Commerce and Consumer Finance minister David Clark was forced to tweak the CCCFA and then order an inquiry after lending orders fell. Photo / Mark Mitchell
Commerce and Consumer Finance minister David Clark was forced to tweak the CCCFA and then order an inquiry after lending orders fell. Photo / Mark Mitchell
A Government investigation into changes made to the Credit Contracts and Consumer Finance Act has revealed the law tweaks resulted in a raft of unintended consequences, despite warnings from the financial sector.
Commerce and Consumer Finance minister David Clark ordered the Ministry of Business Innovation and Employment to take acloser look at the December 2021 changes in mid-January, amid an outcry from the public and mortgage brokers.
Since December, lending activity has dropped across the board with tales of borrowers being turned down for loans for reasons ranging from a Netflix or gym subscription to spending too much at the pub.
The report found that though it was too soon to say whether the law changes had been successful in achieving their intent - to address concerns about continued irresponsible lending - it did find the changes were having some unintended impacts.
The MBIE report revealed that more borrowers across all lending types who should pass affordability tests had been declined, or subject to reductions in credit.
Some borrowers had been subjected to unnecessary or disproportionate inquiries that were perceived as intrusive.
The investigation put this down to lending processes becoming more restrictive and more onerous than was expected when the CCCFA changes were made.
"This is a consequence of the way a number of specific provisions in the regulations are designed and drafted, combined with interpretational difficulties and many lenders taking a naturally conservative approach to compliance, given the CCCFA's strong liability regime."
The MBIE report noted instead of being confined to high-risk/vulnerable consumer lending, the prescriptive nature of the law changes meant it was applied to all lending.
On top of the credit law changes, the investigation discovered the changes had prompted some lenders to make wider changes to their credit assessment processes to allow for automated collection of consumer data.
"These new systems have sometimes fallen short of their promise and are likely to have also contributed to some adverse consumer experiences."
Some creditworthy borrowers were turned down for loans or were unable to borrow as much as they wanted. Photo / 123RF
What happened when the law changed?
Mortgage lending across the board fell sharply between December and March compared to the same months a year earlier.
And it fell across all groups of borrowers, although greater falls came from mortgage lending to investors rather than first home buyers and other owner-occupiers.
Investor lending is not regulated under the CCCFA although some lenders apply the same process as owner-occupiers.
But conversely lending by non-banks - building societies, credit unions and finance companies - jumped 46 per cent in the year to February 2022 - the strongest growth since records began in 1998.
"There is no obvious impact from the CCCFA changes, with lending up $300m over the past three months. NBLIs [non-bank lending institutions] are not subject to LVR [loan-to-value ratio] restrictions, which have been tightened on banks over this time period."
The report noted that much of the decline in home loan volumes was due to a drop in applications driven by other factors like loan-to-value ratio cap changes, rising interest rates and a slowdown in the property market.
There was also a drop in new personal loans in a trend similar to that of mortgages, with new personal loans well below the peak in December 2019 before Covid-19 hit.
New credit card accounts halved and credit reporting agency data showed a "marked decline" in new vehicle loans from December 2021.
There was less evidence of a drop in applications driving lower loan volumes for consumer debt.
"Some banks have seen personal loan and credit card applications hold up, while others have seen falls. Credit reporting agency data suggests that overall credit card inquiries have fallen more than personal loan inquiries, perhaps reflecting the longer-term trend in credit card balances."
MBIE noted that "some portion" of the reduction in loan volumes was attributable to more applications being withdrawn and declined.
"Rates of declines and withdrawn applications appear to have increased across a range of products since late 2021."
Despite the law changes being focused on high-risk and vulnerable borrowers, the largest fall in loan conversion rates was for borrowers with credit scores over 700 - those considered to be most creditworthy, while borrowers with credit scores under 500 saw only a small fall in conversion rates.
Overall the report found the impact of the CCCFA changes on home loan lending levels had been moderate, though the impact of the changes on personal and credit card lending loan levels had been high compared to home loans.
"Declines in new credit card and personal loan levels are consistent with the expected impacts of the CCCFA changes, given these products were subject to a higher level of concern before the reforms.
"Therefore, personal lending was expected to be subject to increased restrictions and subsequent declines in new loan levels, in line with the policy intent."
Unhappy borrowers
The CCCFA changes resulted in a sharp rise in complaints to the Banking Ombudsman with complaints centred around delays, banks not acting as expected and having to provide more information.
Lenders also claimed that borrowers were complaining that the new more in-depth inquiries were intrusive in nature and this was noted across the industry.
What caused the unintended consequences?
The report noted the drivers of the unintended consequences were a lack of targeting, the design and drafting of specific provisions in the regulations, interpretational issues and the conservative approach taken by lenders due to the liability regime under the law.
The regulations apply to almost all consumer lending rather than just the lending intended to be targeted by the CCCFA changes.
"It is most directly resulting in unnecessary or disproportionate inquiries to low-risk borrowers (who arguably should not require a full affordability assessment to establish loan affordability) and has some implications for borrowers being unnecessarily declined."
This was put down to uncertainty in the use of the exception for "obvious" affordability which allows lenders to skip a full affordability assessment.
"Where borrowers fall outside this exception, or it is not otherwise used, the prescriptive nature of the regulations means borrowers are subject to the same extent of inquiries as higher-risk borrowers.
"Low-risk borrowers are more likely to find this intrusive, as they are unlikely to have been subject to the same level of inquiries prior to the CCCFA changes."
Six initial changes were announced in March by the Government to address the unintended consequences and came into force in July.
Seven further changes were proposed as part of the report but only some of them have been taken up.
The Government chose not to take a targeted approach which would have zeroed in on certain types of lending or lenders or higher-risk consumers.
NZBA chief executive Roger Beaumont. Photo / NZME
That has disappointed the NZ Bankers Association, whose CEO Roger Beaumont said it would have been better to target affordability regulations to riskier lending and lenders, as well as to make changes to the penalties regime.
"Targeting affordability requirements to support those most at risk would provide them with appropriate protections as well as freeing up lending for those who can afford it."
It also decided not to change the penalty and liability regime or to repeal the regulations entirely.
MBIE warned that while reducing this would likely result in a decrease in conservatism for lenders there would also be a reduction in consumer protection for some borrowers and it also risked contributing to non-compliance.
