Credit Law Changes Cause Real Problems For “Limit” Borrowers
Sophie East is a partner at Bell Gully with expertise in banking and financial litigation, class actions and commercial litigation.
Richard Massey, is a Senior Partner and Regulatory Specialist on the Bell Gully Corporate Team
Concerns are growing in the credit industry that recent legislative changes will make life difficult for borderline borrowers. Bell Gully’s Sophie East and Richard Massey Explain | Content partnership
As a new chapter in New Zealand’s consumer credit regulation opens, commentators and industry players increasingly question whether new reforms to responsible lending rules are likely to achieve l target. The changes, originally designed to protect vulnerable borrowers, may ultimately restrict the supply of credit to those who need it most.
Major changes to the Consumer Credit and Finance Contracts Act, or CCCFA, came into effect in December. The changes introduce significant new penalties for lenders who violate responsible lending rules, with new broadly worded obligations that remain unclear in several important respects. This combination of factors creates a real deterrent for lenders to extend credit to âborderlineâ applicants who cannot clearly demonstrate that they can comfortably afford a loan.
Previously, the responsible lending regime was mainly principled, and responsible creditors could (after careful dialogue and reasonable inquiries, and ensuring that the loan was appropriate and affordable) lend to borrowers under a wide range of circumstances. . In addition, the consequences of the error were relatively limited and were generally limited to compensating the borrower concerned for the actual losses.
Now loan appraisals must follow prescriptive and very detailed regulations, which require, among other things, that affordability calculations must provide for a “reasonable surplus” or “buffers” (albeit of unspecified magnitude). In addition, the consequences of the breach have increased significantly and include statutory damages equal to all borrowing costs payable under the loan.
The result is that lenders will proceed with great caution, especially in the absence of concrete guidance from the Trade Commission on the enforcement approach it is proposing for the new regime. Last week, Anna Rawlings, the chairman of the commission, issued a statement noting that the changes should “provide greater consistency”. But, lenders will want a lot more clarity on the finer points of the new regulations. To what extent is a âreasonable surplusâ required? What benchmarks are acceptable for calculating expenses? What adjustments must be made for variable income?
Unless there are meaningful clarifications on the details of the regulations, lenders will continue to take a conservative approach, to the detriment of less fortunate borrowers. The unfortunate result is that these changes, which were intended to protect vulnerable borrowers from âloan sharksâ, make it all the more likely that many borrowers will have to seek credit from alternative sources.
There is therefore an urgent need for definitive and specific guidance on how the new regime is supposed to work, and how it will be monitored, in order to ensure that this new consumer protection legislation effectively protects consumers and avoids harm to consumers. impose greater hardship on the most vulnerable.
Bell Gully is a foundation that supports Newsroom.co.nz and has clients in the credit industry.
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