4 minute read
Changes to the CCCFA
On 1 December 2021, changes to the Credit Contracts and Consumer Finance Act 2003 (CCCFA) took effect. The prescriptive regulations set out how a lender verifies whether a loan is suitable for a borrower, and whether a borrower can afford the repayments. Lenders must now show how they came to the decision when calculating each borrower’s affordability and suitability under the new regulations.
These changes tightened the lender’s responsibilities under the CCCFA by increasing the level of investigation a lender must undertake to ensure a loan meets the borrower’s needs, ensure borrowers can afford the loan repayments and that borrowers are making a properly informed decision. The objective of the reform is to protect everyday kiwis from incurring unaffordable debt.
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What it means for lenders
The new lending requirements are necessary for all types of lenders — banks, payday loan providers and mobile traders. Although lenders are already required to question loan affordability, they will now need to abide by a stricter process involving further information verification and transparency regarding calculation of any fees or charges. Lenders can no longer rely 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 a loan — they will need to scrutinise the information given further.
For instance, a lender examining mortgage eligibility will need to follow a process that specifically verifies information that a borrower has provided — such as household expenses and income — and then authenticate these details with supporting evidence. Adjustments will need to be made where necessary, especially where the supporting evidence does not match the expense and income disclosed by the borrower. If a lender has failed to assess this specific information appropriately, they risk harsh penalties that, under the new regulations, have become significantly more severe.
Whilst these additional steps give borrowers a few more hurdles to jump over, it does have the underlying aim of safeguarding borrowers from ending up in prohibitively high debt.
What it means for borrowers
Buyers looking to secure a loan are now required to provide bank statements or other proof of income, such as payslips. They will also need to be prepared for lenders to make detailed inquiries about their objectives, personal details and requirements to take out the loan. Providing this additional information to supplement the investigations has resulted in loans taking longer to be approved — and many buyers missing out.
According to media and anecdotal accounts from REINZ members across the country, whilst the changes were to protect vulnerable borrowers, it has instead prevented many potential buyers who would have previously qualified for loans from getting approval. Unsurprisingly, this is a significant impediment for first home buyers, many of whom were already at a disadvantage due to rising house prices. Within the real estate profession, the legislative changes will affect all home loan applications.
Borrowers are advised to plan ahead and be patient, despite frustrations. To speed up the process, borrowers will need bank statements for the accounts used to pay expenses reaching back 90 days, evidence of income (if not reflected in bank statements, pay slips or employer contracts are required), and a clear understanding of how much they spend each month on expenses such as food, utilities and travel. It is also wise for borrowers to prepare a plan on how they could alter their spending if they are to receive the loan.
A cause for reconsideration
In REINZ’s view, the CCCFA amendments, although no-doubt well-intended, require reconsideration. This is based upon member feedback from across the country that the reforms are having a negative impact on capable borrowers. Members have reported a decrease in first home buyers and increased caution and confusion in the market due to uncertainty about their financial resources.
Given the impacts on potential buyers, REINZ supports the inquiry ordered by Commerce and Consumer Affairs Minister, David Clark, into whether banks have overreacted to new lending rules. The Minister has asked the Council of Financial Regulators to bring forward their investigation into whether banks and lenders are implementing the CCCFA as intended. The initial advice is anticipated in mid-April, followed by further analysis in April. We will keep our members updated on this investigation and what may come of it.
