Why is the review required?
In formally commencing the review, the Minister of Commerce and Consumer Affairs, David Clark, said that it was important to ensure that the amended CCCFA was working “as it was intended.”
The key issues relate to the new responsible lending laws which took effect on 1 December. Those laws were first introduced in 2015 with the objective of ensuring that consumer loans were suitable and affordable for borrowers, including by requiring that lenders make "reasonable inquiries" of borrowers before issuing loans. The regime was originally intended to be flexible and principles based and was drafted to allow a range of approaches to meeting the various requirements.
However, on 1 December 2021, the responsible lending rules were supplemented by very prescriptive regulations. In particular, the new obligations mandate inquiries which lenders are required to make when issuing credit, and require lenders to look at a borrower’s financial situation in a high degree of detail, including criteria for estimating and verifying a borrower’s income and expenses. The regulations have been criticised for their complexity, and create significant uncertainty for lenders. As noted in our previous article, they also result in materially longer and more complex application processes for borrowers.
At the same time, the penalties for breach of the responsible lending rules have become significantly more severe, including new pecuniary penalties and liability for statutory damages. That combination – uncertain obligations carrying material enforcement consequences if breached – is likely to make lenders very conservative in their approach to approving credit applications.
As a result, the changes have resulted in more borrowers facing difficulty in obtaining credit. Headlines such as “Shopping trip affected mortgage approval”, “Therapy seen as loan risk” and “New lending rules causing credit crunch” capture the high-profile consequences of the new reforms.
What do the Terms of Reference provide?
In response to concerns about the impact of the changes, the Minister has asked the Council of Financial Regulators (COFR) to conduct an investigation. The Terms of Reference, published on Monday (here), confirm that:
- The investigation will be led by MBIE. The other member agencies of the COFR (the Treasury, the Reserve Bank, the FMA, and the Commerce Commission) will provide other input to the investigation including reviewing the conclusions.
- The objective of the investigation is “to identify any impacts of the recent CCCFA changes” and to “assess what, if any, further actions are needed.”
- The scope of the investigation will cover the “intended or unintended impacts, beyond those expected” of the changes that came into force on 1 December 2021.
- The focus is primarily in relation to mortgage lending, but other lending by banks and nonbank lenders will also be considered.
- The lines of inquiry comprise: examining observable changes in consumer credit markets; investigating the causes of those changes; evaluating the “CCCFA impact”; and identifying appropriate actions.
While the review will offer some hope of greater clarity for participants in the consumer credit market, the Government’s announcement was circumspect and made no concessions or promises of change. Rather, in introducing the Terms of Reference, David Clark noted that the clear downturn in lending approvals could be due to “global economic factors at play, and wider economic factors” and warned against “jumping to conclusions.”
The Terms of Reference confirm that initial advice is anticipated in early-mid February, followed by further analysis in April. David Clark also confirmed that he has asked the heads of the country’s major banks to meet with him this week.
It is likely that further details of the enquiry, and the process for engaging with the COFR, will be outlined following the initial advice in February. Until then, borrowers and lenders must continue to grapple with the new consumer credit framework.