The Credit Contracts and Consumer Finance Act (CCCFA) sets out rules that lenders must follow when lending money to consumers. When you borrow money (ie. for a mortgage), the CCCFA ensures you are able to make informed choices, know what you’re agreeing to, and can keep track of your debts.
The CCCFA requires lenders to act responsibly at all times. It provides protection when you:
- take out a personal loan or mortgage
- use a credit card
- borrow money on an agreed overdraft
- buy products and services on credit (sometimes called hire purchase)
Changes to the CCCFA
A Government review of the CCCFA legislation in 2018 resulted in a range of new rules being implemented over the past two years which ranged from tougher penalties for irresponsible lending to interest-rate caps on high-cost loans or payday loans. These changes were aimed at protecting vulnerable consumers from bad debt and preventing them from taking on too much debt.
In December 2021, the Government made some more changes to the CCCFA which included the following:
- New prescriptive requirements for lenders to follow when assessing the affordability and suitability of loans.
- Duties on bank directors and senior managers to exercise due diligence and penalties (of up to $200,000) for failing to comply.
- New minimum advertising standards
- Additional disclosure requirements before debt collection begins
These new rules required lenders to assess whether a loan was suitable for the borrower and to ensure the borrower could make repayments without suffering financial hardship. To achieve this, lenders had to make “reasonable inquiries” into borrowers financial information to make this assessment and could not rely solely on information borrowers provided. This resulted in lenders requesting for a lot more financial information from borrowers, and then going through borrowers spending habits with a fine-tooth comb and to scrutinize their income, credit score and any other debts such as buy now pay later payments.
It was understood previously that borrowers spending habits would change once a house is purchased. To pay the mortgage, borrowers would cut back on luxuries, like daily coffees and multiple takeaways, but with the CCCFA changes, a lender must be confident that the borrowers expenses are under control before their loan could be approved.
As a result, these changes had a negative flow on effect to borrower-ready kiwis, who had their applications declined unexpectedly, even when it was ‘obvious’ that they could afford the loan.
What will change from the 7th July 2022?
The Government has recently confirmed that they will loosen the rules under the CCCFA and these changes will come into force on 7th July 2022.
These changes will include the following:
- Remove the need to capture regular 'savings' and 'investments' as an expense
- Clarify that when borrowers provide a detailed breakdown of their future living expenses, and these are benchmarked against robust statistical data, there is no need to also inquire into their current living expenses from recent bank transactions
- Clarify that when lenders estimate expenses from recent bank transaction records, they can ask the borrower about how expenses are likely to change once the contract is entered into
- Clarify that the requirement to obtain information in 'sufficient detail' only relates to information provided by borrowers directly rather than relating to information from bank transaction records.
- Provide further guidance that a 'reasonable surplus' is not required if the lender has applied adequate buffers and adjustments to income and expenses
- Provide alternative guidance and examples for when it is 'obvious' that a loan is affordable, such that a full income and expense assessment is not required
In essence, they will be removing the need for lenders to scrutinize borrowers current living expenses and bank statements and the need to interrogate borrowers about their expenses and outgoings. It will be back to being more about having good in-depth conversations with potential borrowers, and ensuring they are making sound financial decisions.
Want to find out more?
The team at Wayne Henry Mortgages are available to chat anytime about how these changes may affect you.
