If elected, a National-led government has pledged to roll back “three years of damage” that CCCFA amendments have caused to the credit and mortgage industry and refocus regulations on loan sharks and other high-risk lenders.

But commerce spokesperson Andrew Bayly admits that shifting the lending culture that has developed inside banks over the past three years in response to onerous and prescriptive regulations and other factors will be difficult.

Should the National MP be “lucky enough” to serve as Commerce Minister after the October election, Bayly says repealing all the 2020 and subsequent amendment regulations under the Credit Contracts and Consumer Finance Act 2003 (CCCFA) will be his priority. From there, a new set of regulations will be fashioned to ensure high-cost lenders – the 2019 reforms’ intended target – don’t prey on vulnerable New Zealanders.

However, Bayly concedes his efforts might not suffice. “The biggest issue we’ve got now is that some of this is already ingrained…The trouble is that we’ve had now, what, three years of damage? How do we change the culture?” he says, adding it’s necessary that banks and reputable lenders are prepared to lend small amounts of money to New Zealanders. “That’s what we want, that’s what their business is. But the intent of the regulations was meant to be on high-cost lenders – and that’s where I want to focus.”

Changing culture

While Labour’s succession of commerce ministers has “fiddled at the edges”, Bayly says he’s clear about his plans to strip the legislative regime back and refocus attention. “Changing culture is not going to be easy, but that’s what we’ll have to do. We’ll have to explain it to the people. It should be on those high-cost lenders that people in budgeting services tell you about.”

Supported by the regulations, the Credit Contracts Legislation Amendment Act 2019 introduced prescriptive requirements on lenders to ensure compliance when assessing borrowers’ affordability and suitability, made directors and senior managers of banks and other credit companies potentially liable for irresponsible lending, and capped interest rates and fees on high-cost loans – all with the purpose of better protecting borrowers against debt spirals and predatory lending.

However, the changes proved controversial and, together with rising interest rates and living costs, ushered in a raft of unintended consequences. As lenders stiffened their assessment processes, more borrowers across all lending types – who normally should have passed affordability screenings – were being declined by the major banks or had their borrowing reduced. Borrowers also reported being subject to unnecessary, disproportionate, and intrusive inquiries into their expenditure habits.

The government in early 2022 announced an investigation and has since moved to claw back some of the damage. And the work continues. Just over a month ago, Commerce Minister Dr Duncan Webb announced that certain types of lending would be exempt from the CCCFA, as well as a wider review of the Act itself.

The timing of the announcement has been political, says Bayly, “so that Duncan Webb can stand up at the election and say he’s listening to people. But [Webb’s predecessor] David Clark took at least a year to respond to incredibly intense criticism so that’s why I’m just going to get rid of it.”

The amendment statute was originally passed to deal with the economic issue of predatory lending, he says. In many ways, the reforms have worked: a recent Commerce Commission review of high-cost lenders found they have either exited the lending market or reduced their interest to below 50%.

But since 2019, the government has not only made the economic issue worse but has transformed it into a “pernicious” social issue where vulnerable New Zealanders can’t get access to credit. Locked out from typical credit sources, borrowers risk having to turn to the very high-cost lenders that lawmakers believed would be the sole targets of their reform efforts. “That is why I am so angry about it,” Bayly says.

Personal liability

Industry participants spoken to by LawNews say lending appears easier now than it has been at various times since late 2021 when the first tranche of CCCFA changes were put in place.

While getting credit is nowhere near as easy as it was before 2021, recent changes to the regulations have given lenders a steer on how to properly assess a borrower’s ability to service a home loan, says Financial Advice New Zealand (FANZ) chief executive Katrina Shanks. But the most significant hurdle to the easing of mortgage lending remains in the statute.

Directors and senior managers of creditors must exercise due diligence to ensure the business complies with its duties and obligations under the CCCFA – or face personal liability. Consequences may include a pecuniary penalty of up to $200,000 and/or court-ordered damages. Directors and senior managers cannot be indemnified if they are ordered to pay a pecuniary penalty.

Shanks says the ease with which borrowers can obtain credit won’t return to pre-2021 levels until the liability provisions have been relaxed – something a new government can do, she says. “If you remember, pre-December 2021, there was no evidence that there were poor outcomes for consumers which needed that change in legislation.”

Zeroing in on where the harm to consumers lies will benefit the industry. “What they need to do is look at the legislation, see how they can carve out payday lenders and then write legislation specifically for payday lenders because the banks are responsible lenders and meet requirements that are needed for affordability…Targeted legislation has to be for where the harm is and what you’re trying to fix,” Shanks says.

Bayly doesn’t think softening liability via amendments to the statute is necessary, saying he’s happy with the Act as is. Instead, the wider regulations are the problem. Asked if those in control of banks will be spared personal liability, he doesn’t rule it out.

Banks and non-bank deposit takers that are regulated financial institutions are already subject to a lot of oversight. The focus of the bill – the intent of Parliament – was that we were dealing with high-cost lenders, not banks and reputable lenders. It wasn’t designed or thought or anticipated that we were going to set out prescriptive tables to ask banks to require they ask about Netflix accounts,” he says.

Up for interpretation

Reserve Bank statistics show new commitments to all types of borrowers have been falling. In July 2023, they totalled nearly 13,800, having dropped just over 3% from July 2022. Compared to July 2021, however, new commitments have dropped 48%. The value of new commitments to all borrower types has fallen 7.5% to $5 billion in July 2023, from $5.4 billion in July 2022.

By contrast, two months ago, new commitments to firsthome buyers were up 20% to 2,201 when compared to July 2022. But they’re nearly down a quarter on the almost 3,000 commitments made to first-home buyers in July 2021. Total lending to first-home buyers of $1.24b in July 2023 has jumped 21% compared with July 2022.

Loan Market mortgage broker Bruce Patten says lending has gotten easier, “but only through common sense”. Nevertheless, affordability very much remains up for interpretation. “Some banks are still digging into the depths of a person’s expenditure, whereas others are relying predominantly on what the customers are saying their future expenses will be. I still feel it’s gone way over the top and we really don’t need to be in this space. We didn’t have an issue before; we now have an issue because of the way it’s been written.”

The government’s CCCFA guidance in April 2023 was “lacklustre” as it has merely clarified where lenders can use their common sense on an applicant’s spending, “which should probably not have needed to be said in the first place. But when you get a piece of legislation, the banks tend to take it to their legal department and they tend to be the ones that tell them how to interpret it. And that’s where it’s so up-in-the-air because all the banks still do it slightly differently.”

Patten urges National to follow through on its promise to “actually revisit it and repeal it and just go, ‘let’s look at what it was meant to do’. That’s what we asked for the current government to do, to just put it in place for what it was meant to do, not what it wasn’t meant to do. That would be ideal,” he says.

Hastie Mortgages owner Campbell Hastie believes the recent easing in lending is partly because lenders have become used to the workings of an amended CCCFA and are interpreting it in a way that “allows business to be done and to continue to be done”.

While he welcomes the increased robustness the Act has introduced for affordability assessments as it leaves applicants more informed about the implications of their spending habits on their ability to service a mortgage, “the end result is no different to what we’ve been getting for years. So, more work for the same result – but it’s a better result in a sense because of that work.”

Buy now, pay later?

In Hastie’s view, Bayly should leave the CCCFA intact and instead focus on enforcing it against “those entities in the lending landscape that probably aren’t going through the same kind of robust process the banks are.

“Put it this way, when was the last time you heard of someone feeling overwhelmed by the mortgage they’ve got versus someone feeling overwhelmed by the 15 different bits of short-term debt they’ve got?”

According to credit bureau Centrix’s August 2023 credit indicator report, overall mortgage delinquencies fell in July to 1.26%, although there were nearly 19,000 mortgage accounts past due – a 31% year-on-year increase. By contrast, buy now, pay later (BNPL) arrears sat at 9.4% – the lowest since February 2023.

Cabinet last October agreed to bring the BNPL industry within the CCCFA. Following consultation, Webb last month announced BNPL loans would be exempt from affordability and suitability assessments as “that would be too onerous for these short-term, low-value, interest-free loans”. Instead, he said BNPL lenders must complete comprehensive credit reporting when customers sign up or request a higher credit limit.

Detailed regulations will be announced soon, although BNPL lenders will have a grace period to implement changes. Hastie sees this as a bad move. While he understands the rationale, given it’s less likely a consumer will get into trouble with only a small loan, “when you’ve got people who have five different buy now, pay later accounts, you’re really upping the ante. That’s pouring petrol on a little fire,” he says. “To have that kind of facility exempted from the CCCFA, it’s a bit of a slap in the face in a way.”

Which bit works?

Go Mortgages broker Tony Ridley believes the CCCFA has faded into the background while other market factors exert more pressure on the accessibility of mortgages. “Whenever you were doing an application before, it was almost impossible to pre-empt every question around the CCCFA and customer spending. You just anticipated the banks were going to come back and ask questions, whereas I don’t really get that anymore because you comment on all the stuff that seems reasonable to ask questions about,” he says. “Now, as long as you cover off everything relevant and material, then it’s not normally that which trips you up anymore.”

The Reserve Bank’s most recent credit conditions survey, which asked banks about their views on credit availability and demand, found the demand for residential mortgages had declined further in the six months to March 2023. Banks noted a series of major headwinds were dampening household demand, including rising mortgage rates, the higher cost of living and rising building costs.

The banks also expected mortgage demand to remain subdued in the six months to September 2023. While household credit availability had stabilised after incremental falls during the past two years, some tightening in prices remained. Of the factors affecting credit availability for the next half-year, “regulatory changes” was largely equal to balance sheet constraints, compared with March 2022 when pressure from competition and perception and appetite for risk were the biggest factors.

In an ideal world, mortgages would not even be a part of the CCCFA, Ridley says, “but I don’t know if that’s likely”. The mortgage broker thinks there’s been ample regulation recently of the financial services industry and questions whether the CCCFA is needed for mortgage lending.

“It’s almost like if you throw enough different legislation at something and it works, then how do you know which bit actually works?” he says. “I don’t know if the CCCFA does much to achieve the goals that it was originally trying to achieve.” ■