Commerce Commission chides Kiwibank, HSBC over mortgage break fees

Wednesday 12th May 2010

The Commerce Commission has warned state-owned lender Kiwibank and HSBC over the fees they charge customers for repaying mortgages early.

The regulator completed an investigation into the fees after “a range of complaints from bank customers” following sharp declines in interest rates in late 2008 and early 2009. Kiwibank and HSBC were warned over the formula used to calculate break fees until the middle of last year, which had “technical deficiencies” that likely breached the Credit Contracts and Consumer Finance Act.

The lenders made voluntary payments to customers of $689,000 and $113,000 respectively.

“Creditors are entitled to charge a reasonable estimate of their loss on prepayment of a loan,” said Graham Gill, the regulator’s fair trading manager, in a statement.

“Consumers entering into fixed-rate contracts need to ensure they fully understand the implications of the contract they are signing.”

Borrowers flocked to floating mortgages last year when the global credit crisis and New Zealand’s worst recession in 18 years prompted the central bank to slash the official cash rate to a record-low 2.5%, with some 43% of borrowers on a floating rate in March, compared to 34% a year earlier.

ASB, SBS Bank, Bank of New Zealand and National Bank were cleared of charging unreasonable break fees after the first stage of the investigation ended in April last year.

These banks charge their fees based on the change in retail interest rates. ANZ, Westpac and GE Money, along with Kiwibank and HSBC, based their fees on wholesale rate changes, though the first three lenders weren’t found to be breaching the act.

In a separate statement, the Commerce Commission announced it had reached a settlement with non-bank financier Foundation Custodians over the fee it charged for an early loan repayment. The lender agreed to repay some 35 affected customers $200,000 after the regulator found the company used a different formula to calculate break fees between August 2008 and September 2009 than those earlier provided to clients.

“Foundation Custodian’s customers believed and were led to believe that the safe harbour formula would be applied and they were misled when Foundation Custodians applied a different formula without notification of the change,” Gill said.

The regulator said it accepted the lender’s belief that the different formula wouldn’t lead to higher break fees. The lender stopped fixed rate lending in December 2008, and in February 2009 suspended all new lending.

Businesswire.co.nz

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