Increase in loan rejections sharpest for people with high 700-plus credit scores, Centrix says

Wednesday, 2 March 2022

Usually, it’s people with poor credit scores who struggle to get loans.

Controversial new lending law changes have sharply increased the rate at which people with good credit scores are having their loan applications declined, data from Centrix shows.

Centrix chief executive Keith McLaughlin said changes to lending laws and regulations brought in at the start of December to protect vulnerable people from unscrupulous lenders had led to lenders being more conservative, and turning down more loans.

The biggest increase in applications being declined was for people with credit scores of more than 700, he said.

The smallest increase in loan applications being declined was for people with lower credit scores of 400 or lower, people who were closer to the definition of being vulnerable.

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Credit scores run between zero and 1000, with scores over 700 given to people with a track record of making their repayments on time.

Data from Centrix shows lending has become more restrictive since changes to the Credit Contracts and Consumer Finance Act (CCCFA) came into effect in December, with the number of approvals down again this month. It appears to show low-risk loans are being impacted the most. Loan conversion rates have dropped markedly for those with a credit score above 700, which is generally considered to be good.

“We continue to see an impact on loan conversions, with credit approvals for both mortgage loans and consumer finance negatively impacted,” McLaughlin said.

“Loan conversion rates have dropped markedly for those with a credit score above 700, which is generally considered to be good,” he said.

The lending law and regulation changes caused an outcry from banks, other lenders and mortgage brokers, after it became harder for people to secure bank home loans.

Both ACT leader David Seymour, and National’s commerce spokesman Andrew Bayly have campaigned for aspects of the changes to be rolled back.

Minister of Commerce and Consumer Affairs, David Clark ordered an inquiry into lending law changes banks and mortgage brokers say have made it harder for people to get home loans.

Responding to the criticism that the Government had made it harder for people to get into first homes, Commerce and Consumer Affairs Minister David Clark held meetings with bank chief executives, and ordered an inquiry.

Bank chief executives have voiced optimism that changes could be made to increase their ability to lend again.

A spokesman for Clark said: “The minister has received the preliminary advice and is currently considering it.”

Demand for loans dropped in February as consumer confidence was hit by the Omicron outbreak, McLaughlin said.

High inflation, the threat of rising home loan rates and Reserve Bank restrictions on low-deposit lending were all factors likely to be dragging on households’ confidence to borrow.

“Mortgage applications reduced 16 per cent year-on-year, further signalling a housing market slowdown as interest rates increase and credit tightens,” he said.

Gisborne has the highest proportion of people behind on loan repayments in the country.

New Zealand has had responsible lending laws since 2015, but they have not prevented a lot of people falling into arrears on their repayments, and Centrix data showed arrears levels rising across the entire country.

About 400,000 people are behind on their loan repayments.

McLaughlin said there was usually a spike in people falling behind on loan repayments in February as some households struggled with debts they took on at Christmas.

Centrix compiled monthly reports on credit, and gives each region a red or green arrow indicating whether arrears are on the rise, or are falling.

But, he said: “It’s the first time I have seen everything go red. Normally, you would see quite a bit of green,” McLaughlin said.

The South Island generally fared better, with smaller rises in arrears than most of the North Island, with the exception of Southland.

“Regionally, Gisborne has the highest total arrears (15.1 per cent), while Northland has the highest proportion of mortgage borrowers past due (2.3 per cent). The Nelson/Tasman region has the lowest reported arrears across Aotearoa, with 8.6 per cent of borrowers in arrears,” McLaughlin said.

Despite the rise in arrears, McLaughlin said levels remained low by historical standards

“Whether the trend continues remains to be seen,” he said.

“Financial hardship is at a two-year low, while arrears on credit cards and vehicle loans during 2021 have been at their lowest since consumer credit reporting has been in place,” he said.

Rises in arrears on home loans were low compared to arrears on consumer loans.