Regulation

Advisers not looking forward to CCCFA

Matthew Martin talks to mortgage advisers to about their concerns of the changes to the Credit Contracts and Consumer Finance Act (CCCFA).

BY MATTHEW MARTIN

tsunami of new legislation and regulation has charged across the financial advice landscape recently but mortgage and lending advisers say the biggest waves are being caused by changes to the Credit Contracts and Consumer Finance Act (CCCFA).

The full force of the CCCFA changes came into effect on December 1 and see lenders being required to place more scrutiny than ever on borrower affordability and to adopt stricter affordability criteria.

This legislation requires lenders to be certain the borrower fully understands what they are signing up to and they must estimate borrowers' income and expenses, and verify those expenses, to ensure borrowers can afford repayments.

However, mortgage brokers spoken to by TMM say the changes are virtually unworkable, that all the banks have interpreted the legislation differently and consumers will be forced into taking out higher interest non-bank loans.

MinterEllisonRuddWatts partner Kate Lane said the CCCFA changes will "set a baseline as to what analysis lenders must do in relation to suitability and affordability".

"As the regulations basically take a one-size-fits-all approach, potential borrowers who are non-standard might find that they fall in the too-hard basket for some lenders given the detailed verification work required on income and expense information."

Lane said the regulation will prescribe that expense information is verified against reliable evidence, a process likely to be "very time consuming".

And, according to Squirrel managing director John Bolton, she was right with Bolton saying it's even worse than predicted.

"The problem is that the CCCFA is a very good piece of legislation for managing at-risk borrowers and protecting them from these loan trucks rolling around and backhand finance from dodgy loan operations, but it's not good at all for the sale of property."

He says the legislation is like hitting a nail with a sledgehammer and is pushing a ton of bureaucracy onto banks and therefore onto brokers.

"We now have a whole heap of compliance bureaucracy and the added costs that will wash through to the mortgage market and produce a lot of unintended consequences."

Bolton says government consultation and the resulting feedback on legislation like the CCCFA often falls on deaf ears.

"We don't have a good process of feeding back into these regulation changes. Even the banks don't push back on this stuff, they are very conservative."

He says the banks have been doing a perfectly good job managing loans and were already responsible lenders, but the CCCFA has overstepped the mark in terms of regulation and "...it's a pain in the bum from a paperwork perspective - we have to know more about a client's finances than their partners".

"New Zealanders are a pretty compliant bunch and often this generates the wrong outcomes...it's going to have a series of unintended consequences that will push back on to homeowners and brokers."

He says if the banks won't approve a home loan the onus will then be on nonbank lenders who charge higher interest rates creating extra costs for borrowers.

And if the legislation is wrongly interpreted "the consequences are absolutely ginormous".

Compliance Refinery chief executive Steven Burgess said he's been dealing with some mortgage advisers who are saying not only do they have to deal with the regulators but the large banks and loan aggregators have been putting the pressure on too.

"So, you can also lose your autonomy to these big players - some even mandate CRM usage - and they have significant influence in the market.

"The banks don't necessarily want to deal with the smaller businesses and want you to be going through an aggregator and work with the standards they want to put in place."

He says for those advisers who dabble in the market that their time could be up.

"In the governance space, it's not worthwhile to have a small product line - it's expensive and is not economic anymore - so they need to make some hard decisions - however, this can be healthy for a business in terms of what they want to focus on."

He said the banks have already changed the way they deal with distribution agreements and lenders have had to quickly adapt to those changes.

"And when change happens people have different reactions to it...there was a lot of doom and gloom when the new FAP regime came in but there are more advisers than ever before and a lot of them are younger and more diverse.

"In terms of mortgage advisers, there are some that the CCCFA is going to impact them more moving forward such as what products they can sell and who they provide services to in different parts of the market."

The Mortgage Lab chief executive Rupert Gough says the CCCFA has got the banks in a spin about how they interpret the rules and each one has a slightly different response to them.

Gough says while legislation that protects consumers can only be a good thing and the intent of the law is sound, its implementation has been a "...bit of a nightmare".

"We don't always know which bank we go to first, so we have to meet all the criteria for all banks, which has been quite frustrating.

"The risk groups in each bank have their own mandates and tolerances and it would be good if they could share their thoughts with each other and make it more uniform, but we are in stage one so it's not surprising we are going through this," Gough says.

He says he feels sorry for the one-manband operators who are trying to keep up with all the changes and that the days of the sole operator are numbered.

"I do wonder what the market will look like in even three months time and, on the whole, I don't think New Zealanders are ready for this especially if there is a sudden loss of their ability to get finance.

"I don't think I've ever seen a time when there have been so many bank and regulation changes, plus the CCCFA - you wouldn't even recognise it from six months ago." ✚