Recent changes to the Credit Contracts and Consumer Finance Act (CCCFA) have made banks less likely to approve loans. The changes, which came into force in December of 2021, aim to limit the abilities of institutions in creating unfair loan agreements. However, the interpretation of these new amendments has led to the failure of many loan applications which, previously, would have likely succeeded.

The aim of the CCCFA Amendment Bill is to strengthen the responsibilities of creditors, particularly when it comes to determining the eligibility of an individual seeking a loan. This creates issues in how to strike a balance between the autonomy of the debtor in seeking a loan, and the responsibility of the creditor in granting it. The responsible lending rules can be found in Section 9C of the CCCFA. The amended section 3(a) states the lender must, before entering the agreement as well as before making any material change, be satisfied that it is likely the credit will both meet the borrower's requirements, and that the borrower will make the payments without encountering substantial hardship. The subjective element of this section may lead to creditors interpreting the legislation widely to avoid liability. By increasing the responsibility of the creditor in investigating the debtor's financial history, and subsequently creating higher penalties for ill-considered lending, banks are more reluctant to approve loans. This is evident in the fact that last December loan approvals dropped from an average of 30,000 to 23,000 per month.

Most commentators agree that these changes have had unintended consequences for those seeking to borrow to buy a home. In response government has tweaked the lending rules (see press release from David Clark Consumer and Commerce Affairs Minister https://www.beehive.govt.nz/release/govt-updates-responsible-lending-rules), so that in summary:

a.Banks can take people's word for it regarding what their expenses will be if they get a mortgage, rather than feeling they have to assume past spending based on detailed bank statements will continue.

b.Banks no longer have to effectively treat regular savings and investment "spending" as expenses.

However, prominent Auckland mortgage broker Stephen Robertson of My Money says "The reality is the review [led by MBIE and the Council of Financial Regulators, into the CCCFA amendments] will take until June at least to unwind the situation. Mortgage advisers are required to reconcile clients bank and credit card statements to confirm their income and expenses against what has been disclosed on the application form. When these do not match advisers must present the actual expenses being paid."

Until the review/inquiry (as referred to above) is complete and meaningful clarification of the legislation is provided, be aware that in borderline cases spending habits, which have not previously prevented you from having a loan approved, may be brought under the microscope.

Written by Blair Franklin (Property Partner)