Lenders will have to dig deeper before approving loans from December 1

Changes to the Credit Contracts and Consumer Finance Act (CCCFA) mean that personal loan or mortgage applications could take longer to process from December 1, with borrowers being required to provide more detailed information and the industry faces severe penalties for non-compliance.

The goal of change is to protect New Zealanders from unaffordable debt.

The new Responsible Lending Bonds, which cover any loan amount, will cover all types of lenders, including banks, mobile merchants and payday loan specialists. It may also apply to certain credit-related products such as warranty extensions and consumer credit insurance.

The impact is significant: While lenders are already required to educate themselves about the affordability and suitability of loans, they will now have to go through a specific process that involves additional verification of information and more transparency around the calculation of fees. or charges.

For example, when assessing mortgage eligibility, lenders will need to take steps to independently verify information, such as household expenses provided by the borrower, support it with reliable evidence, and provide adjustments if necessary.

The December 2021 update of the Responsible Lending Code, which underpins the law, is one of the final steps in implementing a consumer credit check started by the government in 2018.

Another step, the establishment of fit and appropriate person assessments to verify the qualifications and suitability of anyone in a managerial position with a lender, as well as greater potential for personal liability, came into effect on October 1.

“We believe the changes are likely to require consumers to take a few extra steps before being granted credit. While this can be painful in the short term, the new rules are meant to protect consumers and prevent them from accepting credit. unsuitable debt, ”said Jon Duffy, Managing Director of Consumer NZ.

Responsible lending means assessing the suitability and affordability of the loan in relation to the circumstances of the individual borrower and not putting them under undue financial hardship.

It also means stepping up files by keeping a cut, with loan adequacy assessments and accompanying evidence to be kept and provided free of charge to anyone who is entitled to request them.

“There has been a lot of work behind the scenes to ensure that responsible lenders such as our members understand and comply with the changes to help protect vulnerable borrowers, but it is also important that everyday consumers know to what to expect and how these changes will affect the lending process, ”said Lyn McMorran, executive director of the Federation of Financial Services.

The Federation of Financial Services is a lobby group for non-bank financial institutions.

Consumers will benefit from the new requirement for lenders to be very transparent about variations, repayment amounts and to detail how fees were calculated, where data exists to do so.

In the spirit of increased transparency, Article 41 of the CCCFA states that “a loan agreement cannot provide for credit charges or default charges that are unreasonable. Lenders should not take advantage of the fees. Charges will be unreasonable if they exceed costs which are closely related to the activity for which it is billed.

The changes to the law also put the screw on loan sharks, with lenders not allowed to use phrases like “no credit check”, “guaranteed acceptance” or “bad credit history,” OK “.

It also requires the industry to collectively breathe on fast approvals: when lenders advertise an approval speed, say an hour, they must also post a prominent statement that this is subject to loan investigations and checks. responsible.

Roger Beaumont, CEO of the New Zealand Bankers’ Association banking lobby group, said; “Banks are responsible lenders, and we support the goals of legislative changes to help people avoid taking on unaffordable debt. We also think it’s important that people be prepared for what the change in law will mean for them when they apply for a loan. “

Lenders will also be required to be more proactive when borrowers run out of financial resources, providing timely information on financial mentoring, in certain default or hardship situations, and informing them of dispute resolution mechanisms. when responding to complaints.

To an extent designed to protect borrowers who may be vulnerable due to limited English proficiency, lenders will also be required to provide full information in the same language as any advertising they broadcast.

A spokesperson for the Trade Commission said he had “actively engaged with lenders to support them with the changes in the law.” This includes organizing a series of educational seminars and focus groups, and producing guidance documents to educate lenders on the changes needed to comply with the new laws. . “

“We have increased our engagement with lenders and industry organizations directly to ensure they have the advice they need to help them comply with the law. The Commission will continue to monitor the type and number of complaints we receive after the changes in the law come into force. . “

The role of the Trade Commission is to enforce the laws on competition, fair trade and consumer credit contracts.

Penalties for lenders who fail to meet their responsible lending obligations are up to $ 600,000 for businesses and $ 200,000 for individuals, plus legal damages equivalent to the cost of borrowing.

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