The Commerce Commission has settled with a company that specialises in providing finance to medical professionals over the incorrect calculation of mortgage break fees.

In the settlement, Medical Mortgages Limited admits breaching the Fair Trading Act by making misleading representations that it was entitled to charge break fees calculated using a different formula than the one set out in customers' contracts. Medical Mortgages Limited is to refund around 100 affected customers a total of approximately $80,000.

The Commission's investigation identified that the affected customers had contracts which stated that the break fee would be calculated using a formula set out in the Credit Contracts and Consumer Finance (CCCF) Regulations (2004). This formula is colloquially known as the 'safe harbour' formula and is based on changes in retail interest rates. However, the affected customers were charged a break fee based on changes in wholesale interest rates. Using the wholesale instead of retail rates meant that the break fee charged was greater than it would have been if the formula set out in the customers' contracts had been used.

"The formulae that banks and other mortgage providers use to calculate break fees are complicated and the average customer has no way of checking the calculation to confirm that it is correct. Customers have the right to expect that break fees quoted or charged are calculated in accordance with what is stated in their contracts," said Graham Gill, Commerce Commission's Fair Trading Manager, Auckland.

"The Commission considered that as Medical Mortgages Limited charged a fee for breaking a mortgage which was calculated in a way other than that set out in customers' credit contracts, it was likely to have breached the Fair Trading Act," said Mr Gill.

As part of the settlement with the Commission, Medical Mortgages Limited has agreed to recalculate the break fee in accordance with the CCCF Regulations and to refund to affected customers the difference in the fee together with interest. Medical Mortgages Limited has also agreed to contact customers who obtained a quote for a break fee but then did not break their mortgage. These customers will be offered the opportunity to break their mortgage at the fee which would have applied at their quote date had the correct formula been used. They may also be compensated for any interest differential which exists.

"Medical Mortgages Limited has been cooperative with the Commission since the commencement of this investigation. Medical Mortgages Limited passed on break fees to its customers at the same rate it was being charged by its own bankers. It was under the mistaken impression that it could pass this cost on to its customers. When Medical Mortgages Limited realised that its contract stated that the break fee would be calculated in a different manner, it sought to work with the Commission to remedy this breach," Mr Gill confirmed.

Background

Medical Mortgages Limited is an in-substance subsidiary of Medical Assurance Limited (MAS). MAS is a mutual society which offers insurance and other financial products and services to its members, who are primarily health professionals. Medicals Mortgages Limited is a special purpose company which offers home loan finance to MAS members.

A break fee, or prepayment fee, is a fee charged by a creditor to recover its loss when a customer repays their loan early. Under the CCCF Act creditors are entitled to recover their loss when a customer makes an early prepayment or breaks the term of a fixed interest loan, as long as the creditors use what the CCCF Act describes as an appropriate procedure to calculate a reasonable estimate of loss.

Section 54 of the Credit Contracts and Consumer Finance Act 2003 states:

(1) A creditor must calculate a reasonable estimate of its loss arising from a full prepayment using -

(a) a procedure prescribed for the purposes of this section by regulations; or

(b) an appropriate procedure set out in the consumer credit contract for calculating that loss.

(2) If a creditor uses a procedure prescribed for the purposes of this section by regulations, the amount calculated is to be treated in any court and in any proceedings under this Act as a reasonable estimate of the creditor's loss.

The safe harbour formula. The procedure set out in the CCCF Regulations is colloquially known as the safe harbour formula. It is based on the movement in retail rates. If a creditor follows the safe harbour formula, then the creditor will be assumed to have assessed a reasonable estimate of loss in accordance with section 54(2) above.

Section 13(g) of the Fair Trading Act states:

No person shall, in trade, in connection with the supply or possible supply of goods or services or with the promotion by any means of the supply or use of goods or services, Â….make a false or misleading representation with respect to the price of any goods or services.

Only the Courts can decide if the CCCF and Fair Trading Acts have been breached and set appropriate penalties.