Come clean on prepayment charges

As a result of a loophole,housing finance companies continue to levy prepayment charges on dual rate loans despite RBI regulations prohibiting the practice

This Wednesday the largest and most respected bank of the country announced a reduction in home loan and car loan rates with another public sector bank following suit the same day. In both the cases,the reduction is only for their new customers and not for their existing customers.

This is clearly a fallacious argument. If a bank offers a floating rate home loan it is a solemn promise that the rates will be as prevailing from time to time. So when rates go down and they are not offered to existing consumers,it is a clear breach of promise. Floating rates in India mainly means rates which float upwards,and they rarely float downwards. Many official committees of the Reserve Bank of India have commented on the stickiness of the floating rate loans on the downward side.

To combat this both the National Housing Bank NHB that regulates housing finance companies and the RBI that regulates banks banned pre-payment charges on floating rate home loans. In fact,the NHB had been pro-active and issued a regulation in October 2011 prohibiting pre-payment charges on floating rate loans. This regulation removed a major hurdle in the way of existing home loan consumers to shift their loan to cheaper alternatives with other lenders.

REGULATORY LOOPHOLE

Unfortunately on April 4,2012,the NHB opened a loophole for the housing finance companies that allowed them to continue to levy prepayment charges on home loans that had a fixed rate for a few months/years in the beginning.

As a result,almost all the HFCs are aggressively promoting dual rate loans where interest rates remain fixed for 1-5 years,which converts into a floating rate loan later. In the current environment,such home loans make little sense for consumers given that interest rates are expected to go down in the near future. In addition,consumers will have to pay prepayment charge if they shift to a cheaper alternative after the interest rate turns into a floating rate.

Home loan consumers who took teaser rate loans in 2009-10 at 8-9.5 per cent for a couple of years are now learning this the hard way as the interest rates charged currently stand at around 11.50-12.00 per cent after they have turned floating as compared to 10.50-10.75 per cent being charged to new floating rate consumers.

The RBI,even though a little late, issued a regulation on June 5,2012 titled Home Loans 8211; Levy of foreclosure charges/prepayment penalty prohibiting the prepayment charges on floating rate home loans.

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However,unlike NHB the central bank has clarified this through an RTI that the author filed,Will dual rate home loans at any stage of the loan tenure fall within the definition of home loans with floating rates as mentioned in the aforesaid circular?

The response states: As per extant instructions in case of dual sate/special rate home loans,the provisions of our above-mentioned circular will be applicable from the date the rate of interest on the loan becomes floating.

The RBI response can be accessed here: http://india.apnapaisa.com/RBI-circular-on-prepayment.pdf

NEED FOR ACTION

Clearly NHB needs to close this loophole which it has provided to the HFCs. Even this may not be sufficient as the author has come across many complaints from customers that lenders continue to include prepayment charges in the settlement calculations requested by consumers at the time of prepayment. When consumers,who are aware of the circular protest this,they are offered a revised calculation sheet without the prepayment charges with a sheepish explanation,that the software systems have not yet been updated for the removal of prepayment charges from the settlement calculations.

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Clearly just regulation is not going to help eradicate this discriminatory treatment. Regulators should impose large fines on banks and housing finance companies,which continue to charge prepayment charges inadvertently till today.

Will it require multi-million pound fines like the ones imposed by Financial Services Authority in UK before this discriminatory treatment of existing home loan consumers ceases?

The author is CEO, Apnapaisa.com