NZ calls for early review of lender behaviour

New Zealand’s Minister of Commerce and Consumer Affairs, David Clark MP (member for Dunedin), has asked the country’s Council of Financial Regulators to bring forward an investigation into new lending laws, following concerns that lenders are being overly cautious on how they treat living expenses.

On 1 December 2021, changes came into effect that amended New Zealand’s responsible lending laws (the Credit Contracts and Consumer Finance Act), which changed how lenders assess borrower information.

As part of the changes, lenders in New Zealand are no longer able to rely solely on the fact that information has been provided by the borrower to show that they have made reasonable inquiries about the affordability and suitability of loans.

The changes also saw new rules brought in for lenders regarding record-keeping and requirements for affordability and suitability inquiries (including undertaking affordability and suitability inquiries before making “material changes” to home loans).

However, since the changes came into effect, there have been reports of New Zealanders being denied loans/changes to their mortgage due to “conservative” lender appetite. Examples brought to light in recent news coverage include borrowers being denied home loans due to Netflix subscriptions, or spending money on takeaway food.

Following the reports, the Minister of Commerce and Consumer Affairs, Mr Clark, has now called for an early investigation into the new regime to determine whether there have been any unintended consequences that may have negatively impacted borrowers.

In a statement provided to Mortgage Business, Mr Clark commented: “Whilst we are in the early days of new regulations to protect vulnerable borrowers, I have asked the Council of Financial Regulators (Reserve Bank, the Treasury, Financial Markets Authority, MBIE and Commerce Commission) to bring forward their investigation into whether banks and lenders are implementing the CCCFA as intended. 

“Banks appear to be managing their lending more conservatively at present, and this is likely due to global economic conditions. It may also be that in the initial weeks of implementing the new CCCFA requirements there has been a decision to unduly err on the side of caution.”

While the minister has noted that there could be “a number of factors affecting the market have occurred at the same time as the CCCFA changes” – including increases to the official cash rate, loan-to-value ratio (LVR) changes and an increase in house prices and local government rates – he added: “An investigation by COFR will determine the extent to which lender behaviour, in respect of the CCCFA, is a significant factor in changes to banks’ lending practices.”

The concerns raised in New Zealand closely resemble similar issues that resulted in compliance disputes between regulators and lenders in Australia regarding interpretation of Australian responsible lending laws.

These issues culminated in the now-famous “wagyu and shiraz” case between the Australian Securities and Investments Commission (ASIC) and Westpac. This court case focused on whether or not the lender had been writing unsuitable loans. However, the court did not agree with the financial regulator’s interpretation of what lenders should be doing to adhere to the responsible lending laws.

The Australian government had therefore moved to repeal responsible lending obligations (RLOs), with Treasurer Josh Frydenberg stating that the principles-based responsible lending framework had become “an overly prescriptive set of obligations” that had stifled the flow of credit.

The Treasurer said at the time: “Borrowers, irrespective of their financial circumstances, have subsequently faced a longer and more intrusive approval process.”

He gave the example of a first home buyer who had put down a deposit after receiving pre-approval from the bank. 

“Before settlement, he received a promotion at work that involved a salary increase. He notified the lender before his loan was finalised and the bank told him that the promotion constituted a change in circumstance, requiring his loan application to be reassessed and delayed because he didn’t have a past history of income at that level to rely on,” the Treasurer said.

“Even modest increases in credit limits for existing customers trigger the need for a reassessment of the customer’s financial circumstances.”

As such, he said the move to remove RLOs for all lenders except those issuing small account credit contracts or consumer leases would “restore balance and reduce the cost and time faced by consumers”.

However, the move to repeal RLOs has long been dead in the water, with multiple blocks and delays in Parliament.

[Related: RBNZ eyes DTI, serviceability limits]