The controversy over mortgage exit fees could soon come to a head as the Financial Services Authority (FSA) prepares to publish its findings following an investigation of the practice. Critics say that currently exit fees are too high, unfair and unclear to the borrower, citing the big increases levied by some lenders whose charges have more than doubled in just a few years.
Detractors are particularly angry that some borrowers have seen the exit fees applied to their mortgage rise dramatically from the amount that was stated when they originally took out their home loan. While lenders maintain that the increased fees are only charged to cover their own costs, critics say that it is little more than profiteering by lenders. They also claim that providers use high charges as a form of backdoor retention by making it too costly for borrowers to switch mortgages.
Yet it seems the tide could be turning against exit fees, at least in their current form. Last September the FSA announced that it would be looking into the practice of Mortgage Exit Administration Fees (MEAFs), and in an announcement in June it revealed that it had challenged providers to ‘consider whether their terms might be unfair, and to provide it with evidence of how decisions to increase their MEAFs were taken’. It is the result of that work that the FSA is due to report back on in the next month or so.
Meanwhile, speaking on Radio Four’s MoneyBox programme, the Council of Mortgage Lenders’ (CML) director-general, Michael Coogan, acknowledged growing concern among the industry, watchdogs and consumers about the fairness of exit fees. He said: “What the FSA has asked is are MEAFs fair? And if you aren’t clear about what you’re going to charge, one of the things the FSA will be talking about with lenders is whether or not it’s right to pass that on; and, if they are going to change those fees, how clearly are they making it upfront that it’s a variable fee, how clear is it why they’re changing it and when they may change it.”
The regulator is remaining tight-lipped over the actual publication date and what the announcement will say, only confirming to Mortgage Introducer that the follow-up note would be published in the Autumn. The regulator won’t say whether it will be issuing specific guidelines about exit fees or some kind of warning to lenders to change their policies on charging and communicating MEAFs.
Differing opinions
There are differing opinions among commentators as to what action the FSA can or will take, as well as how lenders will respond. Broker Danny Lovey, who runs The Mortgage Practitioner, has been an outspoken critic of exit fees for a number of years, lobbying both lenders and the FSA on the issue, claiming that the charges contravene ‘Treating Customers Fairly’ (TCF) rules.
He believes that the matter is a test of the FSA’s ability to deal with a matter that falls into a grey area for the regulator. He told Mortgage Introducer: “I think the FSA is in a difficult position and it is unsure what to do about exit fees and how to respond to appease everyone. Is It really going to make an example of the entire industry by coming down hard on how lenders use exit fees? But if it doesn’t do something, then how can the rest of the industry take it seriously?”
Lovey claims exit fees are purely designed to generate extra income for lenders from their customers and bear no resemblance to the real cost of closing down a mortgage. He cites research by financial analysts Defaqto, on behalf of ING to support the company’s entry in to the mortgage market, which puts the real cost of closing down a home loan at around £35.
In fact, Defaqto went so far as to add up all the fees paid by mortgage borrowers, such as telegraphic transfer of mortgage funds, administration fees for paying off a mortgage, valuations and various administration fees, calculating that UK homeowners paid £705 million a year in fees, of which Defaqto claims £615 million is clawed back by the lenders as mark-up.
Lovey also points to research by Vertex that revealed lenders’ administration costs had risen from almost £90 in 2004 to more than £146 per case in 2005 as a direct result of regulation. However, he says this is still much lower than the £200 that many lenders charge.
Lovey continues: “Lenders are extracting the Michael and everyone knows it. Some lenders increased their exit fees from £150 to almost £300 overnight, so do they really expect us to believe that before then closing a mortgage was actually costing them money? In fact the cost should be coming down, as most of the processes, such as deeds release, is being done electronically so there is little manual work involved.”
Lovey believes that exit fees should be in the region of about £50 per case, but more to the point he feels that the current policy is blatantly unfair to his clients who sign up for a fixed mortgage deal for two or three years and expect an exit charge of around £100, only to find that at the end of the deal when they look to move to another lender, they are actually going to be charged closer to £300 for the privilege.
He explains: “In the spirit of TCF, this issue is now going to be the watershed as to whether the FSA is prepared to put the consumer’s interests first and gain the respect of the market by bringing the lenders to heel and heavily fine those who have blatantly gone against the whole spirit and driven a ‘coach and horses’ through the ethos of TCF. If the lenders are not brought to heel, nobody will have any confidence in the regulator and it will be seen by both the market and the public as a ‘paper tiger’.”
Laying the groundwork
In its previous comments on MEAFs, the FSA has been pretty clear about laying the groundwork for what it believes to be fair and unfair in terms of how charges are calculated and explained to consumers. The regulator said that although mortgage lenders could incorporate a clause in their mortgage contracts that allowed them to vary charges, even if the borrower had not explicitly agreed to such a variation in advance, there had to be a valid reason for the change.
In its June briefing note, the FSA said ‘that a ‘valid reason’ may be one which reflects legitimate cost increases associated with providing the particular service, provided that the change is proportionate’. This is in-keeping with the Unfair Terms in Consumer Contracts Regulations 1999, which was quoted by the FSA in May last year in its own Statement of Good Practice on ‘Fairness of terms in consumer contracts’.
It is the issue of changes in fees being ‘proportionate’ that many critics feel has been ignored by lenders who have doubled their exit fees, and means that the FSA has no choice but to take action.
Again in June, the regulator warned that: ‘After examining a number of mortgage contracts, the FSA considered that some were not as clear as they could be in explaining which costs would be charged to the consumer at what time or event in the life of the contract (e.g. default, early repayment charges or exit fees), and that it was not clear that increases in MEAFs were proportionate to any increase in associated mortgage exit costs incurred.’
Keeping quiet?
Lenders are keeping quiet with regards to their original response to the FSA in justifying and explaining their exit fees, or whether they are re-considering their policies in advance of the regulator’s next announcement. Instead of re-thinking the issue of exit fees, they seem to prefer to wait until the FSA makes its move and then react.
David Stewart, spokesperson for Abbey, says: “It is too early to respond. We will have to wait and see what the FSA says and make a decision then.” Bernard Clarke, spokesperson at the CML, is of a similar point of view. He says: “Exit fees have been levied for a long time. The issue being discussed at the moment is how they relate to the actual cost incurred. The lenders will need to justify that to their customers and the regulator.”
Ray Boulger, chief technical officer at John Charcol, believes that the FSA will have to take definite action. He explains: “The FSA will look at the key requirements of regulation and that is transparency. Exit fees are not transparent.”
He believes that providers will find it difficult to convince the FSA that exit fees are a legitimate indication of the actual work involved. Boulger continues: “Exit fees are supposed to cover the lender’s costs – and not just how much they think they can get away with. For example, the costs for deeds release are a nonsense. This puts lenders in a difficult situation because if they do demonstrate that what they charge bears some resemblance to the actual cost, then it shows that they are very inefficient.”
In terms of the specific action the regulator could take, Boulger says: “I think the FSA will come up with some recommendations. If mortgage lenders choose to ignore those recommendations then they will be in the firing line.
“But the question is what then will lenders do if they have to change their policies on exit fees? They won’t just accept it. Our experience with credit card fees shows what they might do. Lenders will probably increase set-up fees, increase interest rates or invent another fee and recoup the money in another way.”
Not seeing the last of exit fees
It is unlikely however that lenders will just abandon exit fees altogether as there is no doubt that they now contribute a lot to the cost of a mortgage, whether it is to cover expenses or partly as a means of generating extra revenue. Research by Moneyfacts earlier in the year showed that Alliance and Leicester had one of the highest exit fees of £295, almost double the £150 it had charged five years before.
Abbey attracted a lot of criticism when it raised its exit fees from £85 to £225. Cheltenham and Gloucester (C&G), Halifax, NatWest, Northern Rock, Royal Bank of Scotland (RBS) and Woolwich all have exit fees in excess of £200, and much higher than their charges five years ago. Even Nationwide, which for a long time had remained one of the few lenders not to levy a fee, now has an exit charge of £90.
The problem is that because the mortgage market is so competitive, most of the focus is on the headline interest rates, which subsequently is cut to the bone to win new customers. However this also means that profit from mortgages are low, so there is more pressure on fees, hence higher arrangement fees, higher lending charges in the non-conforming sector and, of course, increased exit fees.
Boulger believes this issue may well force lenders to reconsider how they levy a raft of charges. He explains: “There are a whole range of arrangement fees up-front, so there is no reason why lenders cannot have a wide range of fees for when you exit the deal, so long as they are transparent and fair.
“In fact, lenders may decide to have higher fees up-front that borrowers can choose to defer payment of until the end of the mortgage. This may well bring some retention benefit to lenders as borrowers might choose to stay with their current mortgage provider rather than pay the deferred fee. The FSA’s investigation into exit fees may well cause lenders to think ‘how can we arrange these things differently and be smarter’.”
Boulger points to the example of the HBOS Group, which is now taking steps to offer its existing borrowers better deals if they stay, along with procuration fees for intermediaries if their clients decide that sticking with HBOS on a new deal is best for them.
So not only is the issue of exit fees an acid test for the financial services regulator to see whether it can tackle a market-wide problem rather than just taking action against those that break its rules, it is also an opportunity for lenders to completely re-think the way they structure the fee element of their mortgage products, turning it from simply a means of earning extra income, to a proactive way of winning and retaining customers.
