ANALYSIS: Commerce and Consumer Affairs Minister David Clark has announced that the Government will soften of the recent amendments to the Credit Contracts and Consumer Finance Act (CCCFA) in response to strong public and finance industry feedback on where the act missed the mark.
The December updates to the CCCFA had been made, in Clark's words, to "stop vulnerable people from finding themselves with unaffordable debt". The ability to pursue the director of a ratbag finance outfit and issue a fine that that the director must personally pay (i.e. the fine is not covered by Professional Indemnity insurance) is a strong step towards protecting vulnerable borrowers from predatory lending.
What was missing from the act was a rational view of how borrowers’ spending changed once they bought a house. This is a well-established phenomenon; renters tend to spend a bit more on luxury purchases but almost everyone prioritises the mortgage payment once automatic payments begin. Clark's announced changes to the act, which will take effect in June, will allow banks to take a rational approach to future spending, something that isn’t possible in the CCCFA's current form.
The changes outlined by Clark include:
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• Removing regular "savings" and "investments" as examples of outgoings that lenders need to scrutinise when assessing an applicant's future expenses.
• Clarifying that when borrowers provide a detailed breakdown of future living expenses there is no need to inquire into current living expenses from recent bank transactions.
• Clarifying that the requirement to obtain information in "sufficient detail" only relates to information provided by borrowers directly rather than relating to information from bank transaction records.
• Providing alternative guidance and examples for when it is "obvious" that a loan is affordable.
While it's meant to be comforting, the last change rings alarm bells. Trying to fit everyone’s result into a neat and tidy box with a result that fits everyone is almost impossible. People earn income from a variety of sources - salaries, self-employment, commissions, bonuses, share dividends etc. Getting a uniform number at the end of all those variations is difficult and can’t really be regulated.
Rupert Gough: "Mortgages are likely to be easier to get." Photo / Fiona Goodall
The CCCFA, instead, needs to concentrate on the methodology with which banks calculate affordability rather than telling a bank what the end result should be. Given the very low default rates, even as interest rates creep higher, it is fairly clear that banks are already using a robust methodology to calculate mortgage affordability. They have always used, for example, a “test-rate” for the mortgage many percentage points higher than the actual mortgage rate would be. The question from the bank has always been: "Yes, you can afford the mortgage at 3.5% but can you afford it at 7%?" It would surprise me if the assessment calculations being used prior to December 2021 - when the CCCFA was implemented - didn’t meet the criteria of testing for an obviously affordable loan.
So, in the near future, mortgages are likely to be easier to get compared to the last few months. Does this mean we just get runaway property prices again? Will buyers return in droves to open homes?
The Reserve Bank has a number of financial levers that have been successfully used for many years now. These include Loan to Value Ratios, Debt to Income Ratios, and of course, the Official Cash Rate. The important difference between these levers and the CCCFA is that they can be turned up or down in line with the market. If the property market gets a bit hot again, LVRs could be implemented further (as a purely random example, 50% lending for property investors and 70% lending for owner-occupied). When the market cools, these levers can be changed almost overnight to adjust the market.
Commerce and Consumer Affairs Minister David Clark has announced tweaks to the CCCFA. Photo / Getty Images
The CCCFA was clearly having a negative effect on the market, despite official claims to the contrary, but tweaking legislation is a slow process. This is dangerous as housing market sentiment can move quickly (over a couple of weeks). So while the CCCFA is a good tool for protecting vulnerable borrowers it is a terrible tool for controlling the property market.
The Government has said the changes will take effect in early June but the banks will need another month or two to adjust their policies. From there, applicants may take a month or so to reapply under the new policies and find a property. Expect the real effects of the act update to start showing in statistics from August onwards.
- Rupert Gough is the founder and CEO of Mortgage Lab and author of The Successful First Home Buyer.
