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When good law goes bad - the unintended consequences of lending law changes

Authorised by Andrew Bayly, 7 Wesley St, Pukekohe 2120

by Andrew Bayly, MP for Port Waikato

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Amendments made late last year to the Credit Contracts and Consumer Finance Act (CCCFA) have had a significant impact on the average Kiwi who wants to apply for a credit card, obtain finance or get a mortgage – and the announcement of minor tweaks made in March by the Commerce Minister won’t lead to any real change. In 2019, Parliament voted to amend the CCCFA with the goal of reducing predatory lending from the likes of loan sharks and truck shops that were targeting vulnerable borrowers.

The purpose of the law changes was to put new obligations on high-cost lenders and truck-shop operators to better assess the affordability and suitability of loans – that vulnerable borrowers would be able to repay the loan without suffering substantial hardship. However, the subsequent regulations issued by Commerce Minister Dr David Clark required ALL financial institutions to comply with the new rules, rather than just high-cost lenders. The regulations came into force on 1 December last year.

Shortly after, news starting surfacing of people being turned down for home loans for obscure and quite personal reasons – examples included being pregnant, subscribing to Netflix, a shopping trip to Kmart, Friday-night takeaways, buying Lotto tickets, even being in therapy – as well as data showing a sharp drop-off in mortgage approvals.

Lenders started reviewing would-be borrowers’ spending habits in much greater detail and were determining that expenditure, which would previously have been considered discretionary, was now being deemed as non-discretionary to meet the new requirements of the CCCFA. Law firm Bell Gully noted that the new regulations highlighted “the remarkable complexity of the new regime and the numerous gateways and decision points that lenders must navigate”.

Instead of protecting vulnerable borrowers, the Government caused a credit crunch, with first-home buyers unable to get past the banks’ forensic auditing of their income and expenses, those people wishing to carry out home renovations unable to raise a loan to do so, and businesses unable to raise extra capital for investment in plant, equipment and property.

But it got worse. Unable to obtain finance from the banks, there were reports of borrowers turning to higher-cost lenders, forcing people into a poverty trap where they are unable to work their way out of debt.

The Government’s approach of taking a blanket ‘one size fits all’ approach to lending subjected banks to the same set of highly prescriptive and draconian regulations as high-risk pay-day lenders. However, banks are already subject to an overarching set of mortgage lending standards that are enforced by the Reserve Bank (RBNZ). The changes to the CCCFA removed the discretion they historically have had over lending criteria, forcing them instead to adopt an overly cautious approach to lending. Minister Clark at first blamed the banks for “not interpreting the law correctly” and called for an inquiry. Meanwhile, I proposed a simple workable solution: a Member’s Bill that would require the Government to issue new regulations with separate and different provisions for different classes of lenders – provisions that would take into account the scale and risk profile of that lender.

My strong view is that regulated financial institutions – those regulated by the RBNZ, such as registered banks, credit societies and entities that raise money publicly – should be treated differently to high-cost lenders. And there is another issue. Minister Clark said he would commission an ‘inquiry’ into this debacle. However, he chose to refer it to the Council of Financial Institutions, which comprises MBIE, the Commerce Commission, the Financial Markets Authority (FMA), RBNZ and Treasury. The lead agency for the review is MBIE.

This is a poor choice. The regulations were prepared by MBIE and the enforcement body is the Commerce Commission. By putting them in charge of the inquiry, the Government is effectively asking them to ‘mark their own homework’. I have advocated for an independent chair and the involvement of independent banking sector experts. In mid-March, Minister Clark announced some ‘tweaks’ to the lending rules, such as the removal of regular savings and investments as examples of outgoings that lenders need to enquire into, and 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.

However, while Minister Clark would like to think he has solved the CCCFA issues, he hasn’t moved the dial. He failed to pick up the key issues where pain points exist. The legislation specifically provided for a differential approach to be taken with regard to the types of lenders, as the intent of the legislation was to target high-cost lenders and protect vulnerable borrowers.

Another issue he failed to address is the ability of reputable lenders to take into account the nature of a client’s borrowing history and family circumstances when assessing applications for credit.

Of course these changes to the CCCFA could not have come at a worse time. Other levers within the financial market are reducing access to finance for ordinary Kiwis. Changes to loan-to-value ratios (LVRs) implemented 1 November 2021 have limited the amount a bank can lend and a borrower can obtain, meaning first-home buyers have had to save a larger deposit. Interest rates continue to climb, impacting the affordability of home loans, especially for new home borrowers. DTI (debt-to-income) restrictions are starting to be applied informally by certain banks, restricting the amount of mortgage that people can obtain. The Government is being slow to act on something that is hurting first-home buyers, existing homeowners who are simply trying to extend their mortgages to carry out much-needed renovations, and small business owners looking to borrow against the family home to raise much-needed capital.

Sadly, Minister Clark rejected my proposed Member’s Bill, saying “it would cause unnecessary delays in dealing with this matter” which is ironic when the MBIE-led inquiry isn’t expected to be completed for some time.

The recent tweaks made by Dr Clark are a sham. They are unlikely to lead to any significant change and he has been deliberately misleading by blaming the banks for the decline in lending to date. The real issues are the regulations that he passed that were not subject to select committee scrutiny.

This an immediate issue with the hopes and financial futures of thousands of Kiwis at stake. Instead of playing politics, Minister Clark should be knuckling down to fixing this real issue quickly as it is hurting New Zealanders who are needing credit at a time when the cost of living is escalating rapidly.

Authorised by Andrew Bayly, MP for Port Waikato, 7 Wesley Street, Pukekohe

But it got worse. Unable to obtain finance from the banks, there were reports of borrowers turning to higher-cost lenders, forcing people into a poverty trap where they are unable to work their way out of debt.

By putting them in charge of the inquiry, the Government is effectively asking them to ‘mark their own homework’.

Andrew Bayly is the MP for Port Waikato, the Shadow Treasurer (Revenue) and the National Party spokesperson for Infrastructure and Statictics.

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elocal Digital Edition – April 2022 (#252)

elocal Digital Edition
April 2022 (#252)

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