11 Mar 2022

Lending rules that hit credit approvals to be eased, government announces

9:12 am on 11 March 2022

The government has moved to change new lending rules blamed for causing creditworthy borrowers being refused loans and causing a credit crunch.

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Consumer Affairs Minister David Clark. Photo: RNZ / Samuel Rillstone

Consumer Affairs Minister David Clark said changes would be made to responsible lending rules to curb any "unintended consequences" of the Credit Contracts and Consumer Finance Act (CCCFA).

The CCCFA came into effect in December, aimed at protecting vulnerable borrowers from loans with punishing conditions and interest rates which they could not afford.

But almost from day one there were complaints that the rules were too restrictive, the information required too intrusive and unreasonable, and the time taken to process applications too long.

Clark said lenders would not need to check current spending from recent transactions when assessing future spending, nor would current savings and investments be regarded as outgoings.

The requirement to obtain information in sufficient detail would only relate to information provided by borrowers directly rather than information from bank records, while new guidance would be given to lenders on what would be an obviously affordable loan.

Clark said there was no "enthusiasm" for wholesale changes.

"There is no question that the banks, budget advisers and government are all on the same page when it comes to supporting the intention of the law, we want to stop vulnerable people from finding themselves with unaffordable debt."

However, he continued to push back on suggestions that the CCCFA was largely responsible for a drop in lending, saying there were seasonal influences and other factors.

"It is also important to note that banks may be managing their lending more conservatively and this is likely due to global economic conditions. And that a number of factors affecting the market have occurred at the same time as the CCCFA changes, including increases to the OCR, LVR changes and an increase in house prices and local government rates."

A broader review of the CCCFA is still under way.

Auckland mortgage broker Bruce Patten from Loan Market said the changes were sensible and needed.

"It's good they've moved on it because it's been the biggest credit crunch since the GFC (global financial crisis) essentially ."

Patten said the changes were common sense such as not trawling through bank accounts looking at daily spending.

"They just need to take an average cost of living, look at what you're spending on your fixed expenses we don't need to know about your Netflix, we don't need to know that you go the cafe every morning for your morning tea we just need to look at your fixed expenses, everything else is adjustable."

Lenders will be able to process applications more quickly, he said.

"The time it's taking us on average, and the banks, is probably six times as long as it was previously to go through three months worth of bank statements, itemise every item, decide whether it's a regular or a non-regular payment, then go back to the client to clarify it. It'll certainly get things moving."

The rules had not only resulted in more applications being declined, but a huge number of people being able to borrow significantly less than previously, he said.

Proposed initial changes to regulations and Responsible Lending Code agreed by Cabinet:

  • Removing regular 'savings' and 'investments' as examples of outgoings that lenders need to inquire into when assessing the borrower's future expenses.
  • Clarifying that when borrowers provide a detailed breakdown of their future living expenses, and these are benchmarked against robust statistical data, there is no need to also inquire into their current living expenses from recent bank transactions.
  • Clarifying that where lenders choose to estimate future expenses from recent bank transaction records, they are permitted to obtaining information about how their current expenses are likely to change once the contract is entered into.
  • Clarifying that the requirement to obtain information in 'sufficient detail' only relates to information provided by borrowers directly (eg ensuring that expense categories on application forms are sufficiently detailed) rather than relating to information from bank transaction records.
  • Providing further guidance on when a lender needs to allow for a 'reasonable surplus' (the amount left over when the borrower's estimated expenses are subtracted from their income) and how lenders should set surplus requirements.
  • Providing alternative guidance and examples for when it is 'obvious' that a loan is affordable, such that a full income and expense assessment is not required.

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