Deferred establishment fee regulation will decrease competition: MFAA

Regulation regarding deferred establishment fees will disadvantage non-bank lenders and may eventually reduce competition in the market, according to the Mortgage and Finance Association of Australia (MFAA).

The MFAA submitted a formal response to the recently published Australian Securities and Investments Commission (ASIC) Consultation 135, stating deferred establishment fees (DEF) allowed the non-bank sector to offer increasingly competitive interest rates to borrowers.

The ASIC consultation paper proposed different measures to put an end to unconscionable early exit fees paid to lenders by consumers in case of an early repayment of a loan.

However, MFAA chief Phil Naylor said a DEF was not a penalty for breach of contract or a fee for early repayment. “It is applicable when a lender gives the borrower the option of deferring the establishment costs of the loan in return for a lower interest rate,” he said.

“Any regulatory focus on costs would ultimately be to the detriment of consumers,” Naylor added.

Naylor also said that if non-bank lenders were required to diminish deferred establishment fees, the end result would be higher up-front fees and higher interest rates.

“In turn, this would reduce any downward pressure on interest rates, and reduce the likelihood of innovative and competitive products in the mortgage lending market,” he said.