The Reserve Bank has reservations about the Government's approach to tweaking the credit law. Photo / File
The Reserve Bank wanted the Government to wait until the final report on consumer credit law changes came out in April before announcing tweaks.
And it warned that taking a two-stage approach risked decisions being made based on insufficient data and experience which may need to be unwound later, creating an impost on lenders.
Commerce and Consumer Affairs Minister David Clark announced tweaks to the Credit Contracts and Consumer Finance Act on Friday less than four months after it was tightened.
Changes to the law came into force on December 1 prompting complaints from consumers and mortgage brokers frustrated that borrowers were being turned down for loans due to spending habits like takeaways, going to the pub or seeing a counsellor.
More than 10,000 people signed a petition against the law changes and the Government announced at the end of January it would review them.
The changes include;
• clarifying that when borrowers provide a detailed breakdown of future living expenses there is no need to inquire into current living expenses from recent bank transactions.
• Removal of regular "savings" and "investments" as examples of outgoings that lenders need to inquire into
• Clarifying that the requirement to obtain information in "sufficient detail" only relates to information provided by borrowers directly rather than relating to information from bank transaction records.
• Providing alternative guidance and examples for when it is "obvious" that a loan is affordable
They are now up for industry and public consultation with plans to bring them into force from early June.
While that is happening a broader investigation led by MBIE and the Council of Financial Regulators into the CCFA amendments is ongoing with a report due in April.
But a Cabinet paper released late Friday on its findings so far also revealed not all parties are behind the approach.
The paper noted the Reserve Bank, which is one of the regulators which makes up the Council of Financial Regulators, was against the two-stage approach.
"The Reserve Bank does not recommend the proposed two-stage approach because of
the impost on lenders, the risks of making decisions based on insufficient data and
experience which may need to be unwound later and the other risks outlined above.
"The Reserve Bank suggests that decisions should be deferred until the final advice is
available in April."
The paper also highlighted risks that progressing with the tweaks could be seen as inconsistent with the process set out in the terms of reference on January 31 and that not enough consideration had been given to any potential unintended consequences of the initial proposals.
It also warned that lenders may be reluctant to implement the initial proposals ahead of the investigation being completed.
"This is particularly the case because of the high profile and sensitive nature of this topic, and the cost involved with making changes to their systems and processes, and because operationally lenders will likely need to seek approval from their governing bodies to implement these changes.
"This may lead some lenders to defer implementing any changes until the conclusion of the investigation."
But Clark was convinced these risks could be mitigated by clearly describing the recommendations as "initial proposals" and making it clear that the changes would be considered as part of the remainder of the investigation.
"I believe making some 'no regrets' changes now, in line with the intent of the Act and
in advance of the investigation's conclusion, allows us to respond expeditiously to the
concerns raised by consumers and lenders to ensure we are not unduly restricting
access to credit for New Zealanders, including first home buyers, in the near term."
Scott Abel, a partner at Buddle Findlay, said he expected the "initial proposals" to have a limited effect.
"They appear to be mostly optics and perception."
He said the Government wanted to be seen to be responding expeditiously to the concerns that have been raised.
"But I think even once the changes come in - it is unlikely to lead to any immediate change in behaviour because given the penalties lenders face for non-compliance no one is going to move until the detail is clear and these things are implemented."
Abel said three of the six initial changes were merely clarifications of interpretation.
"The regulations let you do that now anyway, it is just making that a bit more clear. It is not going to lead to resolution of some of the key issues that people have been focusing on or concerned about."
One of the clarifications was to make it clear that when borrowers provide a detailed breakdown of future living expenses there is no need to inquire into current living expenses from recent bank transactions.
"Lenders are still going to need...to ask questions, still going to need detailed and potentially intrusive lists of questions to determine a borrower's income and expenses - that hasn't changed and there is no indication of taking a scalable approach - that will still be the case regardless of the amount borrowed and you are still going to be doing it in sufficient detail to make sure the borrower hasn't underestimated [their expenses]."
Abel said there was a caveat that said if lenders asked about likely living expenses and these expenses were benchmarked they did not need to request bank statements but he said there were a lot of living expenses and particularly discretionary expenses that could not be effectively benchmarked.
Those included remittance payments, tithing, going to the gym or pub - anything that did not show in household data surveys.
"You are then going to have to go back to transaction records or try and make an estimate."
And he said lenders would be very circumspect around doing that because if they got it wrong it was not a good outcome for them.
Abel said lenders were being told if they used bank statement data they could ask borrowers how expenses were likely to change once the borrower got the loan.
"But there is nothing in the regulations that say lenders can rely on that confirmation."
Abel said there used to be statutory presumption in the act which was removed in December 2021 that meant the lender could rely on anything a borrower provided unless they had reasonable grounds to believe it was not reliable.
"None of this is going to lead to quick processing times. None of it addresses other issues talked about - borrowers with good credit histories will they be approved more quickly?"
He said borrowers coming back for a small top-up to an existing loan would still have to go through a full assessment exercise while borrowers trying to refinance to a cheaper loan might still be locked out because they can't get past affordability tests.
The issue of business owners using their home as security to borrow and being locked out was also still to be addressed.
Abel said the tightening of the law had seen a fundamental shift to a mandated income and expenses assessment regardless of the size of the loan or the history of the borrower.
"Previously lenders were given a reasonable degree of discretion and cut their affordability assessment as they saw appropriate for their customer base. The process a motor vehicle financier followed may have differed from the approach that a registered bank would take for identifying home loan affordability - it wouldn't necessarily have applied a full assessment - would have relied on other metrics - credit reporting etc and that flexibility has gone and I don't think that is coming back through these changes."
He said there needed to be recognition that the regulations were very prescription - more so than Australia and the UK's lending laws.
"The balance is not quite there yet and that would require I think quite a change to the regulations to allow a bit more flexibility for lenders. I don't at this stage see the will to make those changes from statements being made but let's just see where the report comes out."
Nearly 90% of new mortgage lending in October was floating or fixed for a year or less.