New lending law changes causing problems

If you have recently tried to apply for a home loan or mortgage, you might have found your application being declined by your bank. You might have had the necessary income to cover the repayments, so the bank’s decision has probably left you scratching your head in disbelief.

The problem is the recent amendments to the legislation that covers financial institutions, like banks, and other organisations that lend money. The Credit Contracts and Consumer Finance Act (you’ll see it referred to as the CCCFA) requires those that lend money to act responsibly at all times.

It provides protection for those that take out a personal loan or mortgage, borrow money on an agreed overdraft, or buy products and services through hire purchase.

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 changes, which came into effect in December last year, included new requirements for lenders to assess the affordability and suitability of loans – that borrowers would be able to repay the loan without suffering substantial hardship and that the loan would likely meet the borrower’s needs.

Tougher penalties for irresponsible lending were imposed, including fines of up to $600,000 on directors and senior managers of lending institutions.

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

Lenders were reviewing would-be borrowers’ spending habits in much greater detail and 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. The changes to the CCFA have effectively forced the banks to adopt an overly cautious approach to lending.

Now an inquiry is underway, called for by Commerce Minister David Clark, but this will take time – the MBIE-led inquiry isn’t expected to be completed until April.

National proposed a simple workable solution: a Member’s Bill that would require the Government to issue new regulations that contain separate and different provisions for different classes of lenders. However, Minister Clark rejected this, saying (ironically) that it would cause unnecessary delays in dealing with the matter.

In the meantime, first-home buyers are missing out, as are existing homeowners who are simply trying to carry out much-needed renovations, and small business owners looking to borrow against the family home to raise capital to keep their business afloat.

The hopes and financial futures of thousands of Kiwis are at stake, and sadly, the Government is dragging its feet to sort things out.