Business journalist Daniel Dunkley is a regular contributor to The Opinion.
Opinion: The new year has unleashed a new problem for New Zealand borrowers, as thousands of mortgage holders and potential first class home buyers face the government’s recently amended Credit Contracts and Consumer Finance Act (CCCFA) (CCCFA) for the first time.
The law, which took effect on December 1, forced banks to take a forensic approach to consumer lending.
Horror stories emerging from the new “ultra-conservative” rules include one person who was told they spent too much on a pet, another who refused despite having a 57 percent deposit, and reported people from their banks that they got $18. Netflix monthly subscriptions.
The legislation, passed in 2019 under the Labor-led coalition, has wreaked havoc for banks, who appear unsure of how deep it has gone.
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This agreement has been described as a credit crunch caused by the government, and it has left many first home buyers in an impossible situation. Some were forced to live as “hermits” to pass bank loan service tests.
Others have given up searching for their property altogether, succumbing to being trapped in the rental trap.
Homeowners’ stories highlight the unintended consequences of the law initially designed to curb predatory and exploitative lending similar to shark loans.
And while first home buyers bore the brunt of the new law, small business owners also felt a huge impact during the early weeks, according to those in the housing loan market.
As many Kiwi small business owners know very well, it is very difficult to raise unsecured debt financing. Since the outbreak of the pandemic, banks have become more reluctant to offer commercial loans, which are considered to have a higher risk than mortgages.
Banks’ preference for lending to homes rather than businesses is well known, driven in part by risk weighting rules, which motivate New Zealand lenders to write less risky mortgages. The rules effectively make it easier and more cost-effective for banks to pursue home lending.
In contrast to the booming mortgage lending market, secured lending against corporations remains broadly flat at pre-pandemic levels, according to Reserve Bank data, reaching $123 billion in November, up slightly from $120 billion in lending in November 2019, although From a period of strong economic growth. Lending experts say banks are particularly wary of companies that have received Covid support.
Over the past year, banks’ reluctance to offer business loans has led many small and medium business owners to borrow against their family’s homes instead. Now, with the door closed under the CCCFA, small business owners are running out of financing options, often turning to non-bank lenders.
While non-bank institutions are more flexible and willing to lend, they usually charge much higher interest rates.
A recent survey by non-bank lender Prospa last year confirmed the problems SMEs faced even before the CCCFA changes. According to the company, 57 percent of small business owners said they have found it more difficult to obtain an unsecured loan since the pandemic.
According to mortgage brokers, small businesses have started to run into more hurdles in recent weeks as they look to borrow against the family home.
John Bolton, founder of Mortgage Advisory Group and lender Squirrel, says financing options for business owners are increasingly limited. Besides the arduous application process, banks are more conservative than ever as they evaluate home loan run-ups, he adds.
“Banks have always been conservative in this area, but it’s getting tougher,” Bolton says.
“The reality is that we are a country of small business owners, and many of us own property. It is a very important part of the working capital mix. When we play around with this, we really impact small and medium business owners. From my experience as a banker, I know that being denied access to credit is one of the The worst things you can do.”
CCCFA developments have caused concerns across the business community, which is grappling with the ongoing effects of the pandemic, lockdown measures, restrictions under traffic lights, high inflation and the inevitable threat of Omicron.
“A number of small businesses are funded through housing loans,” says business group BusinessNZ, “so anything that reduces that will have an influx of impact on new businesses and those looking to expand.”
With criticism mounting, the government may have to take an embarrassing turn to amend the law or basic guidance on how it will be implemented through the Responsible Lending Act. Commerce and Consumer Affairs Secretary David Clark asked regulators to provide a review on whether “banks and lenders are implementing the CCCFA as intended”.
“They have to wake up quickly to the fact that they need to sort this out,” says Squirrel’s Bolton.
“The regulations have not been properly thought out. This is a problem that could disenfranchise Central New Zealand.”
While the decision to review the CCCFA will be welcomed by small business owners, potential first home buyers and other mortgage holders, any changes or new guidelines will involve a slow and long process.
For owners of small and medium businesses who are thinking of increasing debt and anyone else who wants to take out a loan to buy a home, inquiry can’t come soon.