The BulletinApril 22, 2024

Lending rule changes a prelude to bigger overhaul of CCCFA


The government has announced tweaks to the much-maligned law, but isn’t scrapping the lending affordability regulations – at least, not yet, writes Catherine McGregor in this excerpt from The Bulletin, The Spinoff’s morning news round-up. To receive The Bulletin in full each weekday, sign up here.

The first stage of a lending-rules overhaul

Many borrowers will find it easier to access credit as a result of changes to the Credit Contracts and Consumer Finance Act, or CCCFA, announced on Sunday by commerce and consumer affairs minister Andrew Bayly. The new rules, which Bayly had previewed in a speech in late January, are part of a suite of updates he plans to make to the controversial law. For borrowers, the most immediate impact relates to exemptions. Councils are now exempt from the CCCFA, allowing them to administer voluntary targeted rates – to pay back loans for installing insulation or heat pumps, for example – without extra credit checks. Car dealers and other companies whose “primary business is non-financial goods and services” are also exempt. Oversight of the CCCFA is moving from the Commerce Commission to the Financial Markets Authority, and the rules of various financial dispute resolution schemes are to be aligned.

A recent history of the CCCFA

While the CCCFA itself is more than 20 years old, it was a 2021 update that brought the act back into the limelight. In response to concerns about loan sharks and other predatory lenders, the Labour government introduced regulations that required lenders to assess the affordability of loans by checking borrowers’ spending habits. Almost immediately, borrowers complained that their everyday spending was being scrutinised to a ridiculous degree, and new lending fell off a cliff. While the rapid slowdown in lending was partly a result of recently tightened loan-to-value rules, the outcry from both borrowers and lenders concerned the government so much that it eased the rules within months. But it wasn’t enough – so in April 2023, then minister Duncan Webb had another go, tweaking the rules to exclude discretionary expenses more explicitly from lenders’ affordability-testing criteria. In August, Webb said he wanted to undertake yet another review of the rules, but Labour’s election loss put paid to his plans.

A graph showing the impact of the initial changes to the CCCFA in December 2021 (Source: Opes Partners)

So what’s happening with affordability checks?

The government has indicated it plans to remove the affordability testing rules entirely – but not quite yet. There was no detailed mention of them in Sunday’s announcement, just an indication that they would be revoked in coming months. The government’s feelings on the rules could not have been clearer, however. Bayly said the “overly arduous checks” had thrown “a bucket of cold ice over banks and financial providers”, while housing minister Chris Bishop said the “ridiculous” rules had put mortgages even further out of reach for first home buyers already coping with high interest rates and rising house prices. Labour’s commerce and consumer affairs spokesperson Arena Williams said loosening the rules would put vulnerable people at risk. “Kiwis can expect less protection from loan sharks and unaffordable debt as a result of today’s announcement,” she said. A number of the changes announced on Sunday, such as the targeted rates exemption, were already in the works under the Labour government.

Banking competition could benefit from rule change

The removal of affordability checks could have an interesting ripple effect across the banking industry. According to last month’s draft report from the Commerce Commission’s retail banking market study, the checks may be contributing to the lack of competition in the sector. Consumers who otherwise would have considered switching banks at the end of their home loan term were likely being deterred by the prospect of new affordability assessments, the commission said. “Our draft recommendation is that the Government consider amending the CCCFA to achieve competitive neutrality between existing home loan providers and potential alternative providers in the context of a consumer refinancing a home loan.”

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