The Commerce Commission has concluded its investigation, which was prompted by complaints from bank customers, under the Credit Contracts and Consumer Finance Act (CCCF) into the mortgage break fees charged by banks when customers repay their fixed-rate loans early.
As a result, Kiwibank and HSBC have each been issued with a warning on the basis that the formulae they were using until mid-2009 had technical deficiencies. During the investigation both banks changed their formula.
Kiwibank has since made ex-gratia payments to its customers totalling approximately $689,000 while HSBC made ex-gratia payments to its customers totalling approximately $113,000.
Commerce Commission Auckland Fair Trading manager, Graham Gill, says the commission recognised that given the variance in fees being charged, that it was a significant and important issue for many bank customers and accordingly the commission conducted a comprehensive investigation of the matter.
He says there is a great deal of complexity in the formulae, the underlying banking arrangements, related legal issues and in the act itself which meant the investigation needed to be thorough in considering every aspect.
"Creditors are entitled to charge a reasonable estimate of their loss on prepayment of a loan.
"The act gives creditors a wide ranging discretion in assessing its loss, and this investigation was focused on the nature of the loss suffered by the banks."
He says the key loss suffered by the banks relates to interest rate swap contracts, which banks enter into when customers enter into fixed rate loans.
Gill advises that consumers entering into fixed-rate mortgage contracts need to ensure they fully understand the implications of the contract they are signing.
"If they choose to, or need to, exit the contract earlier than the agreed term they face legitimate bank charges.
"They should also be aware that, under the CCCF act, banks can alter the basis of their prepayment fees at any time if they provide customers with appropriate notification of the change," says Gill.
