Amendments Nos. 251 to 254 are related and will be taken together. Is that agreed? Agreed.
SECTION 98.
I move amendment No. 251:
In page 53, subsection (2)(b), to delete line 38 and substitute the following:
"(b) may not be changed over a period of at least one year,".
These amendments are of a technical nature and do not change the intent of section 98 as currently drafted. To aid interpretation, amendment No. 251 clarifies that redemption fees are permissible where the mortgage rate is fixed for a period of at least one year. We will deal with that in much greater detail presently. Amendments Nos. 253, 254 and 256 are consequential on amendment No. 251. The thrust of the section is not changed.
The Department of Finance was keen to redraft the section even though it drafted the original provision. The thrust of the section was studied in great detail with our Department and the Department of the Environment and is the same in financial terms. It is for clarification and ease of interpretation.
Do Members agree that we will take amendment No. 256 with this group? The Minister stated that amendment No. 256 is consequential on amendment No. 251.
May I clarify a point? The Department of the Environment drafted the original provision and the Department of Finance changed it. However, all three Departments are convinced that the thrust is the same and that the changes are of a technical nature. Some illustrious members of the Department of Finance may be present.
Is it agreed to take amendment No. 256 with this grouping? Agreed.
Essentially, the purpose of this section, as I understand it, is to provide that if one enters a fixed rate contract and decides to pull out, one would have to pay a redemption fee.
Fixed rate for a year or more.
Am I correct in saying that this provides that the consumer cannot switch back if interest rates fall?
That is the thrust of it but we will discuss it in greater detail when dealing with amendment No. 255. There are now three types of mortgage: the fixed rate; the variable rate and the hybrid. The latter combines both fixed and variable rates. If the rate increases by up to 2 per cent, it must be paid but one is protected if it increases above that. However, one gets the benefit of any fall in interest rates. It is another attractive option open to consumers which arose out of competition and tensions at the time of the currency difficulties. We are coming to another amendment which is quite strong.
Are we providing for equity in setting these fees? It seems the principle may be fair in that if one enters into a contract for a fixed rate, one cannot switch horses free of charge if the market moves against one. Is the Minister providing for equity in the setting of redemption fees if they are to become a feature of the way people borrow, in other words, if they want fixed rates for the first year or couple of years of a mortgage? Lending institutions should not be allowed to apply any redemption fee they choose, there should be some test of reasonableness in the charges.
I am not providing for a standard type or protocol for redemption fees.
This is essentially an exemption. We are saying that a mortgage holder is entitled to pay back money on a loan without being penalised, in other words, to wipe out the capital sum without suffering any penalties. That is the principle we are establishing, but we are withdrawing it in the case of those who enter loans with fixed rates.
Of a year or more.
If we are withdrawing a benefit which consumers would otherwise have for good reason, there should be a limit. Lending institutions should not have the right to set unreasonable redemption fees.
We had a session on it this morning because, like Deputy Bruton, I wanted this clarified. The current position is that building societies cannot charge redemption fees on variable rate mortgages and that position will be retained and extended. At present building societies may charge redemption fees on fixed mortgages of one year or more. The new position is a variable fixed rate, which sounds odd and is a sort of hybrid. The term given to it — I never heard it before, but it is well known in the housing market — is the "cap and collar." One bears a rise up to a limit of 2 per cent over the starting rate and if interest rates fall during that period, one gets the benefit.
We will come back to this when we discuss my amendment No. 259 which tries to insert an element of fairness into the redemption fees which might be set.
Amendment agreed to.
I move amendment No. 252:
In page 53, subsection (2) (c), line 40, to delete "five" and substitute "5".
Amendment agreed to.
I move amendment No. 253:
In page 53, subsection (2), to delete line 43.
Amendment agreed to.
I move amendment No. 254:
In page 54, lines 1 to 3, to delete subsection (3) and substitute the following:
"(3) The exemption from redemption fees in subsection (1) shall apply at any time during the period of the loan at which the period referred to in paragraph (b) or (c) of subsection (2) have elapsed.".
Amendment agreed to.
I move amendment No. 255:
In page 54, subsection (4), line 4, after "with" to insert "the Director and".
The purpose of this amendment is that if the Minister is given powers to alter cases where the consumer must pay redemption fees, the Minister should consult the Director of Consumer Affairs, not only the Minister for the Environment, who seems to crop up here, although he exempts himself everywhere else. It is reasonable that the view of the Director of Consumer Affairs, who is being put in charge of protecting consumers' rights in relation to mortgage and general lending, should be heard before the Minister, or some future Minister, decides that redemption fees would be paid in a wider category of cases. This is a reasonable provision in that the Director's voice should be listened to on such matters.
I am glad to accept the amendment. I was not able to link consumer affairs with the Department of the Environment earlier. However, I believe this is sensible.
Amendment agreed to.
I move amendment No. 256:
In page 54, subsection (4) (a), line 6, to delete "intervals" and substitute "period".
Amendment agreed to.
I move amendment No. 257:
In page 54, lines 9 to 20, to delete subsection (5) and substitute the following:
"(5) A mortgage agent shall, where a redemption fee is payable on a housing loan by virtue of subsection (2), ensure that a statement to that effect, specifying how the amount of such fee is to be calculated, shall be included in or attached to:
(a) any information document which refers or relates to such a loan,
(b) any application form issued for the purpose of applying for such a loan or, where application for the loan is made otherwise than by way of an application form, such a statement shall be sent to the applicant within 10 days of the receipt of the application,
(c) any document sent to the applicant approving the loan, and
(d) any communication in relation to a variation of, or any offer to vary, the terms of the housing loan which would have the effect of making the loan liable to a redemption fee in accordance with subsection (2).".
This amendment specifies culpability. It is a substitute for amendments Nos. 257 and 258 and its purpose is twofold. By placing the onus on the mortgage agent to include in or attach to specified documents the required statement, the offence is raised and the person named in the offence is specified.
This is a reasonable step. As the Minister said earlier, it provides some transparency in that the consumer will be told how this fee will be set. The Director of Consumer Affairs — I will come back to this on my amendment No. 259 — should have some role in setting the codes of practice which will be pursued by lending agents when setting redemption fees.
Is the Deputy talking about codes of practice in money rates or behaviour codes?
These are redemption fees which I presume will — it does not say how they will be calculated — act as a disincentive to a borrower who has entered into a fixed rate loan at 7 per cent but who decides to switch when rates suddenly fall to 4 per cent. The lending agency should not be in a position to exploit that situation to an excessive degree. This is a complex area and the consumer would be better protected if the Director of Consumer Affairs set out a code of practice in relation to these redemption fees rather than leaving it to the lending agencies to decide or make them up as they go along once they are transparent.
That is the purpose of amendment No. 259:
I am happy with amendment No. 257 but I would like to hear the Minister's comments on going beyond that.
Amendment agreed to.
Amendment No. 258 not moved.
I move amendment No. 259:
In page 54, between lines 24 and 25, to insert the following subsection:
"(7) Any redemption fee charged by a lender shall be in accord with Codes of Practice set out by the Director.".
It seems this type of loan is becoming more common. A fixed rate for a certain period gives borrowers a degree of certainty, at least in the first couple of years of their mortgage, as to what repayments they will have to enter into. I would not like to see this type of product, which is sold quite aggressively at times, having draconian penalty clauses written into the small print where consumers perhaps find subsequently that the rates of interest have dropped substantially and that they are committed to fixed rate loans.
The local authorities are an interesting case in point in that many are working off 12.5 per cent. Clearly people made a commitment but I do not think it should bind them for all time to pay 12.5 per cent if the current rates are 5 per cent. It should not be open to lending institutions to effectively lock the door and throw away the key as soon as the consumer is committed to a 12.5 per cent rate. There should be some equity in this, the redemption fee which may be charged should be set in a way seen to be fair to the borrower. As things now stand, the attitude of the Department of the Environment is that this is not possible. It will not reduce its fee or its interest rate, which is reasonable too. It takes the view that borrowers entered a commitment to pay at the rate of 12.5 per cent. However, borrowers should have the right to pull out, cut their losses at a reasonable figure, go back to the market and borrow at the market rate. All I am asking is that these redemption fees, which lock the consumer into the original agreement, should not be set at an unreasonable level and that the Director of Consumer Affairs should have a role in setting the codes of practice that would be followed by lending institutions in setting these fees. I do not think that is unreasonable. We expect the Director of Consumer Affairs to set codes of practice generally. We accept that the Director of Consumer Affairs would have the right to refuse charges being sought by banks and other lending institutions, so it is consistent with the position the Minister has come around to during the debate, that this is essentially a type of bank charge and, therefore, subject to some regulation by the Director of Consumer Affairs.
The thrust of what the Deputy is saying looks right until it is examined. He makes two points in his amendment. He says any redemption fee charged by a lender shall be in accord with codes of practice set out by the Director. I went into this in great detail because codes of practice are regarded as good things in most areas of life. Business should be done correctly and professionally and with regard for other people. However, the Deputy is also putting forward in this amendment that in this case a code of practice would be a mandatory or an agreed Protocol on the cost of a redemption.
The redemption fee is defined here as being in addition to principle and any interest due. It is an add on to the contract.
The Deputy is putting forward an amendment to the effect that the Director of Consumer Affairs would in fact set a Protocol for redemption fees.
That is correct.
I want to encourage transparency and that is what I have done. As the Deputy knows, this Bill will outlaw redemption fees on all variable rate housing loans, including those in existence before the commencement of the Act. However, redemption fees are being permitted in the case of fixed interest rate housing loans which is already the statutory position in relation to building societies. I will not be able to accept this amendment because it is an incursion into what I call the macroeconomic policy, even though Deputy Bruton has suggested that a redemption fee is a charge outside of the principle and interest which is the macroeconomic arena. Deputy Bruton is taking this fee as a charge.
The Department of the Environment tells me and I also make inquiries, that the redemption rate covers only the cost to the lender, and in some cases does not fully cover the lender. No money is made on redemption fees. It is not a business, so to speak, and as the Deputy said in the earlier part of the debate, the lender is stuck with repaying the money and honouring whatever commitments he or she entered. He or she must cope in turn with a market which frequently fluctuates, depending on circumstances. It would mean the Director of Consumer Affairs straying into an area which is not properly his, because even though the consumer is involved, this is not a money making section of a lender's portfolio of business and only covers the cost of redemption. What I am allowing for and what I want to see is that people involved in redemption and moving on to another loan will have full transparency of costs, so that if there is a redemption fee they will know how it was arrived at, shop about and compare costs. I encourage transparency. Codes of practice should refer to the fact that those engaged as part of their portfolio in redemption work should be open and transparent with those who seek redemptions. I have no bother with that, I do not think anybody would have, but I could not accept that the Director of Consumer Affairs would in turn have an input to redemption fees.
I honestly find the distinction difficult to understand. Admittedly, the typical lender will have entered into commitments with his depositors so that he will have a certain number of fixed rate depositors if he has a certain number of fixed rate borrowers, but the Minister's defence is that the lender will only treat this in a cost covering way. Clearly it would be open to a lender to set redemption rates that were more than cost covering. We will come back to this a second time, if we miss an opportunity for testing its fairness we will not get another chance. Perhaps a way out is if the Minister can give us an assurance that the Director of Consumer Affairs will have the authority under the earlier section to challenge this fee as being an unreasonable term.
Where a redemption fee is payable it gives the lender very much the upper hand because the lender could set a punitive redemption fee and, therefore, interfere in the reasonable right of a borrower to redeem the loan. Am I correct in assuming that there is no cap on the redemption fee based on the percentage of the total amount borrowed or whatever? There is a looseness there that puts the lender in a very strong position. A lender might try to avoid allowing a loan to be redeemed on the basis that the borrower will not necessarily borrow again from the same lender.
Oh, indeed not, in many cases I meet in my constituency work they are going to an alternative method of financing.
Is the Minister saying that when a borrower takes out a loan the borrower has to be told that in the event that he or she redeems this loan——
That is correct. When the borrower takes out a loan, he or she must be advised at the application stage, when the first form is being filled, of the position if he or she seeks to redeem. This provision also applies to all advertising in connection with the loan. In this respect, therefore, the issue of transparency is covered. Furthermore, in general, the codes of practise regarding the carrying on of the business will be sharpened. Already, all the groups and companies are undertaking this.
However, the developing of a mandatory Protocol regarding the giving of authorisation to the Director of Consumer Affairs to so intervene in redemption fees is straying into the macro economic field. It should be linked with principal and interest.
Is redemption fee defined? Is it a charge under section 46, or is it a term of credit under section 48? Under both of these sections, the Director of Consumer Affairs has redress if unreasonable terms are used.
Section 98 (6) of the Bill states:
In this section, "redemption fee" means, in relation to a housing loan, any sum in addition to principal and any interest due on such principal (without regard to the fact of the redemption of the loan) at the time of redemption of the whole or part of the loan.
This definition is derived from the Building Societies Act, 1989 and it bears out my remarks on the macro economic aspect of both the principal and the interest, because the redemption fee includes "any sum in addition to principal and any interest due on such principal".
Under section 46, the Director of Consumer Affairs may go to the court to challenge any cost of credit or any charge that is excessive.
Mortgages have been exempted from this provision. The Deputy will recall that the committee had a lengthy discussion on this aspect.
Is the Minister advising that this is a charge under this term, and not in terms of credit, which could be open?
It is part of the macro economic aspect of the loan, the principal and the interest, and is linked with that. The definition of "redemption fee" set out in section 98(6), and which is taken from the Building Societies Act, 1989, bears this out when it states:
. . .in relation to a housing loan, any sum in addition to principal and any interest due on such principal. . .at the time of redemption of the whole or part of the loan.
The Government has conceded on the issue of the bank charges. This is virtually identical to a bank charge. It is a form of charge.
The Deputy is referring to transaction charges.
This is a transaction.
It is more than a transaction charge. A transaction charge is a charge for handling, for dealing or for undertaking a transaction with regard to some aspect of a person's bank business. However, this fee is caught up in the principal and the interest. It is part of the overall price costing.
Is it fair to suggest that where, for example, there were legal fees or legal costs involved in redeeming a loan on the part of the lender, the lender would feel rightly entitled to pass this charge on to the borrower as part of the redemption fee?
The rates we have received — these would only be indicative — from various companies do not allow for any money to be made. They cover the cost, and in some cases not fully.
I was worried about this provision, because all of us who deal with constituents come across people who are leaving, moving, redeeming and so on. I therefore examined it in great detail. There is not a profit, and there is no killing in redemption fees. Doubtless this would be the case, if possible. However, they deal with the cost of redemption and, in some cases, are not fully doing so.
Section 98 (1) states that a borrower may make early repayment of ". . .the whole or any part of a housing loan and shall not be liable to pay any redemption fee. . ."
Is the Deputy referring to variable rates?
That is correct.
Payments are not made where variable rates apply. Payments are only made on fixed rates of one year or more.
With regard to the fixed rates of one year or more, does the Minister agree that any redemption fees charged on this kind of loan should be in accord with the amendment moved by Deputy Bruton, and in accord with the codes of practise established by the Director of Consumer Affairs? Otherwise the borrower has no come back and would have to pay the piper. In this respect, the redemption fee could be fairly hefty on the borrower.
Is the Deputy referring to early repayments?
That is correct.
The legislation will provide that full information on redemption will be provided when the borrower signs the application form at the outset. The borrower is not entering into something which is sprung upon him or her when and if it is decided to undertake a redemption as he or she will know what the situation will be. In addition, the redemption covers the cost of redemption, no more or no less.
Could that cost be exorbitant or is there a set fee?
There is no set scale. Redemption does not take place at a set time. It cannot take place under a fixed rate loan until after a year, but it could then be done at two or three years or any other year. There could not therefore be a scale.
Is it not advisable for the borrower to have some kind of guarantee that there was not going to be——
Is the Deputy suggesting being ripped off?
That is correct.
It does not happen. The cost of redemption is linked with the cost of the loan and the prevailing rates of interest. The definition of "redemption fees" set out in the Bill embraces this. It is not a matter in which the Director of Consumer Affairs can or should have the remit to scrutinise.
Would the Minister agree that the Director of Consumer Affairs should be the watch dog of the borrower?
He is the watch dog of the borrower with regard to the matters which the committee is discussing, such as advertising, the issue of misleading, transparency and all the matters we have agreed. In this instance, however, while I recognise that Deputy Bruton has the interests of the consumer at heart in his proposals, it is not possible to accept his amendment.
Is the amendment being pressed?
Perhaps I will withdraw the amendment and reconsider the issue on Report Stage. The committee has accepted that the Director of Consumer Affairs may set out codes of practise in order to secure transparency and fairness regarding the terms of credit agreements and the conduct of agents dealing with the consumer in general.
This was in respect of general behaviour.
Is the Minister worried that, under the terms of this amendment, these codes will become statutory?
I have no difficulty with codes of practise regarding transparency, openness and fairness between consumers and those who loan and borrow, and I accepted some amendments from the Deputy earlier regarding this area.
That is correct.
The committee discussed it and it appeared sensible. The Deputy has combined two matters in this amendment.
It is becoming statutory.
It is becoming statutory and the Deputy has gone into the macroeconomic——
I do not accept the latter. It is becoming statutory but perhaps we will have to agree to differ. I do not accept the rationale that the Minister and the Government have defended throughout, namely that banks and building societies should be exempt from any challenge from the director regarding their charges or terms.
The Deputy is not talking about their transaction charges, it is their interest rate charges.
Any charges, interest rate charges——
We had that argument earlier.
——unfair terms, and that is an error in the Bill. This is out of the same stable. We are aware of one another's position and perhaps we must agree to differ. I will withdraw the amendment and reconsider it for Report Stage.
Amendment, by leave, withdrawn.
Section 98, as amended, agreed to.