Changes to the Responsible Lending Rules underwhelm
Changes to the Responsible Lending Code (Code) and the Credit Contracts and Consumer Finance Regulations 2004 (Regulations) took effect on 7 July 2022. The changes follow a review by the Council of Financial Regulators. Many will remember that the review arose as Minister David Clark’s response to substantial criticism of the major reforms of the Code that took effect in December last year.
The changes are intended to relax some of the rules in the credit affordability – that is income v expenses – assessment. The key changes are as follows:
• savings and investments removed from the definition of expenses
• information from multiple sources not required where information provided by the borrower is obtained in sufficient detail to minimise the risk of relevant expenses being missed or underestimated
• ability to exclude certain expenses where the borrower advises a change in spending habits. For example, no more rent or takeaways after buying a house
• creditors do not have to ensure that borrowers have a reasonable surplus where their credit process already applies buffers or adjustments that adequately address the risk that income is overestimated and expenses underestimated; and
• a more detailed explanation (including worked examples) of how to apply the “obviousness exception”. This relates to the application of affordability criteria to high earning or high net worth borrowers.
The clarity around the obviousness exception is welcome. No real guidance was provided previously.
The removal of savings and investments from the definition of expenses is unlikely to affect many borrowers, particularly as KiwiSaver is not included.
The other changes are helpful. In particular, no longer requiring information from multiple sources should reduce the amount of work required. However, the general framework of the responsible lending regime, and the credit assessment exercise, remains intact. Accordingly, lenders will still need to conduct substantially the same credit assessment process.
The biggest criticism we hear from clients is that the rules prevent them from lending to existing borrowers who have proven that they can meet repayment obligations, despite questionable financials. This restriction remains, despite the changes.
Historically, there was an element of risk in consumer lending. A good credit manager could take a chance on a questionable borrower and still be repaid. Unfortunately, those days are now gone. People with some degree of risk, who rely on borrowing, are excluded from the market. This weakens their ability to participate in the economy in general. As such, a valuable opportunity for reform has been lost.
For more information on responsible lending please contact Mark Hopkinson or Mike Roberton.
