It’s official: the era of ‘overly prescriptive’ lending is over

Wednesday, 31 July 2024

The Government’s removal of controversial affordability lending regulations comes into effect from July 31.

Getting approval for a loan will now be a much easier process as the Government’s removal of controversial affordability lending regulations comes into force on Wednesday.

Back in 2021, the previous Government made changes to the Credit Contracts and Consumer Finance Act (CCCFA) that put extra requirements on lenders to verify borrowers could afford a loan.

The changes were intended to crack down on irresponsible lending by loan sharks, but reports of people being turned down for home loans based on things like spending too much on a dog, or having been on maternity leave soon emerged.

Others were subjected to intensive scrutiny by their banks for having Netflix subscriptions, taking a weekly sum of money out of ATMs or buying takeaway food.

Critics said the banks were taking the rules too far, while mortgage brokers said the result was a “credit crunch” which contributed to the housing market slowdown.

Commerce Minister Andrew Bayly says the Government will undo affordability rules for lenders, to make it easier to access credit.

Some amendments were made, but in April Commerce and Consumer Affairs Minister Andrew Bayly and Housing Minister Chris Bishop announced the CCCFA provisions in question would be revoked.

That change takes effect from July 31, which Bayly said meant strict loan affordability requirements and arduous, overly prescriptive checks were a thing of the past.

“The regulations treated people like children and required lenders to do things like check whether the information provided by an applicant about their personal expenses was in line with information held by Stats NZ about the cost of living.

“They had to explain why they bought an occasional coffee, or why they treated the family to fish and chips every now and again, even when they could clearly afford to.”

The hoops customers had to jump through resulted in a confusing, stressful process, he said.

“It also increased compliance and led to increased costs for lenders. This had a particularly chilling effect on lenders’ ability to offer small loans of under $5000.”

The removal of the CCCFA affordability rules would enable people to access finance with greater ease and confidence, he said.

Since the change was announced, some financial mentors have warned it meant there would be “fewer mechanisms” to punish predatory lending, and safeguard vulnerable borrowers.

Commerce and Consumer Affairs Minister Andrew Bayly says lenders still have an obligation to appropriately assess affordability.

But Bayly said while the prescriptive requirements had been removed, lenders still had an obligation to be responsible, and the Responsible Lending Code had been updated to provide them with guidance.

Lenders had to properly assess affordability, there were significant penalties for lenders who failed to do so, and he expected they would be appropriately enforced in cases of failure, he said.

“To ensure that, I am looking at further beefing up dispute resolution services so they are more effective, more accessible, and more accountable to people.

“Raising awareness about these services is part of that as the average person who has been ripped off is often not aware of their existence,” he said.

“One idea is a consolidation of services so there is a single ‘street front’ service which people recognise, but we are just considering options, and nothing has been decided.”

Bayly said the goal was never to just loosen up the lending rules, and his biggest concern had been getting the balance right to make sure vulnerable people were protected.

Banks have already moved to make the changes, mortgage adviser Hamish Patel says.

“But we wanted to stop people being put under unnecessary and costly scrutiny due to poor practices. If someone has a clean credit history, why should getting a loan be so onerous?

“This is about giving lenders more discretion as they should be able to work out what affordability criteria to apply, and it’s in no one’s best interest to loan money to people who can’t afford to pay it back.”

Mortgages Online director Hamish Patel said the banks had pre-emptively moved to make the changes, and it was no longer necessary to drill into and scrutinise the minute details of a client’s finances.

“For clients with good payment records, it’s back to the old days. But hopefully they’ll extend it to interest-only loans and small top-ups soon as the work involved on them is still bogging us down.”

A small proportion of people, who did not have much financial understanding might be negatively affected, but for most people the changes were a positive development, he said.

Mortgage adviser Bruce Patten, from Loan Market, said the changes would not improve the borrowing ability but they did make it quicker for banks to turn around approvals.

Earlier amendments had tied up the CCCFA affordability rules, which were a shambles to start with, but these changes removed all the remaining waffle that impacted on banks, he said.

“Now, they can get back to the common sense approach in assessing loan applications, and for borrowers it will be easier to get an answer.

“But interest rates remain high, and banks’ serviceability test rates are still around 9%. It won’t be until interest rates truly start to drop, that people’s borrowing capacity will improve.”