The Government was repeatedly warned over a period of more than three years that changes to lending laws could cut people off from mortgages they could likely afford.

Since new lending changes came into force at the end of last year, people have reported having mortgage approvals declined for reasons as simple as a trip to Bunnings, or having too many subscriptions, despite being apparently creditworthy.

In 2018, the Government announced a review of lending laws, as part of a drive to clamp down on payday lending, and people taking on debts they could not afford.

The law change that emerged from that review was to make sure that small loans could not spiral into large debts. But other parts of that law change, designed to ensure that lenders were lending to people who could afford the sums of money they were borrowing, have apparently been too restrictive.

These changes were not in the original legislation, but were left to officials to regulate; those regulations came into force on December 1 last year, which is why we are seeing the effects of the change now.

Banks, the organisations that do the most lending, have warned since the 2018 review about the risks of getting those regulations wrong. For more than three years, banks warned that overly prescriptive regulations would see them trim back lending more than what the Government intended.

Government calls review into dodgy lenders

In a submission to the 2018 review, the New Zealand Bankers Association, an industry body that represented the banks, warned against overly prescriptive regulations, noting that most banks “already have prescriptive requirements for conducting” lending assessments.

On the back of that review, the Government introduced legislation curbing predatory lending and high-interest loans. The legislation was designed to ensure people did not fall into punishing levels of debt, and become trapped by onerous penalties.

When the bill was before select committee, the banks warned that the regulations (which had not yet been published) could have the unintended consequence of cutting some borrowers off from credit.

The bill introducing those changes was introduced and passed in 2019, and at the end of that year, MBIE published an exposure draft of the new regulations, getting further feedback from banks and other lenders.

In both rounds of submissions, banks warned that overly prescriptive regulation would likely lead to people with good incomes being declined loans, despite probably being able to service those mortgages.

The bill changed the way banks and other lenders tested whether a potential borrower could service a mortgage without getting themselves into hardship – essentially, it meant banks and other lenders had to do a far more detailed investigation into a potential borrowers’ finances (so much so, that one bank, BNZ, wondered whether there might be privacy concerns).

Banks warn prescriptive regulation will limit lending

A 2019 submission on the main bill from BNZ, warned that while the regulations could mean “a number of circumstances in which inflexible prescription is likely to lead to poor customer outcomes”.

In fact, the Bank warned that the new regulations could lead to something amounting to credit self-censorship, where banks adopted an overly conservative approach to lending to ensure they maintained their status as responsible lenders under the law, and to avoid the stringent penalties set out in the legislation.

Banks were worried the legislation and penalties would almost work too well – stopping lenders from extending credit, even when a borrower might scrape in under the new regulations.

“Prescriptive requirements may encourage compliant responsible lenders to adopt overly-conservative approaches to affordability and suitability, possibly restricting access to credit for customers who might otherwise be eligible for a loan,”BNZ wrote in a submission.

BNZ argued that instead of a prescriptive model, “discretion as to the application of the Lender Responsibility Principles is retained in certain circumstances”.

The bank warned that people who used cash, people who had variable income, and people who did not have a long financial history in New Zealand like new migrants or refugees, would likely struggle to meet this threshold.

New Zealand’s largest lender, ANZ, took a similar view saying that instead of the Government’s prescriptive approach, “flexibility” would be “critical to avoid restrictions on credit for those who do not fit neatly into defined categories”.

ANZ said that “‘One size fits all'” will not work ─ prescriptive rules will not suit all types of credit”.

“Excessively prescriptive rules will inevitably lead to poor customer experience and limit access to credit that is otherwise considered responsible,” the bank said.

“Vulnerable borrowers may find it even harder to access mainstream credit options. The low paid, immigrant and refugee groups, first home buyers, and those trying to rehabilitate their lives will struggle to access credit if rules become too prescriptive”.

New regulations will cull lending levels – banks

Submissions on the 2019 regulations suggest some of the banks’ fears had come to pass – the Government had pushed on with what the banks alleged was inflexible, and prescriptive regulation.

The Bankers’ Association, submitting on those regulations, decried them as being excessively inflexible.

It suggested that the Government make a distinction between banks, and the kinds payday high-cost lenders that it was really trying to regulate.

“[P]rescriptive or additional regulation for banks is not necessarily required,” the association wrote, noting that the banks are already subject to some regulation of this kind from the Reserve Bank and – in the case of the big Australian-owned banks – from the Australian banking regulator, Apra.

The Association warned that vagaries in the definitions used in the regulations could mean borrowers getting stung for something as simple as extending their overdraft limit by just $50.

The Association also warned that despite its members wanting less prescriptive regulations, the Government’s draft rules were both too prescriptive and not prescriptive enough. The Association warned that “ambiguity and inconsistencies” in the regulations would mean banks once again deciding to interpret the rules conservatively, meaning that again, some people who might qualify under the new rules would miss out.

“NZBA members have zero tolerance for non-compliance with legislation,” the Association said, meaning a “conservative interpretation” would be applied, rather than taking a chance with borderline cases.

The Association did not leave officials guessing about the scale of disruption the regulations might cause, warning that there could be wider economic impacts ” significant tightening in the availability of credit goes deeper than is envisaged”.

ANZ’s submission on the regulations reiterated they were “too prescriptive, and will inevitably lead to poor customer outcomes”, including limiting “access to credit that is considered responsible”.

Like the Bankers’ Association, ANZ recommended further detail around the sorts of spending activities that would need to be looked at by lenders – things like what a person’s existing debt repayments cost, and clearer distinction between discretionary and non-discretionary spending.

The bank said that the draft regulations would mean that things like gym memberships – that could easily be cancelled if the borrower got into trouble.

“In our research, people talked about ‘leftover money’ when thinking about discretionary spend, or ‘optional extras – the first to go if money is tight’ and ‘things I choose to spend money on,” ANZ’s submission said.

“Not all discretionary expenses will be, or should be, relevant to a responsible lender’s affordability assessment, and some may be included within general living expenses (like spending on cigarettes included with groceries).

The bank used two further examples: One, spending money on things like newspapers and coffee – the spending is discretionary, and it is regular, but the amount was ” small” and therefore “unlikely” to have an impact on that person’s ability to afford a loan.

Other sorts of discretionary spending included holidays, which, while expensive are “discretionary and not regular or frequently occurring”.

ANZ suggested that the Government reword that regulation to make it clear that the frequently occurring discretionary expenses that counted against someone’s ability to borrow, would only be things they were not willing to cancel or give up.

The Government accepted this advice and changed the wording in the final regulation to “regular or frequently recurring outgoings (for example, savings, investments, gym memberships, entertainment costs, or tithing)” that are “material” to the estimation of relevant expenses – those expenses had to be ones that the borrower was “unable or unwilling” to cancel.

However, it appears the changes the Government made were not sufficient to stop the banks cutting back on lending.

The banks and the Government now appear to be in a standoff with the Government questioning whether the tightening of lending is really down to the CCCFA changes or whether the banks are using the law change as an excuse to cut back on lending and let the Government take the public relations blame.

Commerce and Consumer Affairs Minister David Clark has ordered an inquiry into whether banks have overreacted to new lending rules.

He said that it was possible that banks trimming back on lending was due to global economic conditions.

“I have asked the Council of Financial Regulators (Reserve Bank, the Treasury, Financial Markets Authority, MBIE and Commerce Commission) to bring forward their investigation into whether banks and lenders are implementing the CCCFA as intended,” Clark said.

“Banks appear to be managing their lending more conservatively at present, and this is likely due to global economic conditions.

“It may also be that in the initial weeks of implementing the new CCCFA requirements there has been a decision to unduly err on the side of caution,” Clark said.

He noted that with a rising cash rate, loan-to-value ratio changes, and increases in house prices and rates could be having an effect on banks limiting lending.

Bankers’ Association chief executive Roger Beaumont said that the changes had “tightened banks’ ability to lend”.

“There’s much less room for discretion than was previously the case,” he said.

He said the regulations were “detailed and prescriptive”.
“We welcome any investigation into the unintended consequences of the new lending rules. In our submissions on the CCCFA law change and new regulations we’ve set out our concerns all along the way.

“It turns out we were right,” he said.

Clark was approached for comment.

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