explainer: Since the beginning of December last year, it was hard to go a day without hearing about someone who was denied a loan to buy a home, seemingly due to a minor infraction.
One person was told he spent a lot of money on his dog. One was denied despite filing 57 percent because she was on maternity leave. A couple lost their informed consent a few days before the auction and saw the property being sold for less than they were willing to pay.
Part of the problem for borrowers has been the tightening of loan-to-value restrictions, which limit how much lending banks can do to borrowers with low deposits. But the bigger issue for many is the change to the Consumer Credit Contract Finance Act (CCCFA) that went into effect on December 1.
* Library fines have kept the family on the sidelines of the New Zealand property market
* New lending laws a “nightmare” for those seeking loans to buy homes
* Major banks shut down more than 460 ATMs and bank branches over 18 months
So what is really going on?
Changes to the CCCFA brought new rules to all lenders, including banks.
The new rules clarify what lenders are expected to demand and also introduce new personal liability for directors and senior managers, with penalties of up to $200,000 if their organization does not comply with the rules.
Regulations require that the lender prepare an estimate of the borrower’s income (if he is going to rely on it to repay the loan) and then estimates the expenditures using various specific tests including new requirements to verify the information received.
The lender must ensure that there is a reasonable surplus in the borrower’s budget, including reasonable buffers, but Sophie East, partner at Bell Gully, said that what was considered “reasonable” had not been demonstrated, and no guidance was given as to the exact extent of the buffer or surplus required.
Legislation states that expenses include accommodation costs, insurance, fares, corporate fees, school fees, child support paid under the Child Support Act, debt payments, utilities, food and groceries, clothing and personal care, childcare, medical expenses, transportation expenses or expenses Other recurring costs such as savings, investments, gym memberships, entertainment costs, or tithes.
Brokers say putting more money in your KiwiSaver account can count against you unless you tell the bank that you plan to reduce your contributions once you buy a home.
But haven’t they already made sure that people can afford their loans?
Yes, but not to this extent.
Previously banks would have checked affordability “to a slightly different level and not this new level,” said John Kensington, financial services specialist at PwC. What this new legislation said if you were going to lend to someone, it’s really better to make sure that He can pay.”
He said the new rules set out “very clearly” the minimum that banks were expected to do.
“You can’t use another formula that says if you earn $50,000 you will spend 80 percent of your money, or whatever else, on living expenses, or if you earn $200,000 you will spend 40 percent. You can’t do that, you have to get on the person’s data, scrape it and see exactly what he’s doing.”
He said people may usually cut back on their spending once they are worried about mortgages, but that banks no longer have a clear way to manage that.
“As seniors’ priorities change and they might fall back a little bit out of their shell but if someone turns to the bank and hands over details that show all that, the bank has a problem — the bank can take the view that the person is going to change their discretionary expenses but if they don’t and they get in trouble, The bank will be in trouble.”
He said the Commerce Commission did not provide sufficient guidance on how to interpret this situation. Contacted for comment.
Kensington said the banks were in a tough spot. Nobody wants to be the first lender accused of behaving irresponsibly.
“Because ComCom isn’t willing to provide guidance and say you can use your judgment, they probably won’t use judgments, they’ll get all the data and make stronger calls than they normally would.”
The chief executive of the New Zealand Bankers Association, Roger Beaumont, said that banks no longer have as much discretion as they once did.
He said each should design and implement changes to their lending policies and processes, including staff training, to ensure they comply with the new rules.
“There is no uniform approach across the industry because banks operate in a commercial and competitive environment and are responsible for managing their own risks, including their compliance with the law.
Banks are largely involved in lending. They are also responsible lenders and take legal compliance requirements very seriously.”
Do they exaggerate it?
There have been reports of some people turning down because the bank was not happy with the number of times they got junk food in a week.
At first glance, banking expert Claire Matthews of Massey University said, it would be inappropriate to make an arbitrary rule about the number of nights a borrower is allowed to spend. What matters, she said, is whether they can afford it.
“It is reasonable for a lender to ask about junk food as part of understanding what is being spent on ‘food and groceries’ for example. But these definitions are about how much people spend and therefore how much surplus they have to finance loan repayments – they are not (or at least shouldn’t) be) about the items people spend their money on.”
She said the legislation’s definition of what expenses should be included was designed to ensure that everything relevant was recorded.
“Looking at how much is spent on groceries without including regular restaurant meals and/or fast food does not provide a proper picture of how much the borrower is spending on food, as the grocery bill would be smaller if it were for fewer meals. If the borrower was eating out every night But he still has a large surplus to cover his payments, that shouldn’t be appropriate.”
She said the new requirements may have made banks a little more cautious, and they may not be lending to people who would have had them in the past. But, she said, in some cases, saying a loan denial over a takeaway might be too simplistic.
“If they were simply implementing the new rules it would probably make sense. The increased cost of homes would also make it more difficult, along with concerns about higher interest rates that would require an increase in the reserve.”
What kind of effect does it have?
Centrix estimated that there was a slowdown of about 23 percent in lending after the changes were introduced and the number of home loans processed fell by about 7,000 compared to normal levels.
Housing loans are treated in the same way as high-risk lending. Should that change?
Kensington might say. “You have different interest rates for different risks.”
Home loans are traditionally considered low-risk borrowing because most people do what they can to avoid losing their homes. The data shows that banks wrote off only about 0.1 per cent of housing loans.
Can you get cash and avoid scrutiny?
There have been suggestions that people could avoid the eyes of the banks by withdrawing cash for their trips to the pub, fast food, or other things that might be looked down upon.
Matthews says that’s not the answer.
“I don’t see that it will help. If they take the money from the bank, the bank will keep asking for proof of how they spend their money. If they do everything with cash, it will create a lot of problems for a lot of people.”
Broker Glenn MacLeod said banks would question regular cash withdrawals.
“I think the simple thing is if they take the money every Friday for the weekend, that would count as an entertainment expense. My advice is to settle all your spending for three months before you submit your mortgage application. Keep it clean and simple.”
“We’re waiting for a new processing tool to be trialled by banks as we take bank statements, analyze them, and segment spending. It’s inevitable.”
Is this what the government intended?
When the changes were announced, there was talk of protecting vulnerable people from lenders charging interest rates as high as triple digits. Did you really want to make it more difficult for your first home buyer to get a loan?
Commerce Secretary David Clark said he has asked the Council of Financial Regulators to submit their investigation into whether the CCCFA is being implemented as intended.
Banks seem to be managing their lending more conservatively at the moment, likely due to global economic conditions.
“It may also be that in the first weeks of implementation of the new CCCFA requirements there was a decision to unjustifiably err on the side of caution.
“It must be said, that a number of factors that affected the market occurred at the same time as the CCCFA changes, including increases in OCR, LVR changes and an increase in home prices and local government rates. An investigation by the COFR will determine to what extent the behavior is The lender, in relation to the CCCFA, is an important factor in changes to banks’ lending practices.”
Kensington said there are likely to be unintended consequences, such as small business problems.
“Many small or medium businesses have survived the pandemic so far by their owners’ injection of money. Some of these owners’ capital is about to expire but they don’t want to give up the business yet. How are they going to get a bank loan now?”
The CCFA does not apply to business loans but many small businesses are funded with home-secured loans.
“At a time when the New Zealand economy will need the money pumped into it to open up again, and perhaps more economic turmoil this year, when there will be a need to borrow money, there will come a time when it will be very difficult for banks to do so. There is no easy answer” .
While “you don’t want people to borrow money they can’t afford,” he said, some people may not get loans they should have offered.
There could also be estuary effects, he said. People who are rejected by a bank may go to a financing company and get a loan but pay more. Then the finance company will look at it and say it’s a large mortgage that saves me writing 30 loans. These 30 loans will not be offered by that finance company, but there are other loans further down the chain… at the bottom of the scale will be the people who have been told no, who really need the money.
“What you have here are good intentions but it must be adapted to better suit the purpose.”