How the unintended consequences of the CCCFA are playing out

Reweti Kohere

Even if the government moves to claw back some of the more draconian provisions of the Credit Contracts and Consumer Finance Act 2003 (CCCFA), the good old days of relaxed assessments and easy access to mortgage money from our major banks are well and truly gone.

Mortgage brokers say approval processes for loan applications are likely to remain tight, regardless of whether the tough personal liability provisions for bank directors introduced in December 2021 are removed from the legislation. These provisions are widely viewed as being the driver behind the banks’ current hard line on lending and high rejection rate of would-be borrowers.

Brokers spoken to by LawNews say that since the controversial changes to the CCCFA in 2021, some banks have now invested heavily in automated assessment and approval processes to streamline lending, suggesting they have accepted the new lending parameters as being here to stay.

But brokers caution that not all blame for the high rejection rate of mortgage applications can be sheeted home to the CCCFA. Also feeding into the mix is the rapidly rising cost of living which is forcing mortgage-seekers to tighten their belts. And alongside the new affordability regulations and high interest rates, high living costs mean applicants must demonstrate their ability to service mortgages that are stress-tested by the banks at much higher rates than a year ago.

The government is investigating other measures to claw back some of the unintended consequences that have flowed from the late 2021 CCCFA amendments. Expected to come into force in March, the new rules will further clarify which expenses banks can take into account when assessing affordability. However, the option to soften the penalties and liability regime for bankers has been ruled out.

“We’re all sitting now on tenterhooks waiting until March, hoping they use some common sense and repeal most of what they’ve done or scrap it altogether and start from scratch,” says Loan Market mortgage broker Bruce Patten. “Whether they will, I can’t see it.”

‘Reasonable’ buffer

Part of that lies with what the responsible lending code is designed to do, says Catalyst Financial managing director Peter Norris. Introduced in 2015, the code builds on the CCCFA by helping lenders comply with their obligations, ultimately ensuring borrowers aren’t taking on debt they can’t actually pay off.

The recent CCCFA rules were enacted largely to protect people from high-interest loan sharks and payday lenders by prescribing what they and other kinds of lenders must require when assessing credit applications.

That includes probing applicants’ financial resilience, partly by looking at three months’ worth of expenses and comparing future expenses against statistical benchmarks to see whether they can withstand further interest rate hikes. However, what a “reasonable” buffer means has been left to lenders’ interpretations.

Moreover, the Act effectively raises the risk of legal action against directors and senior managers of lending companies if they preside over irresponsible or deficient lending. Personally liable now, top brass face pecuniary penalties of up to $200,000 and/or courtordered damages or compensation.

In early 2022, the government announced an investigation into the impact of the changes to the CCCFA due to widespread concern.

By the middle of last year, further changes were implemented that focused on addressing interpretational issues, such as by clarifying when lenders can ask how borrowers’ spending behaviours may change if their mortgage is approved and removing savings and investments as examples of outgoings that lenders must inquire into. Cabinet is expected to decide on a second round of changes in early February.

Overly cautious

New Zealand Bankers’ Association (NZBA), a lobby group representing the country’s banking industry, supported imposing due diligence duties and some form of penalty on directors and senior managers.

However, in a submission on the proposed CCCFA amendments to Parliament’s finance and expenditure committee, the association said any consequences must be “suitable and proportionate” –which the rule changes weren’t.

The association noted the CCCFA risked being “significantly” out of step with comparable overseas regimes that didn’t impose personal liability or forbid indemnities and insurance for civil pecuniary penalties. And the Act could discourage otherwise qualified candidates from accepting more senior roles, given the

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As a result of the 2021 amendments, banks have become overly cautious in the face of stiffer legal obligations and have tightened their lending processes more than what lawmakers anticipated.

Mortgage Lab spokesperson Rupert Gough says that reaction is understandable “because the directors of the bank can’t control someone seven management layers down”. The banks don’t want to be perceived as lending recklessly either, and will be hesitant about loosening their policies. “Until the CCCFA is amended to relieve the main banks of that burden, they aren’t going to walk that back. It’s just too risky.”

‘Complete joke’

Those at the coalface of assessing lending applications might have a different attitude.

Norris says frontline bankers, brokers and assessors are the ones most significantly affected by change and they’d most likely want affordability regulations softened. “Unfortunately, those are the people who really have no say in terms of policy.”

Loan Market’s Patten believes the banks will “jump all over” any changes that ease their increased workloads. “They’re all in total agreement the changes are a complete joke and make their jobs extremely time-consuming and difficult,” he says, adding more harm than good is being done.

“Really good clients are not able to borrow simply because of a change in the way the banks have to approach something.”

Patten argues the sooner that significant changes are made, the better. “I’m absolutely convinced the banks will follow through and make changes straight away.” has swung in the other direction to an extreme degree. “What we’ve actually ended up with is having to do a hell of a lot of work to essentially get the same result.”

Hastie describes the Act as a “sledgehammer cracking a nut”. The protection the CCCFA amendments purportedly offers isn’t needed for prospective homeowners or investors, whom the banks were already treating responsibly, he says.

In one respect, Hastie welcomes the recent CCCFA rules as they establish a standard of stringency he and his Orewa team have followed for several years in screening applications just as rigorously as the banks do. By revealing potentially problematic spending habits, brokers offer solutions “so that you can then say to the bank ‘here’s what we’ve found, here’s what the customer’s going to do about it, now approve that loan’.”

But Hastie acknowledges the amendments make it much harder for people to borrow, a change further compounded by the rise in interest rates.

Norris, from Catalyst Financial, agrees: “It just so happens they happened at the same time.”

The stats

According to statistics collected by the Reserve Bank, credit is still flowing, even if access has tightened. New lending totalled $5.1bn at December 2022, down 15% from the previous month and nearly a third from December 2021. In December 2020 – a year before the CCCFA amendments came into force – all borrowing totalled almost $10b. Within one month of the changes, total lending fell 70% to $4.7b.

Peter Norris

In a Cabinet paper issued mid-2022, Commerce and Consumer Affairs Minister David Clark noted he wouldn’t explore the option of relaxing the liability settings, which the Ministry of Business, Innovation and Employment had recommended to remove some of the unintended consequences.

While changing the liability regime would open up access to credit and encourage less-cautious interpretations of the rules, it would “disincentivise compliance…and reduce consumer protection”, Clark said.

New mortgage commitments for first-home buyers in that one-month period nearly halved, from $1.6b in December 2021 to $819m in January 2022. By year’s end, lending to first-home buyers recovered to $1.2b. Investors also suffered an immediate fall of 60% in the month following the amendments, from $1.3b in December 2021 to $811m. By the end of 2022, lending to investors increased only $100m.

Rupert Gough

If elected in October, National has promised to exclude the major banks from the CCCFA while it crafts a better law. A year ago, Opposition Housing spokesperson Nicola Willis and Commerce and Consumer Affairs spokesperson Andrew Bayley wrote to the minister, urging him to adopt National’s proposed Bill. This would amend the regulation-making powers of the CCCFA to enable regulated financial institutions, including the major banks, to apply appropriate discretion over their lending decisions.

“There is a categorical difference between regulated financial institutions issuing long-term mortgages at low interest rates and other types of higher-risk, shorter-term loans issued by other lenders for different purposes,” Bayley said. “This Bill would require the minister to take their differing scale and risk profiles into account when setting regulations for their lending activity.”

Hastie Mortgages owner Campbell Hastie says the pendulum

In the past year, the official cash rate has risen steeply to 4.25% from December 2021’s figure of 0.75%. At the same time, and just as quickly, banks have increased interest rates, with the average floating rate hitting nearly 8% and rates fixed for less than three years set anywhere between 6.85% and 7.07%.

Open banking

The more onerous, prescriptive CCCFA and responsible lending code have arisen as the local banking industry takes tentative steps toward a more open future.

“Open banking”, where banks make client and transaction data available to other financial service providers to unlock better deals for consumers, is set to arrive in New Zealand by 2024. In the past three years, the government has created the foundation by establishing a consumer data-rights framework, allowing people to securely share data held about them with trusted third parties, and by agreeing to explore banking as a test-case.

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Already in use in the UK and Europe, open banking could usher in a raft of new financial services while putting pressure on banks to improve their offerings. For instance, customers looking for a new credit card could let a financial advice service analyse their transaction history and spending habits, assess that information against credit card offers from banks and return recommendations tailored to their circumstances.

But open banking comes with risks, including the threat of cyberattacks and privacy breaches, the extent of consumer adoption and an increasing reliance on the big tech industry. Other concerns, gleaned from a recent investigation by the UK Competition and Markets Authority, include corporate governance failures, the late delivery of data and how conflicts of interest are managed.

Automation

Helping drive open banking is artificial intelligence, automation and analytics and at least one New Zealand bank has jumped on board.

In early 2021, ANZ signed a “strategic AI deal” with UK-based fintech firm Bud to build a simpler, more transparent lending process. It followed Bud’s $20 million capital raise in 2019, in which ANZ as well as the likes of Goldman Sachs and HSBC participated.

Acknowledging the move was partly driven by changes to the CCCFA, which would add significant manual overhead to lending decisions, ANZ said it chose to automate aspects of its process. In using Bud’s tools, the bank can ingest and categorise income and expenses data from applicants’ banks statements, and receive summaries to help determine applications.

ANZ NZ chief information officer Mike Bullock at the time said its new functionalities meant the bank could keep meeting its responsibilities under the Act, “without unnecessarily slowing down the lending process”.

An ANZ spokesperson declined to comment further on its investment in Bud, citing commercial confidentiality. But the spokesperson says the bank continues to provide feedback on how the categorisation tool can be better enhanced. “Given the significant number of lending applications our staff handle, reviewing 90 days [of] transaction records, sometimes over multiple accounts, to capture and categorise the extensive list of expenses solely manually was impractical,” the representative says.

“Carefully assessing suitability and affordability when making decisions around lending is a fundamentally important part of our role as bankers. At the heart of that is the need to balance convenience with protection.”

Grey areas

One mortgage broker spoken to by LawNews paid to trial the same platform as ANZ was using (without the bank’s customisations) for three months. But the tool wasn’t perfect, the broker says – it recognised data only in specific formats and some manual inputs remained. “What we were originally led to believe in terms of the useability wasn’t the case in terms of the actual capability.”

Another broker described Bud as “buggy”, saying it was a band-aid before open banking arrives. “There’s no digital transfer of information. It’s basically an OCR [optical character recognition] reading of a PDF statement and automatic categorisation.” A spokesperson for Bud declined to comment.

Gough says lending processes are nowhere near as automated as the current state of technology might suggest. But lenders and mortgage brokers also don’t want to lose the ability to deal with the grey areas of credit applications. “If you’ve got a blip on your credit record, they want to know why because they’re still in the business of making money,” Gough says. “So if they can mitigate risk, then they will. And an automated system can’t do that.”

A successful pairing of AI and human discretion could take the form of technology sweeping through applications to identify potential red flags, which are then escalated to credit teams for a decision. Until then, the human element of lending processes mustn’t disappear, Norris says. “There’s a middle ground where responsible lending can play a really important role but borrowers can still get money.”

‘Can they?’

Tighter lending assessments mean prospective homeowners are tightening their spending to reduce the risk of lenders declining their mortgage applications.

There’s nothing wrong with that approach, Hastie says. But the reality is that people won’t fully curb their expenditure. “They’re still going to have a little bit of fun because otherwise life would be pretty boring. You can’t live on baked beans all your life.”

Gough says applicants, tested at a 9% interest rate, are technically over-proving themselves to get a mortgage set at 6.5%. “That is a good exercise for people to be doing…the test has to be ‘can they’? That is part of responsible lending.”

But with the CCCFA set in stone, all parties must get used to their new lending environment. Norris adds: “Whether we’re going to suddenly wake up and the government is going to change things that means lending is really easy, I don’t think that’s going to happen. I don’t think lending is going to get any easier.” ■