Concerns are rising in the credit sector that recent law changes will make life difficult for borderline borrowers. Bell Gully's Sophie East and Richard Massey explain | Content partnership
As a new chapter in the regulation of consumer credit in New Zealand gets underway, commentators and industry participants are increasingly questioning whether the new reforms to responsible lending rules are likely to achieve their intended purpose. The changes, originally designed to protect vulnerable borrowers, may ultimately restrict the supply of credit to those who need it most.
Major changes to the Credit Contracts and Consumer Finance Act, or CCCFA, came into effect in December. The changes introduce significant new penalties for lenders who breach responsible lending rules, with new, broadly-worded obligations which remain unclear in several important respects. That combination of factors creates a real disincentive for lenders to extend credit to “borderline” applicants who cannot clearly demonstrate that they can comfortably afford a loan.
Previously, the responsible lending regime was primarily principles-based and responsible creditors could (after careful dialogue and reasonable inquiries, and ensuring the loan was suitable and affordable) lend to borrowers in a broad range of circumstances. In addition, the consequences of error were relatively confined, and were generally limited to compensating the relevant borrower for actual losses.
Now, loan assessments must follow prescriptive and very detailed regulations, which require, among other things, that affordability calculations must provide for a “reasonable surplus” or “buffers” (though of unspecified extent). In addition, the consequences of breach have drastically increased, and include statutory damages equal to all borrowing costs payable under the loan.
The result is that lenders will proceed very cautiously, particularly in the absence of concrete guidance from the Commerce Commission on its proposed enforcement approach to the new regime. Last week, Anna Rawlings, the commission chair, issued a statement observing that the changes should “deliver greater consistency.” But, lenders will want far greater clarity on the finer points of the new regulations. What extent of “reasonable surplus” is required? What benchmarks are acceptable for expense calculations? What adjustments should be made for variable income?
Unless there is meaningful clarification on the details of the regulations, lenders will continue to take a conservative approach, at the expense of less affluent borrowers. The unfortunate result is that these changes, which were intended to protect vulnerable borrowers from “loan sharks”, make it all the more likely that many borrowers will have to seek credit from alternative sources.
There is therefore an urgent need for definitive and specific guidance on how the new regime is intended to operate, and how it is going to be policed, to ensure this new consumer protection legislation does in fact protect consumers, and avoids imposing greater hardships on the most vulnerable.
Bell Gully is a foundation supporter of Newsroom.co.nz, and has clients in the credit sector.
