If ever there was a law designed to do good that has fallen on its face, it’s the CCCFA.
Following widespread criticism over the changes it made to the Credit Contracts and Consumer Finance Act last year, the Government announced on March 11 that it would make tweaks to the amendments that resulted in Kiwis being turned down for loans for shopping trips to Kmart.
It's a stunning U-turn and it's unlikely to be the final word on a piece of legislation law that dates right back to 2003, when the government of the day saw the need to protect consumers from poor lending practice.
“The CCCFA was a substantial revision of the lending laws from the 1970s and 1980s to better reflect the needs of both consumers and lenders and to align with international trends,” says Banking Ombudsman Nicola Sladden.
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“The purpose of the CCCFA was to protect to the interests of consumers entering credit contracts, consumer leases and buy-back transactions of land. Some key changes [on previous laws], such as information disclosure, were designed to ensure that consumers were able to make informed decisions before entering into contracts.
“Other changes operated to protect consumers through the life of contract – for example, by requiring that fees be reasonable, allowing early repayment, and giving consumers the right to request changes when they were experiencing unforeseen hardship.”
Lenders who broke the rules faced damages and penalties that could be enforced by the Commerce Commission.
The 2003 law gave consumers more protection. However by the early 2010s many were complaining that loan sharks and mobile traders were rife in poor communities and the CCCFA wasn’t doing its job of protecting vulnerable people. As a result the law was reformed in 2014/2015 adding responsible lending obligations for lenders, says Sophie East, partner at Bell Gully.
Widespread criticism
The law changes required lenders to ensure that their loans were suitable and affordable for borrowers, “The obligations included new requirements on lenders to make ‘reasonable inquiries’ of borrowers before issuing loans, and to assist borrowers to make ‘informed decisions’,” says East.
The principles were so broad it made it difficult for lenders to know precisely what was required of them, or for the Commerce Commission to identify specific breaches. As a result, the principles were very rarely enforced, says East.
A for sale sign in the Auckland suburb of Onehunga. There are fears that first home buyers are being shut out by the new rules. Photo / Fiona Goodall
Widespread criticism that the 2015 reforms hadn’t gone far enough led to the overhaul that came into effect on December 1, 2021. That imposed more stringent regulations around the suitability and affordability of loans.
Under the December rules:
• Directors and senior managers must exercise due diligence to ensure their organisation complies with the CCCFA;
• Advertising must meet new standards set by the regulations;
• Lenders are required to keep better records of how they satisfy affordability and suitability requirements and how they calculate the fees; and
• Lenders and mobile traders who offer credit need to be certified by the Commerce Commission.
The central problem of how the new update led to consumers being refused loans was that directors and senior managers at lending institutions could be personally fined as much as $200,000 for breaching the act, while companies could be fined up to $600,000. That big stick made banks overly cautious around requirements that they must ensure there is a “reasonable surplus” after borrower’s expenses.
Fear and confusion
East says the regulations governing responsible lending are complex and include a number of untested standards, which are capable of wide-ranging interpretation.
“To supplement the new requirements, MBIE has issued an updated version of the Responsible Lending Code. This attempts to assist lenders in navigating the new regulations,” says East. “However, the flowchart provided in the code, though intended to simplify things, highlights the remarkable complexity of the new regime and the numerous gateways and decisions points that lenders must navigate.”
In fear of breaching the regulations, banks and other lenders have been drilling down into every single entry in borrower’s bank statements stretching back three months or longer. Borrowers have found themselves denied mortgages as a result of Netflix subscriptions, eyebrow waxing, or café visits.
Those seeking extensions to their home loan to fund renovation projects are also feeling the pinch. Photo / Getty Images
The irony, says East, is that in Australia, which originally inspired New Zealand's introduction of responsible lending rules, the Government is now seeking to ease restrictions on lenders. The Australian government is warning against “unnecessary barriers to the flow of credit to households”, says East.
“If the Australian Government successfully pares back the regime as proposed, it will leave a stark contrast to the detailed and prescriptive demands of New Zealand’s new framework,” she says.
Borrowers suffering
One big issue with the affordability directives is that they are one-size-fits all whether it’s a borrower seeking a mortgage from the BNZ or a payday loan at 300% interest from a fly-by-night lender.
It’s not just first home buyers who are suffering the pain. Top ups are also affected, says East. “Material changes” to a loan, such as a top up for a new car or building work treats the new money as a new advance, meaning the lender needs to run its magnifying glass over the loan.
The current rules do have an exemption where it is “obvious in the circumstances” that the borrower can afford the loan, says East. But the code only gives one example of a customer who has more than $1m in net assets, a $350,000 salary, and is seeking a credit card limit of $10,000 in order to collect Airpoints on purchases. “Lender L establishes that it is obvious that the borrower will make the payments under the agreement without substantial hardship,” the example states.
This is the grey area that the Government hopes to bring clarity with its new changes.
The amendments, which will come into effect in June, include:
• 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;
• Removal of regular "savings" and "investments" as examples of outgoings that lenders need to inquire into;
• 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.
However, not everyone is convinced the changes go far enough.
Roger Beaumont, chief executive of the New Zealand Bankers' Association, told the New Zealand Herald shortly after the changes were announced that it wasn't clear they would "move the dial enough to make a difference".
Beaumont said more could be done to reduce the impact on most consumers while maintaining protections for vulnerable consumers.
"We'd like to see the new rules work in a way that doesn't restrict access to responsible lending for consumers who can afford it, while ensuring vulnerable consumers are protected from high-cost credit that may not suit their circumstances. These changes maintain the one-size fits all approach that hasn't worked so far."
