It's got a lot harder to get credit to buy a house. Image / Getty Images
It was meant to protect vulnerable borrowers from getting too deep into debt or being targeted by predatory lenders.
Instead, the introduction of regulations tightening up the Credit Contracts and Consumer Finance Act (CCCFA) has resulted in a raft of tales from would-be borrowers about being turned down for home loans because they are pregnant, spend too much on Netflix - or even being told they need to stop going to therapy.
Just over two months since the changes on December 1, Commerce and Consumer Affairs Minister David Clark has ordered a review by the Ministry of Business, Innovation and Employment, with a report due back by April.
Three years before the changes, banks warned the Government that they were likely to result in people being turned down for loans.
On Wednesday, data released by credit bureau Centrix showed the rules have already had an impact, with the proportion of mortgage loan applications successfully converted into new home loans dropping significantly from 39 per cent in October to just 27 per cent in December/ January.
Other types of consumer finance such as credit cards, car loans and personal loans have also been hit, with successful loan conversions falling from 35 per cent in October to 25 per cent, according to Centrix.
Keith McLaughlin, Centrix chief executive, said he was hearing anecdotal evidence every day of borrowers being turned down, many of whom would have been approved before.
"It will have an impact on both consumers and small businesses," said McLaughlin.
"And it is going to be detrimental because the obligations are placed not just on the banks, but all credit providers and all lending companies. The onus from what we see will result in a higher level of declines and the costs will go up and they will inevitably be passed on to the consumer."
He said the CCCFA was meant to protect vulnerable borrowers.
"But I think it has really gone a lot further than that. Penalties for the lenders if they are found not to have done enough due diligence are really severe, so naturally they are going to take a cautious approach."
McLaughlin said the changes had been made despite the fact that arrears and defaults had dropped steadily over the past two years to a very low point.
"To me that indicates responsible lending coupled with credit reporting, lenders ... were making responsible decisions which meant consumers weren't getting into the level of financial difficulty that they were two or three years ago.
"Based on that, you have got to say ... why do we need something else?
"Is it worth the increased costs, time delays, increased declines? Banks will turn people down and those people will have to go to a higher cost lender and I don't think that is the object of the exercise."
Since 2015, lenders have had obligations to ensure they were lending responsibly, but on December 1 new regulations were enacted making the rules more prescriptive.
Instead of relying on household financial data to decide if a loan is affordable, lenders must now drill into the applicant's precise spending habits - everything from how much they spend at the pub on a regular basis to Netflix or Uber expenses.
Mortgage brokers are having to supply pdf copies of their clients' bank statements to back up information on spending habits, as the onus is now on the lender to check any information provided by the borrower - and it all has to be documented in case the regulator later wants to check it.
That has blown out the time it takes for loan applications, as lenders ask borrowers for more information, from a matter of hours to three to five days.
Lenders have also become more cautious because if they make a mistake, the company's directors and/or senior managers can be held personally liable, with fines of up to $200,00 per person.
John Bolton, chief executive of Squirrel Mortgages, has been at the coalface of the changes.
He believes banks have done a poor job of implementing them.
"They have basically done what they have been told to do. They may have questioned it behind closed doors but they haven't really fought this. The fighting of this in public has been left to the mortgage adviser community."
Last month Bolton launched a petition calling for the law to be changed which garnered more than 10,000 signatures. He has since filed a parliamentary petition which has about 8500 signatures.
He said banks had been beaten up over the past few years following the Australian Royal Commission into their behaviour, and investigations by New Zealand regulators.
"My honest view is the banks were expressing concerns about this when the legislation was going through and no one was listening to them. I think the reason they are quiet on it now, is because they lost the fight a couple of years ago, they believe this is a no win scenario. And that is completely wrong because it is a big issue for them and it should have been addressed two years ago."
Bolton said he didn't blame the banks and said there was a culture in Wellington that had been generally quite negative about the banks in recent years.
Clark has already pointed the finger at the banks, hinting that they may not have been complying with responsible lending obligations before the changes came in.
However in a statement this week, the New Zealand Bankers' Association said it did not know what Clark was referring to.
"Banks take their obligations to comply with the law very seriously. That was the case before the rule change, and remains the case," said NZBA chief executive Roger Beaumont.
Clark and the banks were due to meet this week to discuss the issue.
Ian Hankins, Westpac NZ general manager of consumer banking and wealth, said the intent behind the law was completely aligned with how the bank ran its business.
"If we don't lend responsibly it's not good for our customers, it's not good for us."
Hankins said the changes it was seeing in the mortgage market were due to a combination of things, not just the CCCFA.
"Interest rates are increasing, the LVRs are coming into place, CCCFA is happening, inflation is making it more expensive. It's a combination, it's not just one thing; from my perspective it is a combination of those things coming together."
Hankins said Westpac provided feedback via the NZBA when the law changes were going through and it was "pretty much" coming out as it expected.
"From that perspective it is no surprise. We are working with the minister and NZBA on the process they are running."
Hankins said it was really good that the review was happening already, given that it was only two months since the change.
"It is quite healthy to be having an early discussion on it. I don't have a view on where it will end up - it is good to be at the table talking about it."
Richard Massey, a senior associate at Bell Gully specialising in consumer credit law, said it was a positive sign that the Government was looking to review the changes despite them being so recent.
"I think it shows they are listening to quite widespread criticism of the regime, both from lenders but also from borrowers. It may seem like a very fast reaction but I think it is an appropriate reaction in this case where clearly the reforms are having a pretty major impact in terms of lengthening application times and also creating greater uncertainty for lenders."
Massey said the concerns being publicised now were very much the same concerns that were highlighted during the consultation period.
"Many submissions by lenders and other parties noted this regime was very extensive and represented an overreach in terms of what the law was originally intended to protect against."
He said the focus of the changes was on protecting very vulnerable borrowers and limiting predatory lending by loan sharks.
"That original objective was a very worthy one but the regulations have strayed quite far from that original purpose and capture a huge range of lending and apply effectively a one-size-fits-all set of requirements.
"It is that which during submissions was criticised, and unfortunately only seems to have been recognised now as a major problem."
Massey said there were a range of options but he believed the key objective was to gain greater clarity for lenders and for borrowers on what the law required, and also greater flexibility.
"When responsible lending was first introduced in 2015, it was intended to be a flexible regime and to apply on a principles based approach allowing a range of different mechanisms for lenders to use when issuing credit.
"What the regulations do is impose a rigid and prescriptive set of requirements that are highly detailed and very complex. I think working back from that to a more flexible and customisable set of rules that lenders can adapt to suit their product will be a step in the right direction."
And Massey said there should also be some moderation of the quite severe consequences for directors and senior managers.
"Some moderation of those would avoid the concern that lenders will become very conservative in their approach because if they do that it is really the more vulnerable borrowers who are likely to suffer. And it is those borrowers who the act is really intended to protect."
Lyn McMorran, chief executive of the Financial Services Federation, which represents finance companies and non-bank lenders, said it would like to see the December 1 regulations repealed.
"There used to be a principle in the act that allowed lenders to rely on what information borrowers were giving them unless they had reason to suspect information was not reliable.
"I think we can treat consumers with a little more respect, to be fair. And say 'yeah, that does look like it stacks up and we trust you can manage the rest of your disposable income to ensure you have got enough to live on and if that means you cut down on takeaways, that's your choice'.
"But we are almost having to say to them 'the only way I can make this fit is because you give me your word you are going to stop spending your money on these things'. I don't think consumers want that. People do spend to the level of their income but that doesn't mean they can't afford a loan because if they need something they will adjust."
But Jake Lilley, policy adviser at FinCap, which represents New Zealand's financial mentors who every day deal with people who get into financial difficulty, said that while the changes required more work, they were necessary to prevent future financial disasters for borrowers and their families.
"We see so many cases where brokers or agents completely misrepresent where someone's financial position is at. It puts them at significant risk. They get into a lot of trouble and then they have a lot of hard times trying to get redress for what happens.
"It is a safeguard in there. Or for our financial mentors, when it all falls apart there is a very clear thing to complain about and get a better outcome."
Lilley said affordability assessments were vital.
"That is much more than a credit check, it's getting in there making sure it is going to work. That what someone is asking for is what they are getting. And that it is suitable for what they are asking for. That is a really important protection for borrowers because there is a lot of different dynamics going on, a lot of decisions that need to be made quickly."
Lilley said while it may take time for lenders to check the information, when that didn't happen and things went wrong, it became a task for a financial mentor volunteering beyond their paid hours to do the exact same thing backwards and try and work it all out.
"They do that regularly. Going through that process at the start is preventing a disaster from coming up or making people more aware of how difficult things are going to be on the other side.
"And of course, anyone can have a change in life circumstances very suddenly unfortunately, and financial mentors see it a lot. Having that awareness of where the line is and what is affordable is really helpful in knowing what they are getting into, in what can be a significant financial decision that could affect their whānau for generations."
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