exit fees was being charged well over the odds and they should claim that money back.
“In many cases it is as simple as sending them a letter like the one found on our website at www.thisismoney.co.uk, and the lender will refund the money as they are unable to justify the charges. If you get £100 back it might not be the biggest windfall in the world, but it could pay for an evening out at a posh restaurant, rather than going into the lender’s coffers.”
Not the end
Whatever happens after the end of July, it is unlikely that we will have seen the end of exit fees, because as rates rise, pushing up monthly mortgage payments, lenders that want to offer competitive rates are increasingly turning to arrangement fees as a way of making money. This has been marked by an jump in arrangement fees, sometimes up to 3 per cent of the loan, so the exit fee is likely to remain, albeit under a different name.
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Ray Boulger, senior technical manager at John Charcol, explains: “Some lenders have already reduced their exit fees to around £145, but those that keep them at over £200 will have difficulty justifying that to the FSA. If the fee is this high it either means that their admin is inefficient, or they have been overcharging.
“But exit fees won’t disappear. That fee will be added on somewhere else, either as part of the arrangement fee or as a new exit fee. There is nothing stopping the lender from charging an exit fee, only that if it is called an administration fee it must reflect the actual cost of the work needed to close the mortgage.”
Boulger says the mortgage market is already splitting into products that offer borrowers low rates and higher fees, or higher rate mortgages with little or no extra charges. The most suitable product will depend on the borrower’s circumstances and will require detailed product knowledge and explanation from brokers.
“Fees are being introduced to subsidise mortgages. If lenders started afresh and said there was a fee of £950 for example, with £700 charged up front and the remainder on exit, if it was presented the right way it could be shown to be a client benefit.
“There would, of course, be some cynicism about such an approach, but this is a competitive market, and lenders can’t take a hit of £100 per mortgage by getting rid of exit fees completely.”
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