CCCFA reforms: Mortgage and banking associations supportive

Last week the government announced major changes to the Credit Contracts and Consumer Finance Act 2003 (CCCFA), aiming to reshape New Zealand's mortgage and banking industries by reducing barriers to homeownership and easing lending processes.

Commerce and consumer affairs Minister Andrew Bayly and housing minister Chris Bishop detailed the reforms, indicating that the overhaul is part of the National-ACT coalition agreement to support economic growth and reduce red tape.

The banking and mortgage industry largely welcomed the changes, with Leigh Hodgetts from FAMNZ, a newly formed mortgage adviser association, calling the “common sense” move welcome relief that “couldn’t come soon enough”.

However, not all are sold that the changes would have their desired outcome, with some saying it could “distract from the real problems New Zealanders are facing”.

Background to the CCCFA reform

While the CCCFA is over 20 years old, it regained attention in 2021 after the Labour government updated it to tackle issues related to loan sharks and predatory lending practices.

The revised regulations required lenders to adopt a “one-size-fits-all” approach when assessing a borrower’s ability to repay a loan. For example, lenders were required to treat all borrowers with the same amount of risk regardless of whether they want a $1,000 overdraft or $1 million home loan. 

This led to immediate backlash, throwing “a bucket of ice over banks and financial providers”, as Bayly put it, by prescribing “overly arduous checks” on borrowers.

“Lenders told me that a small loan that used to take two hours to process suddenly took up to eight hours,” Bayly said.

Bayly said this meant it was no longer affordable for many providers to offer small loans.

“It became very difficult for everyday Kiwis, who need $500 to fix their broken-down car, to access a safe line of credit,” he said. “They were effectively frozen out of the market and many vulnerable Kiwis were instead forced to borrow from high-interest loan sharks.”

While the Labour government tinkered with the policy last year and planned to further review it, they ultimately lost the election paving the way for the current government’s reform.

CCCFA reform: What is expected to change?

With the government revoking 11 pages of the affordability regulations, the latest announcement is “only the first phase of reforms”, according to the joint statement.

Still, there was plenty announced along with removing the affordability regulations:

• Expanded exemptions: Councils are now allowed to offer low-risk financial products like voluntary targeted rates for home improvements without additional credit checks. Car dealers and companies primarily focused on non-financial goods and services also fall under this exemption.
   
• Shift in oversight: The administration of the CCCFA is moving from the Commerce Commission (ComCom) to the Financial Markets Authority (FMA).
   
• Remove duplicate reporting requirements: The Financial Services Complaints Ltd (FSCL) and the Insurance & Financial Services Ombudsman Scheme (IFSO Scheme) are confirmed to be in the process of merger together. The two dispute resolution services, which account for around 90% of financial services complaint cases excluding banking, believed there will be “positive gains”.

New mortgage adviser association responds to reform

The Finance and Mortgage Association of New Zealand (FAMNZ), which opened for adviser membership in April, expressed support for the government's commitment to reduce barriers to consumer lending.

FAMNZ Managing Director Peter White said the "one size fits all" requirements around loan affordability assessments were unrealistic and did not take into account the unique circumstances of each individual or family.

He stressed that lenders have their own assessment criteria and, “it’s clearly not in their financial interests to lend money to someone who can’t afford it.”

“The government shouldn’t be in the business of telling citizens how much pizza they should consume,” White said.

“We commend the government for not only honouring its promise but for taking steps to allow more people to own homes and opening the market for more relevant affordability criteria.”

Hodgetts, the newly appointed FAMNZ country manager New Zealand, applauded the decision to shift oversight from ComCom to FMA. She also thought the decision to merge the IFSO Scheme and the FSCL will lead to better dispute resolution services for consumers.

“It’s sensible, logical, and it’s really good to see they are moving fast with untangling the financial services sector.”

Banking industry's reaction

The New Zealand Banking Association (NZBA) also welcomed the changes, with chief executive Roger Beaumont highlight that the changes would allow banks to exercise flexibility and discretion to better meet customers' needs, especially in emergency situations.

“We look forward to working with officials on Responsible Lending Code guidance, to get the balance right and help ensure we don’t see a prescriptive approach reintroduced,” Beaumont said in a press release. 

“We are also pleased to see moves to simplify other matters in the CCCFA, especially personal liability for directors and senior managers, and the requirements for disclosure of information to borrowers. We will work constructively with the government on these changes.”

CCCFA reform concerns

However, there are some concerns emerging within segments of the financial services industry.

Debt Relief Foundation (Debtfix) CEO Christine Liggins, in an article published by Voxy, cautioned that the proposed changes might lead to unintended outcomes, stating that they could have "the opposite effect" of what is intended.

"At a time when the cost of living is soaring, and personal debt levels are at their highest in years, we need to question the wisdom of these changes." Debtfix, which provides debt solutions to New Zealanders in financial distress, has seen a 25% rise in demand for its services over the past year.

Liggins noted that many individuals struggling financially attempt to borrow their way out of debt, creating a cycle that worsens their personal debt crisis. With the proposed relaxation of affordability assessment rules, there's a risk that more people could end up in this situation.

"We are grappling with a genuine debt crisis. While we appreciate the intent to broaden access to home lending, we fear that the proposed changes could have far-reaching implications across all lending sectors. The most unscrupulous, high-cost lenders could exploit these changes, leading to dire consequences for borrowers."

The bottom line

The intention of the CCCFA rewrite walks a narrow path: to safeguard vulnerable consumers while avoiding excessive restrictions on credit access.

As the first phase of financial reforms takes effect, the government plans to open public consultation to gather feedback and continue refining the regulations for better outcomes.