Those amendments imposed detailed and time-consuming obligations on lenders when assessing credit applications. Following a subsequent decrease in lending volumes, and widespread criticisms of the amended laws, the government responded with an initial round of corrective changes which took effect in July 2022 (summarised in our previous update here).
As the government concluded in a recent report, the initial changes by themselves will not address “the other drivers of unintended impacts” arising from the 2021 amendments. Accordingly, three further amendments have been proposed.
- Narrowing the scope of expenses that need to be considered by lenders to more explicitly exclude discretionary expenses
Current position: Currently, the Credit Contracts and Consumer Finance Regulations 2004 (Regulations) require lenders to estimate likely ‘relevant expenses.’ That term, defined in wide-ranging detail, is not limited to the borrower’s minimum expenses but encompasses various expenses which are, by their nature, discretionary (for example, gym memberships or entertainment costs). This means that lenders are currently required to make long and detailed assessments into such expenses, which may appear unduly intrusive to many borrowers. It also increases the total estimate of expenses, making it more likely that a credit application is declined (even in situations where a borrower could ultimately afford to repay the loan by cutting back on discretionary expenses). As the Minister of Commerce and Consumer Affairs recently acknowledged, loans are currently being declined because applicants had “spent money on takeaways and streaming services,” which he noted “was not the purpose of the CCCFA.”
Proposed change: The Regulations will be amended to narrow the expenses which lenders need to consider, by excluding discretionary expenses more explicitly. This means that lenders would only need to estimate expenses that are necessary to borrowers, or which they would be unwilling to give up even if faced with substantial hardship. Importantly, it appears that lenders will be permitted to assess whether expenses are likely discretionary or not (and the Minister has indicated that additional guidance will be added to the Responsible Lending Code to identify what kinds of expenses could reasonably be classified as discretionary). On this approach, lenders would be free to assume that, for example, a Netflix subscription is a discretionary expense which does not need to be accounted for in the assessment of expenses. This would align the New Zealand position more closely with the finding of the Australian courts that discretionary expenses are not a proper reflection of affordability (see further here).
- Easing assumptions that lenders are required to make about revolving credit contracts
Current position: Currently, the Regulations include prescriptive requirements for the calculation of expenses arising on ‘revolving credit contracts’ (e.g. credit cards and buy-now pay-later schemes). For example, lenders are required to assume that borrowers with credit cards will draw down the full credit limit, and will make only the minimum required payment (or an amount sufficient to repay the credit contract within up to 3 years). If that can’t be calculated from readily accessible information, the lender must assume that the borrower will repay only 3.8% of the credit limit. The Cabinet paper discussing the proposed changes observed that these requirements fail to take into account borrowers who use such revolving credit facilities for day-to-day transactions and pay them off quickly.
Proposed change: The Regulations will be amended to remove or soften these mandatory assumptions. This could be achieved by excluding existing revolving credit facilities from the assessment of expenses, where the borrower routinely repays such facilities without incurring interest. The Cabinet paper notes the risk that after a loan has been advanced, a borrower may change their credit card spending (but suggests that this risk could be reduced by adding related guidance to the Responsible Lending Code).
- Expanding exceptions for refinancing of existing credit contracts
Current position: Currently, lenders have a narrow exception under the Regulations where one of their existing borrowers seeks to vary or replace a current loan (provided there are no new advances, and any increases to credit limits are limited to those reasonably necessary to reduce financial difficulties). Conversely, where a borrower seeks to refinance current debt with a new lender, the new lender cannot rely on that exception. That narrows the availability of the exception and limits the ability for borrowers to manage their debts through consolidation or refinancing with other lenders.
Proposed change: The Regulations will be amended to expand the scope of the existing exception to include refinancing of existing loans with third-party lenders where that would be in the best interests of the borrower. The Cabinet paper notes that this could be achieved by creating a new exception for any refinancing to third-party lenders which would result in equal or lower total repayments, or where the new lender is satisfied that the refinancing is in the best interests of the borrower.
The details of these proposed changes, which represent a welcome refinement of some particularly challenging aspects of the Regulations, will shortly be set out in draft amendment regulations. According to the Minister’s indicative timetable:
- On 22 September 2022, the draft regulations will be released for public consultation.
- On 20 October 2022, submissions on that consultation will close.
- In February 2023, the draft regulations will be finalised and approved.
- On 13 March 2023, the new Regulations will come into force.
If you would like further details on the proposed changes in advance of the public consultation, please get in touch with the authors or your usual Bell Gully adviser.