The Committee has proposed extensive additional amendments to the CCCFA, including wholly new provisions which had not been included in the original Bill, and therefore were not the subject of submissions. Some of these changes carry significant implications for New Zealand lenders.
The key changes in the report include:
1. Affordability and suitability tests now required for “material changes"
- The CCCFA currently requires lenders to make reasonable inquiries into the affordability and suitability of loans before entering into agreements with borrowers.
- The amended Bill now requires lenders to take the same steps when making “material changes" to the loan. Material changes will be defined as increases to a credit limit, or making an additional advance which the lender “did not take into account" when previously making affordability and suitability inquiries.
- Creditors will also be required to refund insurance premiums if they have breached their obligations to make reasonable inquiries before an insurance contract is entered into under the responsible lending provisions. They would also be required to release consumers from guarantees where they have breached their obligations to make reasonable inquiries before a guarantee is given.
2. Calculation of fees
- The original Bill included a requirement to demonstrate to the Commerce Commission, upon request, that credit fees and default fees were not unreasonable at the time they were set.
- The Committee has now expanded this requirement to require lenders to change their fees when they know, or reasonably ought to know, that there has been a change in their business or costs that is likely to affect the reasonableness of the fee.
- This expands on a similar recommendation in the Responsible Lending Code and will heighten the importance of regular fee reviews.
3. Requirement for annual returns
- Lenders will now be required to provide annual returns to the Commission with data on their lending in order to inform the Commission's monitoring and enforcement approach.
- The contents of the annual return will be prescribed by regulations, but “may include a requirement to provide statistical information in relation to the creditor's business (including its loan book)."
4. Cap on fees and interest
- The original Bill proposed capping total interest and fees to 100% of the principal. This would only apply for “high-cost" loans (defined as loans with an annual interest rate of 50% or more, or under which the weighted average annual interest rate applied to the unpaid balance is, or is likely to be, 50% or more on any day during the life of the contract).
- That definition will now be extended to include contracts where the total interest charged (including default interest) is or is likely to be 50% or more on an unpaid balance in the event of default or the credit limit being exceeded.
- This cap will now be reviewed by the Minister every three years. The Minister must consider whether to reduce the threshold rate to between 30% and 50%.
- In addition, daily charges on high-cost loans (i.e. interest and fees, but excluding default fees) will be capped at 0.8% per day. This was a highly contentious change and follows extensive submissions on the effectiveness of rate caps.
- Compound interest will also be prohibited on high-cost loans.
- Default fees on high-cost loans will also be limited to $30 (or another amount set by regulations) unless the creditor can prove another fee is reasonable.
5. Securitisation and Covered Bond arrangements
- New regulations will govern how the proposed “due diligence" obligation for directors and senior managers of a creditor will apply to circumstances that relate to securitisation or covered bond arrangements or similar arrangements.
- The draft provision states this “may include requiring the directors and senior managers of a contract manager to exercise due diligence to ensure that a creditor complies with its duties under this Act."
- The Bill does not directly address whether record-keeping obligations, regarding the inquiries made of borrowers or the calculation of fees, will apply to trustees in the context of securitisation or covered bond arrangements and other similar arrangements. It therefore seems likely that trustees will, technically, be required to comply with the record-keeping obligations and so appropriate arrangements will need to be entered into with contract managers.
6. Advertising and disclosure
- The Bill also enables regulations which would provide for new binding, enforceable advertising standards for consumer credit contracts.
- As for the detailed requirements proposed in the original Bill regarding disclosure in other languages where creditors advertised in those languages, this will be simplified under the amended Bill. Lenders will be required to take “reasonable steps" to provide information that will assist borrowers to make an informed decision, and must do so in any language in which they have advertised.
- Additional disclosure requirements have been added in relation to the creditor's dispute resolution scheme and financial mentoring services for hardship applications, specified complaints and where a creditor declines an application for a high-cost consumer credit contract.
7. Other changes
- A credit sale under which a mobile trader supplies consumer goods to a natural person has been included so that it is now a credit contract and a consumer credit contract under the CCCFA.
- Controlling owners (that is, owners with beneficial ownership of 50% or more) of creditors and mobile traders will be excluded from the requirement to be assessed as fit and proper persons in order for the lender to be certified under the CCCFA. If such owners occupy a position that allows them to exercise significant influence over the management or administration of a company, they would need to be assessed as a senior manager.
The proposed changes were originally due to take effect on 1 March 2020. In response to submissions noting the difficulty of implementing new policies and systems before that date, there has been a partial deferral: most of the changes will now take effect at a time of the Government's choosing, but by 1 April 2021 at the latest. Nevertheless, given the scale of the changes proposed, lenders will need to move quickly to ensure compliance with these new obligations when they come into force.
We will continue to track the progress of the Bill. If you would like further details, please get in touch with the authors or your usual Bell Gully advisor.