Banks cleared on loan breakage fees

THE FINANCIAL Regulator has found that lenders are recovering their funding costs when they charge a breakage fee to customers who opt out of higher fixed-rate mortgages, but they were not passing on additional charges.

George Treacy, head of the regulator’s legal and consumer departments, told the Oireachtas Joint Committee on Finance and the Public Service that 526 complaints were made over breakage fees as variable interest rates had fallen.

He said lenders were passing on to customers some of the fixed cost of funding loans in the wholesale money markets.

Some €23 billion of €114 billion in residential mortgages outstanding in 2008 were held on fixed-rate terms and, of those, about 58 per cent were fixed for a period of one to three years.

Mr Treacy said the regulator was carrying out on-site inspections at the lenders, and is seeking details on redemption levels and how customers are being warned about redemption charges.

The regulator said it found some errors on breakage fees, but not all favoured the lender.

Mr Treacy said the highest breakage fees he had discovered was €44,000 on a mortgage of more than €400,000.

He said the charges brought “a lot of trouble and heartache and worry”, but that they were based on the high value of mortgages drawn by customers. Capping redemption charges was a matter for the Oireachtas, he said.

Three “significant” lenders were found by the regulator to charge six months’ interest or their own funding costs for the fixed-rate period, whichever was lower, for breaking the loan.

Fine Gael TD Kieran O’Donnell said borrowers were “suffering the burden of interest over and above what they should be suffering”.

Later, the Oireachtas committee heard that the Mazars report on lending to small businesses found that the value of new loan applications totalled €9 billion between June 2008 and February 2009 and that, of this, 86 per cent was approved by banks.

Dera McLoughlin, head of consulting at Mazars, said the report did not break down how much of this related to new applications from existing customers or applications from new customers, or the renegotiation of existing loans.