Banks in New Zealand are rejecting mortgages over minor spending, including a $187 Kmart Christmas store and a daily corner store drink, and money spent on pets or petrol, prompting the government to investigate whether banks are overreacting to New financing rules designed to protect at-risk borrowers from predatory lenders.
The Credit Contracts and Consumer Finance Act (CCCFA), updated in early December, requires all lenders to complete comprehensive checks to ensure loans are appropriate and affordable for their clients.
But finance leaders and opposition politicians say the rules have forced banks to take an ultra-conservative approach to lending, putting home ownership out of reach for many as the country grapples with a housing crisis.
There has been a sharp decline in home loan approvals since the new rules were introduced — from about 30,000 a month to 23,000 in December — according to credit reporting agency Centrix.
“It appears that one in five mortgage loan approvals has been hit by the new CCCFA regulations. Consumers who were previously approved are not coming back,” said Keith McLaughlin, the company’s managing director, adding that this represented a $1.9 billion reduction in lending from November to December.
Katrina Shanks, chief executive of Financial Advice NZ, said the new rules require banks and other lenders to follow individual spending habits with a careful comb. Entertainment, food (including takeout), gym membership, clothing, grooming, baby care, and more are included. Before the rules changed, banks had the ability to define some of these costs as “discretionary spending.”
A December survey of Financial Advice NZ members revealed nearly 300 examples of lenders being restricted in the loans they could provide to potential borrowers due to the rules, Shank said.
“What has happened is that the net is so wide about who this new prescription is being applied to, that it has hit the average New Zealander. Most New Zealanders would not be considered vulnerable, but the way this legislation has been written, it captures all New Zealanders.”
Shanks said the rules make managers and senior managers of lending institutions personally liable for up to $200,000 if they are found to be in breach of the rules, which has made banks aggressively risk averse.
Roger Beaumont, chief executive of the New Zealand Bankers’ Association, told Stuff that the change in law means that banks “have much less flexibility or leeway for lenders’ discretion than they previously did”.
Minister of Commerce and Consumer Affairs Dr. David Clark has now asked the Council of Financial Regulators to “make their investigations into whether banks and lenders are implementing the CCCFA 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.”
Clark added that a number of factors that affected the market occurred at the same time as the rule change, including increases in the official cash rate, changes in how much a bank can lend against mortgaged property compared to the value of that property, and increases in home prices and local government rates. .