Pity the home-buyers who are still finding themselves affected by the Credit Contracts and Consumer Finance Act (CCCFA).
Just over a year ago the Government tightened the CCCFA to crack down on loan sharks, but first home buyers became collateral damage in the fight, as banks started to reject home loan applications over shopping trips to Kmart and takeaway coffees.
The changes, enacted in December 2021, required lenders to carry out thorough checks on all applicants to ensure they could afford their loan repayments. The legislation made directors of banks personally liable for any breaches of the act and as result banks took an extremely cautious approach to lending.
Commerce and Consumer Affairs Minister David Clark relented to the public outcry at the start of the year and relaxed the rules from July 7, allowing lenders to to assume that people would curb some of their spending after they got a loan. Clark announced further changes on August 2, that come into effect in March 2023, to “ensure borrow-ready Kiwis aren’t being unfairly penalised when applying for a loan”.
Start your property search
Lyn McMorran, executive director of the Financial Services Federation (FSF), which represents non-bank lenders, says any legislation or regulation that requires a review within weeks of its implementation was badly written legislation from the outset.
“The review and the two sets of tweaks announced as a result would not have been required had more consideration been given to the many submissions made on the changes to the Act and the new regulations by ourselves and the banks.”
Katrina Shanks, chief executive at Financial Advice New Zealand, which represents mortgage brokers, says the changes made in July "were not sufficient” while Loan Market adviser Bruce Patten says the changes have resulted in minimal improvement. “There are [still] lots of clients being declined when they shouldn’t be," he says.
“The main thing that hasn’t changed that needs fixing is the banks are still having to look backwards instead of forwards because of the CCCFA. They are looking at expenses prior to a house purchase, instead of expenses expected once they own.”
For example, one client was going to be closer to work in the new home, so would spend less on petrol. The bank couldn’t accept this, says Patten. Likewise the bank couldn’t accept that once the borrower bought a home, he would be spending less on cycling events. The bank had clearly drilled right down into the borrower’s spending because it questioned the clothing spend, which was light on paper. The explanation was that the borrower had a work uniform.
Commerce and Consumer Affairs Minister David Clark announced changes to the update CCCFA earlier this year. Photo / Getty Images
On the positive side, clients who have more than $1000 uncommitted monthly income (UMI), mostly didn’t have to suffer the banks going through their statements line by line, as they did prior to July, Patten says. “They just accept what the client discloses as their expenses."
iLender adviser Jeff Royle does not believe the banks have improved. “They have not improved and there is significant inconsistency even within one bank,” he says.
One example he cites is a client who has a short-term mortgage with a non-bank lender paying 12% mortgage interest. When the investor applied to refinance through the bank at 6.5%, the bank declined on the basis of the CCCFA. “[The] bank declined as their internal CCCFA-based calculators deemed the loan high risk, at 6.5%. “It makes no sense at all as the customers can clearly demonstrate a 12-month payment history [at 12%] and by refinancing they will halve the rate. The borrower was told to try again in another six months.”
Royle adds that the banks have been reluctant to consolidate large amounts of consumer lending despite this putting the customer in a better position. Small business owners who, prior to December 2021, would have taken out mortgages against their home as security for short-term funding for cashflow or for stock purchase/expansion are still out in the cold, he says.
“Under the CCCFA even a $20,000 facility requires a full application, including financial accounts.” Many have to borrow from non-bank lenders such as Prospa, which may charge 20% interest on a line of credit facility.
More than one adviser pointed out that New Zealand homeowners have very low delinquency rates. They pay their mortgages even when times get tough.
Global Finance head of mortgages Aseem Agarwal says in his opinion banks should have been exempted altogether from the CCCFA for this reason. “Prior to [December 2021] the delinquency ratio on home lending was always less than 1%. This means banks were already lending responsibly and factoring enough buffer through their test rates or assessment rates to ensure the lending is affordable to the borrowers at all times.”
Banks found themselves having to take a conservative approach to lending as a result of the December 2021 CCCFA changes. Photo / Doug Sherring
Agarwal says his advisers are seeing fewer declines under the CCCFA changes, and notes that the banks have been communicating clearly on how they want borrowers’ income and expenses calculated and coded. “They now reflect these changes clearly in their affordability calculators.”
Multiple advisers reported inconsistencies with banks, several citing the same bank as playing more hard ball than others.
Adviser Nathan Dyson of Cave Financial says the issue is not whether the customer can actually afford the loan. It’s the regulation deciding whether the customer can or can’t afford the loan.
“Even if you withdraw or reduce the restrictions within the regulation, the industry effects that have already been set in motion are hard to withdraw and these big banks are not going to spend all day changing their policy back and forward to ride the line of law. They are conservative and will take a long view, what will be acceptable over the short to medium term in regard to the regulation, then aim for that.”
The inconsistency between banks is something that Loan Market adviser Rodney King is also seeing. Some are sticking to the earlier harsher rules when assessing clients’ ability to borrow.
A recent example was a client who was seen to be paying more than the minimum into KiwiSaver, which under the previous rules was seen as an expense. “A customer was paying above 3% into KiwiSaver and was asked to reduce it to 3% and provide payslip evidence,” says King. Bank staff were confused and inconsistent with how they were applying the legislation, says King.
The irony is that anyone saving for a mortgage would do well to be paying into KiwiSaver. “We should be encouraging customers to contribute more if they consider they can afford to, and trust they will reduce this before they allow the mortgage to ever get into default,” he says.
Mortgage adviser Campbell Hastie says easing of the mortgage application was more to do with banks being more at ease with the application rules, rather than the government’s tweaks in July 2022.
“The July rule changes made diddly squat difference,” says Hastie. “Banks have become more at ease around the application of the rules as they stand.
“Meanwhile, advisers and the borrowing public have become accustomed to the level of pedanticism that exists. Instead of it being a shock, we brace for it.
“In my office we do a lot more forensic analysis of things than ever before and that allows us to front-foot any issues before they land at the bank. I also think the weak-borrowing candidates have stopped applying.
“So there have been behavioural changes all round. But that’s not the same as saying the Act is working. Nor can you conclude that things have eased.”
McMorran says the second set of proposed changes announced by the minister in August, due to come into effect in March next year, are somewhat more substantive.
“However, the treatment of what is and what is not a discretionary expense will still require interrogation of borrowers by all lenders to determine what it is that the individual borrower deems to be discretionary as this will differ from one individual to another.
“We are still left with a very prescriptive regime that leaves little in the way of discretion for either lenders or borrowers and the FSF believes that the majority of New Zealand consumers are disadvantaged by this in terms
