Changes to the Credit Contracts and Consumer Finance Act (CCCFA) mean applications for any personal loan or mortgage could take longer to process from December 1st, with borrowers required to front up with more detailed information and the industry facing stiff penalties for non-compliance.
The objective of the change is to protect New Zealanders from landing in unaffordable debt.
The new responsible lending obligations, which cover any loan amount, will blanket all types of lenders including banks, mobile traders and payday loan specialists. It may also apply to some loan-related products such as extended warranties and consumer credit insurance.
The impact is significant: while lenders are already required to make enquiries into loan affordability and suitability, they will now need to follow a specific process which involves further information verification and more transparency around the calculation of any fees or charges.
For example, when assessing mortgage eligibility, lenders will need to take steps to independently verify information, such as household expenses the borrower has provided, and back it up with reliable supporting evidence and make adjustments if necessary.
The December 2021 update to the Responsible Lending Code, which underpins the act, is one of the final implementation steps of a consumer credit review begun by the Government in 2018.
Another step, the implementation of 'fit and proper person' assessments to verify qualifications and suitability of anyone in a leadership role with a lender, along with more potential for personal liability, came into effect on October 1.
"We think the changes are likely to result in consumers having to jump through a few more hoops before being given credit. While this may be painful in the short term, the new rules are intended to protect consumers and prevent them from taking on unaffordable and unsuitable debt," said Jon Duffy, chief executive of Consumer NZ.
Responsible lending means assessing the suitability and affordability of the lending against the situation of the individual borrower and not landing them in undue financial hardship.
It also means stepping record keeping up a notch, with loan suitability assessments and accompanying evidence to be maintained and provided free of charge to anyone who is entitled to ask for them.
“There has been a lot of work going on behind the scenes to ensure responsible lenders such as our members understand and comply with the changes to help protect vulnerable borrowers, but it’s also important that everyday consumers know what to expect and how these changes will affect the lending process,” Financial Services Federation Executive Director Lyn McMorran said.
The Financial Services Federation is a lobby group for non-bank financial institutions.
Consumers will benefit from the new requirement for lenders to be highly transparent about variations, repayment amounts and itemise how fees were arrived at, where the data exists to do so.
In the spirit of the added transparency, section 41 of the CCCFA states that "a loan contract cannot provide for a credit fee or default fee that is unreasonable. Lenders must not profit from fees. A fee will be unreasonable if it exceeds the costs that are closely connected to the activity for which it is charged."
The changes to the act also turn the screw on loan sharks, with lenders to be prohibited from using phrases like 'no credit checks', 'guaranteed acceptance' or 'bad credit history, OK.'
It also requires the industry to take a collective breath on fast paced approvals: where lenders advertise an approval speed, say one hour, they must also display a prominent statement to the effect that this is subject to responsible lending inquiries and checks.
Roger Beaumont, CEO of bank lobby group the New Zealand Bankers’ Association, said; “banks are responsible lenders, and we support the aims of the law changes to help people avoid taking on unaffordable debt. We also think it’s important that people are prepared for what the law change will mean for them when they apply for a loan."
Lenders will also be required to be more proactive when borrowers are reaching the end of their financial tether, by providing timely information on financial mentoring, in certain default or hardship situations, and making them aware of dispute resolution schemes when responding to complaints.
In a step designed to protect borrowers who may be vulnerable through limited English language proficiency, lenders will also be required to provide full information in the same language as any advertising they run.
A Commerce Commission spokesperson said they had been "actively engaging with lenders to support them through the law changes. This includes running a series of educational seminars and focus groups, and producing guidance material to educate lenders about the changes needed to comply with the new laws."
"We have increased our engagement with lenders and industry bodies directly to ensure they have the necessary guidance to help them comply with the law. The Commission will continue to monitor the type and number of complaints that we receive after the law changes have come into force."
The Commerce Commission's role is to enforce competition, fair trading and consumer credit contracts laws.
Penalties for lenders who breach the responsible lending obligations are up to $600,000 for companies and $200,000 for individuals, plus statutory damages equal to the costs of borrowing.