FIRST HOME BUYERS GUIDE: CREDIT CONTRACTS & CONSUMER FINANCE ACT

Tired of being told you need to say ‘no’  to avocado on toast in order to get onto the property ladder?

Buying your first home is a challenge, and for the average person it seems as though the odds are stacked against you from the get-go. Recently things have got even tougher with the banks’ reactions to the 2021 amendment of the Credit Contracts and Consumer Finance Act (CCCFA), which kicked into effect at the end of last year.

Let us give you the low down on how this impacts you as a borrower, and what it means on your quest to get those first home keys.

The Original Act

The CCCFA was originally passed into law in 2003. This law protects you as a borrower when you are borrowing money, setting out rules that the lender must follow when lending you that money. The Act is concerned with more than simply bank mortgages: credit cards, overdrafts and cash loans are all covered too. If you are a private individual that borrows money or buys goods on credit for predominantly personal, domestic or household purposes, then you have entered a consumer credit contract and have rights under the CCCFA.

Your lender must give you information upfront (including information about fees, defaults and penalties) before you sign anything so that you can make an informed decision. This is called ‘disclosure’. The lender needs to inform you:

• The total amount you’ll have to repay, including interests,
• What repayments, and when they are due,
• What interest rate(s) apply and what fees are payable,
• How you can cancel your loan/credit, and
• What you must do if you get into financial trouble.

The lender must also routinely update you during the term of your loan of any changes and how much you have left to pay.

Post Global Financial Crisis

In the period directly after the 2008 Global Financial Crisis and ensuing recession, ‘non-bank lenders’ such as building societies and credit unions (also referred to as second- or third-tier lenders) began to multiply and target the new market of people whose credit was impacted and were therefore turned away from nation-wide banks (known as ‘first-tier’ lenders).

Loan sharks and unscrupulous lenders began targeting vulnerable and desperate people with little consequences. A long-running review of the industry from 2009 to 2014 resulted in the 2015 CCCFA Amendment Act, which was intended to target these bad actors.

2021 Changes

Many believed the 2015 changes did not go far enough to capture bad lending practices, which were proliferating again due to the skyrocketing cost of homes and living. Thus, the 2021 Amendment Act was brought in with the strictest rules yet.

The new rules included:

• Detailed standards for lenders assessing the affordability and suitability of loans,
• Additional record-keeping requirements on lenders and duties on their directors and senior managers,
• A new certification regime that requires all lenders under a consumer credit contract to be required to be certified by the Commerce Commission (with certain exemptions, like banks or licensed insurers),
• Responsible advertising standards, and
• Greater transparency and access to redress before debt collection starts.

These measures sound great! So why did we hear of someone turned down for a loan because of a trip to K-Mart or a cheeky Uber Eats order?

The Impact

Banks have largely begun to reduce their lending. Media commentary suggests that the CCCFA is a major factor in that decision, but it is not the only reason. The global economy is changing rapidly, and there have been increases to the Official Cash Rate (OCR), Loan Value Ratio (LVR) and a continuous increase in house prices and local government rates. The Reserve Bank’s December 2021 figures also cite seasonal variation as a prominent contributor.

The CCCFA includes ‘responsible lending obligations’ and these obligations were originally introduced in the 2015 Amendment Act. These obligations included new requirements on lenders to make “reasonable inquiries” of borrowers before issuing loans, and to assist borrowers to make “informed decisions”. It was intended to be flexible and “principles based” but was generally found to be far too broad – lenders were unsure of what was permitted, and the Commerce Commission had a hard time identifying and punishing the breaches of bad actors.

The 2021 Amendment Act clarified these regulations by prescribing new requirements around the suitability and affordability tests which lenders must conduct before issuing a loan to a borrower; and also requirements around advertising of consumer credit contracts. A lender must enquire around the purpose of the credit, the term the loan was required for, and the amount needed. Crucially, the lenders must identify and be satisfied whether the borrower can make repayments without suffering substantial hardship, and banks took a very cautious approach to ensuring their compliance with these rules.

The Update

On 11 March 2022, the Government updated the responsible lending rules in response to the impact of the above amendments. The updated rules include:

• Clarifying that when borrowers provide detailed breakdown of future living expenses there is no need to inquire into current living expenses from recent bank transactions,
• Removal of regular ‘savings’ and ‘investments’ as examples of outgoings that lenders need to inquire into,
• Clarifying 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, and
• Providing alternative guidance and examples for when it is ‘obvious’ that a loan is affordable.

There is a continuing investigation led by the Ministry of Business, Innovation & Employment and the Council of Financial Regulators, into the early implementation of the 2021 CCCFA amendments. This investigation is due back to the Government in April 2022. The 11 March 2022 update will likely not be the last adjustment, and you should expect further changes after this report comes back.

The Takeaway

As the writer of this blog, I would recommend treating the banks like a potential employer and the loan application process like a job interview. This means doing your research and knowing a bit about the lending rules and your financial position. Gather a home-buying team before you set foot inside a bank.

The writer’s first home buying team comprised of myself, my partner, our lawyer, our mortgage broker, and our parents (for moral support). We were lucky enough to sneak in before the Loan Value Ratio change, so were able to get a loan from a first-tier lender with a 10% deposit. This would be unlikely to happen today, not even a year on.

If your deposit is low, you may need to look to second- or third-tier lenders. If you are faced with this option, you should absolutely get a lawyer on board early as there are far more risks involved with these lenders.

Undoubtedly the 11 March 2022 update should take the pressure off. Time will tell for certain. At the end of the day, your cash savings, money for a deposit, available KiwiSaver and income is likely to be far more important than your spending habits, and lenders have now been reminded of this.

So go out and buy your avocado on toast, head to K-Mart and return home and order that Uber Eats! Just maybe not everyday.

Our experienced solicitors have supported many first time buyers in getting themselves onto the property ladder. If you would like to have Wakefields Lawyers be a part of your first home buying team, contact us on 04-970-3600 or email info@wakefieldslaw.com.

–  Sam Wood (Solicitor)