You will have no doubt seen the headlines about young families being denied home loans because of trips to Kmart or spending money on their pets. Behind these headlines there is a lot of confusion following the introduction on the first of December last year. But what do these laws actually say? And what do they mean for first home buyers in Christchurch?
Following changes to the lending laws under the Credit Contracts and Consumer Finance Act 2003 (CCCFA) in New Zealand on1 December 2021, when applying for a home loan there are a few more steps to take in order to get approved. The Government has made changes to responsible lending laws to protect vulnerable borrowers and lenders, but there have been mixed reviews about the effectiveness of these new laws…
What are the changes?
The new legislation seeks to reinforce the responsible lending regime of 2015 (a pre-existing piece of legislation with the same principles but much weaker enforcement), via the introduction of new regulations with much more prescriptive requirements, which lenders must conduct before issuing a loan to a borrower, and the advertising of consumer credit contracts. However, with the complexity and uncertainty of the new laws, they have suffered some backlash. The prescriptive requirements places on lenders, the responsibility to make reasonable inquiries with the borrower so as to be satisfied that the loan will be repaid without the borrower falling into serious financial hardship.
How does this impact lenders?
Every director and senior manager of a lender under a consumer credit contract needs to exercise due diligence to ensure their organisation complies with the CCCFA requirements. If they do not, the lenders face severe penalties. Under the CCCFA, individual senior managers and Directors can be personally fined $200,000 for a breach of the new responsible lending, substantially increasing the compliance burden of scrutinising borrower affordability and background information for retail lenders, as well as their consequences for non-compliance. Lenders are now also required to make and keep records of how they have met their requirements for responsible lending obligations. These records need to show the inquiries made, and how the lender has satisfied themselves that a loan is likely to be suitable and affordable for a borrower. Therefore, compliance with due diligence is understandably now an important focus for lenders.
What does this mean for borrowers?
New detailed regulations are setting out how a lender tests whether a loan is suitable for a borrower and tests to determine whether the borrower can afford repayments. Essentially, before a bank can lend to you, they are now required by law to assess whether you can afford to top-up your credit or borrow. A full income and expense assessment will now be conducted when you are a borrower relying on your income to make repayments on your loan. This means lenders will be gathering more information about your circumstances, income, expenses and discretionary spending than before.
Aim of the changes
One purpose of the new lending laws such as the protection of vulnerable borrowers were the object of their introduction. Critics have suggested that where the changes in the law are seeking to protect vulnerable consumers, the statistics show they are impacting the approval of loans for all New Zealanders instead. The proportion of home loan applications resulting in successful home loans fell from 36 to 30 percent since the laws kicked in. Perhaps this is a reflection of the laws being too conservative, or it may just be from a lack of clarity in how they ought to be applied, considering how new the laws are.
We are expecting there to be more development on these laws going forward, and this situation is likely to remain fluid. If you want specific information relating to your borrowing situation we recommend speaking to your mortgage broker, and asking them what you can do to improve your chances of being successful in your application.
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