Government unveils plans to further loosen consumer lending rules

Commerce and Consumer Affairs Minister David Clark. Photo / Mark Mitchell

The Government has agreed to further loosen new consumer lending regulations that have been criticised for making it too difficult for people to get loans.

Commerce and Consumer Affairs Minister David Clark has identified three changes he plans to make to the Credit Contracts and Consumer Finance Act (CCCFA) regulations. These include:

• Narrowing the expenses considered by lenders to more explicitly exclude discretionary expenses;

• Reducing 'double counting' of expenses associated with revolving credit contracts such as credit cards and buy-now pay later schemes, and;

• Helping make debt refinancing or debt consolidation more accessible if appropriate for borrowers.

The Ministry of Business Innovation and Employment (MBIE) will consult on the finer details of these changes ahead of them taking effect in March 2023.

Clark said he was confident a balance has been struck between maintaining a strong level of consumer protection and ensuring people have access to credit.

This is the second tranche of tweaks Clark is making to regulations under the CCCFA.

He was met with a barrage of complaints from wannabe borrowers, bankers, and mortgage brokers when new regulations and a Responsible Lending Code under the updated Act took effect on December 1, 2021.

The criticism was that they were too heavy-handed.

Clark responded by getting the Council of Financial Regulators (MBIE, the Financial Markets Authority, the Reserve Bank, the Commerce Commission and the Treasury) to relook at the rules. The investigation was led by MBIE, which headed up the initial review of the CCCFA.

Ahead of the Council completing its final report, Clark in March announced the first tranche of changes. These took effect a month ago.

They were largely aimed at removing the risk of lenders interpreting the rules too conservatively, removing the blanket requirement for lenders to go through borrowers' spending habits with a fine-tooth comb, and recognising borrowers' spending habits may change once they take on debt.

Clark said the latest set of clarifications will assist banks and lenders with some of the more technical aspects of the legislation.

He recognised "unintended consequences" related to the CCCFA had emerged. Borrowers that should pass affordability tests are being declined, and borrowers are being "subject to unnecessary or disproportionate inquiries that are perceived by them as being intrusive".

However, Clark discarded a recommendation the Council of Financial Regulators made to amend affordability regulations to better target specific kinds of lending, lenders, or certain consumers where there is a higher underlying risk of substantial hardship.

Clark said the Council noted the CCCFA regulations had impacted home lending, but other factors such as loan-to-value ratio restrictions, increased interest rates, inflation and a general property market slowdown also contributed to declines in home lending.

"On the other hand, financial mentors are reporting they are now better able to identify and report irresponsible lending, and there has been an increase in referrals to financial helpline MoneyTalks," he said.

"I'm also advised lenders are further refining their processes and consumers are becoming more familiar with the new requirements."

However, the Council concluded, "We consider that it is too early to say whether or not the CCCFA changes are likely to be successful in achieving their main desired impacts and objectives.

"MBIE has collected a baseline of evidence (including survey evidence and data from financial mentoring services) that is expected to provide a stronger basis for drawing conclusions about the extent of the expected outcomes of the CCCFA changes are realised 2–3 years from implementation."

The changes received a mixed response from the banking industry and consumer representatives.

Jon Duffy, chief executive of Consumer New Zealand, said the limited changes being made looked to be reasonable under the circumstances but it was "not ideal" that there had to be three rounds to get the legislation right.

He said narrowing the expenses would make a grey area for lenders a little less grey while it also made sense to stop double-counting expenses through revolving credit facilities.

Duffy also welcomed the move to make debt refinancing more accessible as it was not ideal if it would save a borrower money to consolidate their debt but they couldn't get access to it.

"Fixing that is a really positive move in my mind."

Duffy said the changes would give the industry more clarity and should help borrowers access finance when appropriate.

"It is not ideal that we have had to go three rounds on this one to get to this point. But I think it has reached a practical place."

In terms of the timeframe Duffy said he would have preferred to have seen the changes happen sooner but it did signal to lenders that changes were on the way.

"It would be an odd situation if you had a lender penalised for lending on the basis of these changes."

But the New Zealand Bankers Association said the minister had taken the wrong option.

Roger Beaumont, NZBA chief executive, said it would have been better to target affordability regulations to riskier lending and lenders, as well as make changes to the penalties regime.

"Targeting affordability requirements to support those most at risk would provide them with appropriate protections as well as freeing up lending for those who can afford it."

Beaumont said the Government had announced some positive changes including narrowing the expenses considered by lenders, relaxing some assumptions that lenders were required to make about credit cards and helping make debt consolidation more accessible if appropriate for borrowers.

"The Minister's changes will make some differences to overall lending and lending processes but will need to be done right to result in better outcomes for consumers."

Beaumont said it would be the second set of changes to the lending rules since they came into force in December.

"That's had a huge and unsettling effect on many New Zealanders and their ability to access affordable credit when they need it. We also note that these changes will not take effect until at least March 2023."

But Andrew Bayly, National's spokesperson for Commerce and Consumer Affairs, called changes to the CCCFA window dressing.

"Clark has again missed the opportunity to ensure the CCCFA regulations are targeted where they should – at vulnerable borrowers by high-cost lenders," he said.

"Despite the fact that MBIE put up options to do this and also make it easier for a lender to apply more discretion to borrowers with significant financial assets or income, the Minister has continued to require a prescriptive approach by all lenders to all borrowers.

"This is wrong."

Bayly said waiting 16 months to change a mistake is too long.

"The banks have consistently reported that up to 10 per cent of loans that would have been approved up to 1 December, when the new Responsible Lending Code came into place, are now being declined," he said.

"What is required is a Lending Code that better protects vulnerable borrowers and targets inappropriate lending practices by high-cost lenders, not impose unnecessary barriers to borrowers in general."

Ruth Smithers, chief executive of FinCap - the body which represents New Zealand's financial mentors, said it was pleased the changes were not being rushed through without proper consideration of potential impact for harm.

"We support this approach as we must. Over many years financial mentors have seen endless examples of collection on loans that were always going to be unaffordable. This causes very avoidable but very significant harm in our communities.

Smithers said lenders need to be required to check properly that they are not setting up a whānau to go without food to meet the costs of a loan and additional default penalties.

"The debt spiral that results when such situations arise can have intergenerational impacts when whānau end up facing serious stress, losing their most valuable belongings or going without kai because a lender is collecting on a loan that was always going to be unaffordable."

She said it often took unreasonable efforts from a whānau and their financial mentor to get anything close to resembling timely and fair redress for the mess caused by irresponsible lending.

"The wider reform is already making a positive difference on the ground. Community services have reported fewer issues with high-cost lending for whānau. We expect to see more whānau on the path to financial wellbeing over the next year due to these recent parts of the reform."