Govt walks back tougher lending laws

The Government is making changes to responsible lending regulations that banks blamed for an artificial credit crunch.

The changes remove some of the most controversial aspects of the tougher responsible lending laws, including borrowers being asked about their current living expenses based on recent bank transactions.

People reported being turned down for loans based on things like spending too much on a dog, after the regulations were introduced in December to protect vulnerable borrowers from loans they could not afford.

Mortgage advisers and politicians claimed the regulations prompted banks and other lenders to become ‘‘ultra conservative’’, declining loans they would previously have made.

In a letter to lenders and finance industry associations yesterday, the competition and consumer policy unit of the Ministry of Business, Innovation and Employment confirmed how the responsible lending code would be updated. Lenders would not need to ask about borrowers’ recent bank transactions and living expenses breakdowns would need to be benchmarked against ‘‘robust statistical data’’.

The changes removed regular savings and investments as examples of outgoings that lenders need to account for when assessing a borrower’s likely expenses. Some people had reported having a higher KiwiSaver contribution rate had counted against them, because banks assumed that contribution level would continue.

If a lender estimated expenses from recent bank transaction records, they could also ask how borrowers’ expenses were likely to change after the loan was approved. Brokers had complained banks had assumed current expenses would continue once a mortgage was issued, allowing no leeway for borrowers to adjust their spending when they had a loan to repay.

A ‘‘reasonable surplus’’ was no longer required if a lender applied adequate buffers and adjustments.

The changes also included guidance for when it was ‘‘obvious’’ that a loan was affordable.

The requirement to obtain information in ‘‘sufficient detail’’ related only to information directly from borrowers, not information from bank transaction records.

The changes, made after feedback from banks, other lenders and consumers, will come into force on July 7. The update aimed to tackle the most pressing problems while the final report is due to be released in July.