CCCFA has fallen on its face
Government must listen and fix this as soon as possible
If ever there was a law designed to do good that has fallen on its face, it’s the CCCFA (Credit Contracts and Consumer Finance Act).
The law dates right back to 2003, but its story starts in the 1990s when the government of the day saw the need to protect consumers from poor lending practice.
“The CCCFA was a substantial revision of the lending laws from the 70s and 80s to better reflect the needs of both consumers and lenders and to align with international trends,” says Banking Ombudsman Nicola Sladden.
“The purpose of the CCCFA was to protect the interests of consumers entering credit contracts, consumer leases and buy-back transactions of land. Some key changes [on previous laws], such as information disclosure, were designed to ensure that consumers were able to make informed decisions before entering into contracts.
“Other changes operated to protect consumers through the life of the contract — for example, by requiring that fees be reasonable, allowing early repayment, and giving consumers the right to request changes when they were experiencing unforeseen hardship.”
Lenders who broke the rules faced damages and penalties that could be enforced by the Commerce Commission.
The 2003 law gave consumers more protection. However by the early 2010s many were complaining that loan sharks and mobile traders were rife in poor communities and the CCCFA wasn’t doing its job of protecting vulnerable people. As a result the law was reformed in 2014/2015 adding responsible lending obligations for lenders, says Sophie East, partner at Bell Gully.
Widespread criticism
The law changes required lenders to ensure that their loans were suitable and affordable for borrowers.
“The obligations included new requirements on lenders to make ‘reasonable inquiries’ of borrowers before issuing loans, and to assist borrowers to make ‘informed decisions’,” says East.
The principles were so broad it made it difficult for lenders to know precisely what was required of them, or for the Commerce Commission to identify specific breaches. As a result, the principles were very rarely enforced, says East.
Widespread criticism that the 2015 reforms hadn’t gone far enough led to the latest overhaul that came into effect on December 1, 2021. That imposed more stringent regulations around the suitability and affordability of loans. Under the new rules:
Directors and senior managers must exercise due diligence to ensure their organisation complies with the CCCFA;
■ Advertising must meet new standards set by the regulations;
■ Lenders are required to keep better records of how they satisfy affordability and suitability requirements and how they calculate the fees; and
■ Lenders and mobile traders who offer credit need to be certified by the Commerce Commission.
The central problem of how the new update has led to consumers being refused loans is that the CCCFA makes directors and senior managers at lenders personally liable for fines of up to $200,000. Companies can be fined up to $600,000.
That big stick has resulted in them becoming overly cautious around requirements that they must ensure there is a “reasonable surplus” after borrower’s expenses.
Fear and confusion
East says the regulations governing responsible lending are complex and include a number of untested standards, which are capable of wideranging interpretation.
“To supplement the new requirements, MBIE has issued an updated version of the Responsible Lending Code. This attempts to assist lenders in navigating the new regulations,” says East. “However, the flowchart provided in the code, though intended to simplify things, highlights the remarkable complexity of the new regime and the numerous gateways and decisions points that lenders must navigate.”
In fear of breaching the regulations, banks and other lenders are drilling down into every single entry in borrower’s bank statements stretching back three months or longer. Borrowers have found themselves denied mortgages as a result of Netflix subscriptions, eyebrow waxing, or cafe´ visits.
The irony, says East, is that in Australia, which originally inspired New Zealand’s introduction of responsible lending rules, the Government is now seeking to ease restrictions on lenders. The Australian government is warning against “unnecessary barriers to the flow of credit to households”, says East.
“If the Australian Government successfully pares back the regime as proposed, it will leave a stark contrast to the detailed and prescriptive demands of New Zealand’s new framework,” she says.
Borrowers suffering
One big issue with the affordability directives is that they are one-size-fits all, whether it’s a borrower seeking a mortgage from the BNZ or a payday loan at 300 per cent interest from a fly-bynight lender.
It’s not just first home buyers who are suffering the pain. Top-ups are also affected, says East. “Material changes” to a loan, such as a top-up for a new car or building work treats the new money as a new advance, meaning the lender needs to run its magnifying glass over the loan.
The rules do have an exemption where it is “obvious in the circumstances” that the borrower can afford the loan, says East. But the code only gives one example of a customer who has more than $1m in net assets, a $350,000 salary, and is seeking a credit card limit of $10,000 in order to collect Airpoints on purchases. “Lender L establishes that it is obvious that the borrower will make the payments under the agreement without substantial hardship,” the example states.
Business owners who often rely on borrowing against their homes are also caught in the CCCFA net.
BusinessNZ chief executive Kirk Hope says: “Many small businesses are financed through home loans and any reduction in lending under this act will have a flow-on effect for both new businesses and those looking to expand.
“The Government needs to listen to the advice provided by a number of organisations about the significant negative consequences of changing the CCCFA in the way that they did, and fix this as soon as possible.
The question now is how to fix the mess. Independent economist Tony Alexander has suggested separating consumer credit lending by predatory lenders on one hand and on the other mortgage lending.
Squirrel chief executive John Bolton told Radio New Zealand that the fix was relatively simple because the issue lay with the prescriptive code, not the act. “I don’t think you need a full rewrite of the law. The law is fundamentally right and it’s there to protect consumers from predatory lenders. The good thing with that is because it’s the code and not the act, that’s much easier to change.”
The Government announced in January that there would be a review, not of the law changes, but of how it is being implemented by lenders.