Low-equity fees face legal questions

Low-equity fees and interest rate premiums charged by banks for home loans are being reviewed by lenders and may become a thing of the past after a recent court case.

Monday, April 7th 2014, 7:00PM

Last year the Commerce Commission won a case against Sportzone Motorcycles and MTF centred on lending fees.

The judgment confirmed the commission’s position that lending fees must be related to the activity that the fee is charged for. It also said the fee has to relate to the particular transaction it is being charged against, as opposed to being a cost charged against the general costs of doing business.

In the Sportzone case the Court found that the costs recovered were business costs, not transaction-specific costs.

“The issue with low-equity fees or risk fees is that they are not transaction-specific as there is no cost or loss relating to the specific transaction incurred at the time they are charged,” one legal expert says.

“They are, arguably, transaction-specific in that the specific loan falls within a pool of loans that has a particular characteristic which makes loans in the pool more vulnerable to credit loss.

“All that is happening is that the lender has identified the specific loan as having a greater likelihood of that loss occurring.”

He says that if a lender wants to be compensated for accepting a higher risk, that has to be done by charging a different the interest rate rather than charging a fee.

One way around this is for lenders to insure against the potential loss and that is what lenders’ mortgage insurance (LMI) used to cover.

But none of the LMI insurers are now operating in New Zealand.

RESIMAC recently removed its low equity fees as it believes they could be challenged following the court case.

RESIMAC New Zealand general manager Adrienne Church said: “We don’t believe we can charge [the fees] anymore.”

However, BNZ removed its low-equity interest rates, which were 50 basis points higher than standard rates, and now charges a low-equity premium based on the LVR – the higher the LVR, the higher the premium..

The Sportzone case is being appealed.

The new Credit Contracts and Consumer Finance Act is being reviewed by Parliament.

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