CCCFA Changes and Unintended Consequences

Author Robert Louis Stevenson once wrote the “Sooner or later everyone sits down to a banquet of consequences.” It’s a fair observation to make and is applicable to virtually every action (or lack of) taking place in modern life, with the number of courses often determined by lack of forethought or planning from the offices of authority. When looking through the lens of consumer finance, New Zealand as like many other countries across the globe strive to strike a perfect legislative balance between business enablement and consumer protection, while simultaneously overseeing the wellbeing of the local economy through regulation. 

The end of 2021 ushered in changes to responsible lending requirements under the Consumer Credit Contracts and Financing Act (CCCFA). Since this time, providers of consumer finance have been required to tighten controls on lending by adding additional scrutiny at the application stage. Focusing on due diligence, advertising practices and disclosure, credit providers have invested time and resources into protocol and process design to ensure the best chance of compliance under the legislative amendments.

However, market reporting’s since the December 2021 amendments have highlighted a significant drop in accepted applications, while corresponding demand for applications have also fallen drastically. These changes have impacted lending from mortgage applications, refinancing and other forms of consumer credit. Angus Luffman, Managing Director of Equifax NZ reported that in the first quarter of 2022 demand for consumer loans was down 32% compared to for the first three months of 2021, with home lending enquires down by 42% year on year for the march quarter.

To add to the reduction in demand, Centrix’s Keith McLaughlin stated in a Newstalk ZB interview, that it was not only higher risk borrowers affected by the changes to the legislation. For consumers with favourable credit risk profiles “conversion rate of loans dropped quite dramatically- down about 5 or 6 percent on home loan and up to around about 7 or 8 percent on personal loans”. Drilling down further into the details, McLaughlin noted “Those who are high credit risks (that is with a low credit score) were less impacted than those who had a high credit score and were a lower risk.” When asked if the legislative amendments that had set out to protect vulnerable consumers, the answer was that it impacted the wrong side of the risk spectrum considering the intention driving the changes.

The overwhelming response from both lenders and borrowers alike has been that unrealistic scrutiny around transactional spending habits has led to a significant increase in application processing times to allow for the prescribed due diligence. For lenders, the result has been a decline in business coupled with the added investment of refining loan origination processes. For borrowers it often meant that they have been unable to peruse immediate financial goals often forcing postponement in opportunities or alternatively moving towards less palatable borrowing options.

As we progress further into 2022, the “unintended consequences” Minister David Clarke described in a recent cabinet paper in March are leading to further refinement of the legislation. Attention will be focused on making amendments designed to reverse the unexpected restrictions to credit access, to improve processing times by removing additional scrutiny and reducing unduly intrusive due diligence.

While news of reversing the overly restrictive due diligence requirements will be universally welcomed if done correctly, questions of the New Zealand’s economic stability have arisen resulting from CCCFA changes. Andrew Bailey- the National Party’s Building and construction spokesperson speaks about the two-pronged threat facing the one of the country’s largest employers – the construction industry.

“Builders are building up a lot of debt in existing properties” and when coupled with the shortage of essential supplies, builders and developers are “now starting to really haemorrhage” from a cashflow perspective and “if this industry gets into real difficulty, and we’ve seen signs of this already, it does have the potential to tip the economy into recession.” He further outlined his concerns that the industry employing over 200,000 people is not seeing effective support from lenders because of the “stupid CCCFA rules that have been put into place.” In his opinion, Mr Bailey says the CCCFA amendments are “still a massive problem” and “should have been fixed months ago.” In hindsight, he further reflects that the legislative amendments were ill-conceived stating “The mistake the that the minister made (David Clarke) is that… the new rules should have only applied to high-cost lenders. What he stupidly did was apply it to all lenders including banks.”

With widespread criticism of the December 2021 amendments to the CCCFA, Minister Clark has undertaken an investigation into the unintended consequences, and has determined that there is “little enthusiasm for wholesale changes to the Act, but instead a preference for some practical amendments to be made” after completing discussions with the banks, lenders, and consumers. These amendments  will focus on three components relating to future living expenses; the removal of savings and investments in affordability calculations, the collection of self-reported sufficient income and expense details, and providing alternative guidance when a loan is obviously affordable.

With the practical amendments scheduled to come into effect in July 2022, the construction industry (the fourth largest contributor to NZ GDP as of 2020) might breathe a sigh of relief, however, the question needs to be asked- have the unintended consequences described by Minster Clark already caused significant damage across multiple industries, and whether it might be a contributing factor to tip the New Zealand economy into recession? The proof will be in of course…the pudding.