Lender exit fees not always clear, says FSA

Some lenders are not making exit fee charges as clear as they could be on mortgage contracts when borrowers take out loans, says the Financial Services Authority.

The FSA announced in September 2005 that it was looking into the issue of recent increases to mortgage exit administration fees as some people had argued that these increases were unfair.

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 or exit), and that it was not clear that increases in MEAFs were proportionate to any increases in associated mortgage exit costs incurred.

The FSA has asked some lenders to consider whether their terms might be unfair, and to provide it with evidence of how decisions to increase their MEAFs were taken. The FSA expects to receive responses in the next month or so and it will make a further statement on this issue in the Autumn.

The FSA has been discussing with mortgage lenders how they can vary these fees in a way that is fair for consumers.

When consumers pay off their mortgages or switch their mortgages to another lender, lenders often charge a MEAF.

These fees cover costs such as changing the registration of the property at the Land Registry.

Like many other fees and charges for financial services, in most mortgage contracts firms state that they can change these fees over time rather than keep them fixed over the whole life of the contract.

The FSA does not set prices for financial products and firms can often vary the amount they charge for services, such as mortgage administration.

However, a variation clause which gives a firm the power to impose a level of change to the contract (for example, to increase the MEAF) which the consumer has not explicitly agreed to in advance and which does not require the consumer’s agreement must comply with the Unfair Terms in Consumer Contracts Regulations 1999 (the Regulations) and the general law.

In the FSA’s May 2005 Statement of Good Practice on ‘Fairness of terms in consumer contracts’ it says it explained that a variation clause is less likely to be regarded as unfair if the variation can only be made with a ‘valid reason’ which is specified in the contract.

The FSA says it is of the view that a ‘valid reason’ may be one which reflects legitimate cost increases associated with providing the particular service, provided that the change is proportionate.