Trade and Consumer Finance Minister David Clark was forced to amend the CCCFA and then order an investigation after lending orders fell. Photo/Mark Mitchell
A government inquiry into changes to the Credit Agreements and Consumer Credit Act has revealed that changes to the law have led to a series of unintended consequences, despite warnings from the financial sector.
Trade and consumption
Finance Minister David Clark ordered the Department for Business Innovation and Jobs to take a closer look at the December 2021 changes in mid-January, amid public and industry outcry. mortgage brokers.
Since December, lending activity has fallen across the board, with stories of borrowers being turned down for loans for reasons ranging from a Netflix or gym membership to spending too much at the pub.
The report found that while it was too early to say whether the legislative changes were successful in achieving their objective – to address concerns about continued irresponsible lending – it found that the changes had unintended impacts.
The MBIE report found that more borrowers across all loan types who are expected to pass affordability tests have been turned down or subjected to credit cuts.
Some borrowers had been subjected to unnecessary or disproportionate investigations that were perceived as intrusive.
The survey attributed this to the fact that lending processes became more restrictive and onerous than expected when the CCCFA changes were made.
“This is a consequence of the way a number of specific provisions of the regulations are designed and drafted, combined with difficulties of interpretation and many lenders taking an understandably cautious approach to compliance, given the regime of solid responsibility of the CCCFA.”
This week, the government announced a second round of changes aimed at further relaxing the law, which will come into force from March.
The MBIE report noted that instead of being limited to high-risk/vulnerable consumer loans, the prescriptive nature of the changes to the law meant that it was applied to all loans.
In addition to changes to credit law, the survey found that the changes have prompted some lenders to make greater changes to their credit reporting processes to allow for the automated collection of consumer data.
“These new systems sometimes failed to deliver on their promises and likely contributed to some negative consumer experiences as well.”
What happened when the law changed?
Mortgages in all areas fell sharply between December and March compared to the same months a year earlier.
And it affected all borrowing groups, although the largest declines were due to mortgages to investors rather than first-time homebuyers and other homeowners.
Investor loans are not regulated by the CCCFA, although some lenders follow the same process as homeowners.
But conversely, loans from non-banks – building societies, credit unions and finance companies – jumped 46% in the year to February 2022 – the strongest growth since records began. in 1998.
“There is no obvious impact from the CCCFA changes, with $300m lending in the past three months. NBLI [non-bank lending institutions] are not subject to LVR [loan-to-value ratio] restrictions, which were tightened for banks during this period. »
The report noted that much of the decline in home loan volumes was due to lower applications driven by other factors such as loan-to-value cap changes, rising interest rates and a slowdown in the real estate market.
There was also a decline in new personal loans in a similar trend to mortgages, with new personal loans well below the December 2019 peak before Covid-19 hit.
New credit card accounts were cut in half and data from credit reporting agencies showed a “marked decline” in new car loans from December 2021.
There was less evidence of a drop in applications leading to lower loan volumes for consumer debt.
“Some banks saw applications for personal loans and credit cards holding up, while others saw declines. Data from credit reporting agencies suggests that overall applications for credit cards have fallen more than personal loan applications, perhaps reflecting the longer-term trend in credit card balances.”
MBIE noted that “part” of the reduction in loan volumes was attributable to more applications withdrawn and denied.
“Refusal and withdrawn rates appear to have increased for a range of products since late 2021.”
Although the law changes focus on high-risk and vulnerable borrowers, the biggest drop in loan conversion rates has been for borrowers with credit scores above 700 – those considered the most creditworthy, while that borrowers with credit scores below 500 saw only a small drop in conversion rates.
Overall, the report found that the impact of the CCCFA changes on home loan levels was moderate, although the impact of the changes on personal and credit card loan levels was high. compared to housing loans.
“The decline in levels of new credit cards and personal loans is consistent with the expected impacts of the CCCFA changes, given that these products were the subject of a higher level of concern prior to the reforms.
“Therefore, personal loans were to be subject to increased restrictions and subsequent declines in new loan levels, consistent with the intent of the policy.”
The CCCFA changes have led to a sharp increase in complaints to the Banking Ombudsman, with complaints centering on delays, banks not acting as expected and having to provide more information.
Lenders also claimed that borrowers were complaining that the new, deeper investigations were intrusive in nature, which was seen across the industry.
What caused the unintended consequences?
The report noted that the drivers of unintended consequences were a lack of focus, the design and drafting of specific provisions in the regulations, problems of interpretation and the conservative approach taken by lenders due to the liability regime provided by the law.
The regulations apply to almost all consumer loans rather than just the loans affected by the CCCFA amendments.
“This leads most directly to unnecessary or disproportionate inquiries from low-risk borrowers (who arguably should not require a full affordability assessment to establish loan affordability) and has certain implications for borrowers who are unnecessarily refused.”
This has been blamed on uncertainty in the use of the “obvious” affordability exception which allows lenders to skip a full affordability assessment.
“Where borrowers do not fall under this exception, or it is not otherwise used, the prescriptive nature of the regulations means that borrowers are subject to the same scope of investigation as high-risk borrowers.
“Lower-risk borrowers are more likely to find this intrusive, as they are unlikely to have been subject to the same level of investigation prior to the CCCFA changes.”
Six initial changes were announced in March by the government to address unintended consequences and came into force in July.
Seven other changes were proposed as part of the report, but only some of them were taken up.
The government chose not to take a targeted approach that would have targeted certain types of loans or high-risk lenders or consumers.
It disappointed the NZ Bankers Association, whose CEO Roger Beaumont said it would have been better to target affordability regulations on the riskiest loans and lenders, as well as make changes to the scheme of penalties.
“Targeting affordability requirements to support those most at risk would provide them with appropriate protections while freeing up loans for those who can afford them.”
It also decided not to change the sanctions and liability regime or to repeal the regulation entirely.
MBIE warned that while reducing this would likely lead to less conservatism for lenders, there would also be reduced consumer protection for some borrowers and it also risked contributing to non-compliance.
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