Weeks before new rules regulating lending came into force, the banking industry gave a blunt warning to regulators that the changes would slow the flow of credit and could hurt vulnerable customers and first-home buyers.
Since the final provisions of the Credit Contracts and Consumer Finance Act came into force on December 1, would-be borrowers have complained they were turned down for loans due to the changes, often on the basis of personal spending on items like takeaways.
The legislation, created to target loan sharks but which apply to all lenders, require banks to assess whether a customer has a "reasonable surplus" to repay loans, with credit managers potentially liable for large fines if they are found to have breached the rules.
Commerce and Consumer Affairs Minister David Clark has ordered a review of the legislation and promised speedy remedies, but has indicated he believes to a large extent the legislation is working as it was supposed to.
Banks have complained they believe they have no discretion to assume customers will adjust their spending rather than default on lending.
Documents released under the Official Information Act show the New Zealand Bankers' Association sent an extensive warning to the Reserve Bank - at the central banks' request - in October, predicting banks would likely become more conservative and obtaining loans would take longer and be more complex, with a particular impact on vulnerable customers.
"Members remain concerned the CCCFA's prescriptive rules, combined with significant penalties, may ultimately drive more conservative lending behaviour that could limit access to credit," NZBA chief executive Roger Beaumont said.
NZBA's members predicted the time taken to obtain a loan would increase, with estimates ranging from 14-40 per cent longer.
The changes would have a greater impact on first-home buyers, those seeking Kāinga Ora loans or unconventional lending arrangements, migrants and recent returnees or those who were taking parental leave or nearing retirement.
"Vulnerable customer groups, including those with lower financial capability, may find engaging with lenders more difficult and intensive," Beaumont wrote.
"The added complexity, increased time in the lending process, and the need for more documentation may create unintended barriers to lending access and potentially create customer vulnerabilities where none existed previously."
Those customers may struggle to obtain credit elsewhere, so they "may seek higher-cost lending from unregulated providers of 'credit-like' products or from non-compliant lenders".
Banks would have less scope to provide quick access to credit where customers had specific needs.
"Lenders will have less flexibility to make judgmental credit decisions and consider wider elements where affordability may be more marginal, like relationship and credit history or the underlying need for credit. Any inflexibility means lenders may find it difficult, to provide appropriate and urgent economic support to customers, including in times of regional or national emergency."
While the CCCFA does not cover business lending directly, banks have warned it could lead to complexities for small businesses that typically use home loans as collateral for business borrowing.
"Small business owners and the self-employed may also be unintentionally impacted by slower provision of credit, consumer or business. The new affordability rules present challenges in separating and verifying personal income and expenses, or lending, from business income, expenses, and lending."
Other documents released showed a Reserve Bank official, James Sergeant, shared the letter with other members of the Council of Financial Regulators, a group which includes Treasury, the Commerce Commission and the Ministry of Business Innovation and Employment (MBIE).
"It should be noted that these impacts were not completely unforeseen," Sergeant wrote, noting a regulatory impact statement risks that the CCCFA would lead to reduced access to credit and higher costs and could lead to more black market lending.
Sergeant said that work was underway to increase access to microfinance but acknowledged "this support will not necessarily be available or accessible to all families in need, so there may continue to be service gaps for some vulnerable customers".
The Reserve Bank did not say why it requested the information or express a view on the warnings.
In a statement MBIE, which is leading a review of the CCCFA, said when the letter was received, banks were completing their implementation of the changes.
"MBIE planned to continue engagement with lenders, consumer advocates and other stakeholders as the new requirements bedded in."
The NZBA declined to comment on the letter.
National's commerce and consumer affairs spokesman Andrew Bayly said Beaumont's warning, that it would be harder and more time consuming for customers to get loans, likely sending vulnerable customers looking for other sources of funding, had all proven to be correct.
He said it was likely that soon there would be a significant impact on the property sector, as property developers struggled to obtain funding.