Light on the lending horizon?

 

There are a number of reasons contributing to the low applications for new lending and kiwi saver withdrawals. One of the main reasons however is the obligation imposed on lenders to comply with the Credit Contracts Consumer Finance Act or "CCCFA”.

What is the Credit Contracts Consumer Finance Act (CCCFA)?

When you borrow money the CCCFA ensures you are able to make informed choices, understand the nature of what you are agreeing to and allows you to keep track of your debts.

The Act also places Lender’s under an obligation to act responsibly to provide protection when you:

  • Take out a personal loan or mortgage;

  • Use a credit card;

  • Borrow money on an agreed overdraft; and

  • Buy products and services on credit.

The Government brought in a number of changes to the CCCFA in December 2021 with the intention to bring greater security and protection from high-cost loans (unaffordable debt). These changes required lenders to obtain more information from borrowers about their spending habits before deciding whether to loan to them.

Prior to this amendment there were gaps in the legislation which made it easy for “predatory” loan companies to take advantage of vulnerable borrowers. Despite its good intent, lenders’ conservative approach to the new rules meant new borrowers were having their spending habits subjected to closer scrutiny which lead to a sudden decline it new applications for lending and kiwisaver withdrawals.

How does this affect me?

If you’re looking at taking out a loan, buying a house or ordering a credit card then the CCCFA will apply to you. As it stands, borrowers are having to jump through more hoops than ever to secure a loan.

Lenders must collect and assess information to be satisfied that it is likely the proposed credit will be suitable to meet the borrower’s requirements and objectives. These include asking how much money the borrower wants and what they’ll use it for and includes the infamous in-depth analysis (or detailed inquiry) into the spending habits of potential borrowers.

Despite the regime intending to be flexible and principle based, it has proved to make it much harder for borrowers to obtain a loan, first home buyers especially.

What’s the good news?

On Friday 11 March, Minister Clark indicated there would be some changes made to responsible lending rules to curb the unintended impacts caused by the CCCFA.

What we know about the proposed changes:  

  • Borrowers will not be required to provide a detailed breakdown on their current living expenses when they provide information on their future living expenses;

  • Lender inquiries into regular ‘savings’ and ‘investments’ as examples of outgoings will be removed;

  • Banks will no longer have access to information on borrower’s bank transactions, rather their scope will be limited to information provided by the borrowers;

  • Alternative guidance and examples for when it is “obvious” that a loan is affordable will be provided, a full income and expense assessment is not required; and

  • Banks, budget advisors and the Government will continue to tread carefully to ensure that protection is still afforded to vulnerable borrowers.

As for when we expect to see these changes come into effect, perhaps as early as April or as late as June. In this current climate we simply cannot be sure!

Keep your eyes peeled on our website or social media for further updates.

 
Will Downey