Lower risk borrowers more affected by credit law change

Lower-risk borrowers have been more affected by a tightening of the credit law than higher-risk borrowers. Photo / File

Lower-risk borrowers have been more affected by a tightening of the credit law than those rated as the highest risk, credit agency Centrix data shows.

The Credit Contracts and Consumer Finance law was tightened in December, forcing borrowers to provide a lot more evidence that they can afford to pay a loan without getting into financial difficulty.

The change was designed to protect vulnerable borrowers from being preyed on by loan sharks but has led to complaints of borrowers being turned down over their spending habits and the Government has launched a review of the changes.

But figures from Centrix show loan conversion rates - the percentage of those that apply and are approved - has dropped markedly for those with a credit score above 700 - a score considered to be quite good and at the low-risk end of the spectrum. Credit scores are out of 1000 and the closer to 1000 a borrower is, the lower-risk they are deemed to be.

Centrix chief executive Keith McLaughlin said when credit providers go through the lending assessment process they have been historically quite careful to cut out those who are high-risk.

"People who were lower-risk would tend to be approved. With this new introduction it is now a second filter - and the second filter is hitting those that would normally have been approved.

"It is affecting those people who are less of a risk of defaulting more so than what you would classify as a typical vulnerable borrower."

McLaughlin said the law change appeared to be targeting the wrong end of the market.

Financial support agencies have argued that even those who are well-off can be financially vulnerable.

But McLaughlin said lower-risk borrowers tended to be able to manage a bit better, had more flexibility and their discretionary spending tended to be higher so if things got tight they could cut back on something and not hit the wall.

"The purpose of the CCCFA was to protect vulnerable borrowers from unregulated or disorderly lenders but it appears to have gone a lot wider than that. The high-risk lenders are no worse off or no more protected with the introduction of the CCCFA and the ones that are affected are those that would normally have been approved because they are a low risk. They have a good credit record but they are the ones that have really been affected by the CCCFA."

The percentage of mortgage applications resulting in approval fell to 34 per cent in February, down from 40 per cent in October.

Meanwhile, consumer finance approvals have fallen from 35 per cent to 28 per cent.

And Centrix noted in its report that the decline rate may be even bigger than what it could see as it knew some lenders had opted to assess affordability before running a credit check.

Last month Kiwibank chief executive Steve Jurkovich noted that applications for home loans were sharply down and that was more of an issue than its decline rate, which was also up.

Heartland Bank chief executive Chris Flood told the Herald the decline rate for its vehicle lending had tripled since the Government tightened consumer credit laws.

Demand for consumer credit was down 3 per cent in February compared to a year earlier.

"It's likely consumer confidence is being impacted by the outbreak of Omicron alongside the tighter consumer credit market because of the CCCFA changes," Centrix noted in its report.

Mortgage applications had reduced by 16 per cent compared to a year ago and auto finance had slowed from a peak in January - a period where traditionally there were high vehicle sales.

Demand for buy-now, pay-later credit was at its lowest point since March 2020.

Centrix chief executive Keith McLaughlin. Photo / Supplied

McLaughlin said since Christmas it has noticed buy-now, pay-later had slowed down a lot.

"That's probably seasonal to some extent because people go out pre-Christmas and buy things and January, February things tighten up a bit."

Arrears were also up across the country, with around 400,000 consumers currently behind on their repayments, with arrears on personal loans being particularly high.

McLaughlin said that was also quite seasonal due to the post-Christmas spending hangover.

"The risk that we are watching very carefully is what happens as interest rates rise and the cost of living rises, there will be a squeeze and it will be interesting to see what impact that has on arrears and hardships."

Currently, arrears were at low levels historically, with financial hardship at a two-year low and arrears on credit cards and vehicle loans at their lowest since consumer credit reporting had been in place.

Business credit defaults

Business credit defaults were up 4 per cent in February, with the retail sector hit hardest, where defaults were up 24 per cent year on year.

Centrix noted this was likely the combination of increasing price pressures, supply issues and decreased foot traffic as more New Zealanders were working from home during the Omicron outbreak.

McLaughlin said a lot of that was seasonal as well with people spending up pre-Christmas and then not being able to make repayments in January and February.

"I'm not overly alarmed at this stage but it is a trend we will watch very carefully as generally come March things get back to normal. But the wildcard is the high level of inflation."