New Zealand banks are rejecting home loans for minor frivolous expenses, including a $187 Kmart Christmas shop and daily drink bought from a convenience store, and money spent on pets or petrol, pushing the government to investigate whether banks are overreacting to new financing rules designed to protect vulnerable borrowers from predatory lenders.
The Credit Contracts and Consumer Credit Act (CCCFA), updated in early December, requires all lenders to carry out thorough checks to ensure that loans are suitable and affordable for their customers.
But financial leaders and opposition politicians say the rules have forced banks into an ultra-conservative approach to lending, putting homeownership out of reach for many as the country battles a housing crisis.
There has been a sharp drop in home loan approvals since the new rules were introduced – from around 30,000 a month to 23,000 in December – according to Centrix, a credit reporting agency.
“One in five mortgage approvals appears to have been impacted by the new CCCFA regulations. Consumers who were previously approved are no longer approved,” said chief executive Keith McLaughlin, adding that this equates to a $1.9 billion decrease in lending from November to December.
Financial Advice NZ chief executive Katrina Shanks said the new rules require banks and other lenders to comb through an individual’s spending habits. Entertainment, food (including takeout), gym memberships, clothing, personal care, childcare and more are included. Before the rule changed, banks had the ability to identify some of these costs as “discretionary expenses”.
A December survey of Financial Advice NZ members found around 300 examples of lenders being restricted in the loans they could offer potential borrowers due to the rules, Shank said.
“What has happened is that the net is so wide as to who this new prescription applies to, that it has hit the average New Zealander. Most New Zealanders would not be considered vulnerable, but the way this legislation has been drafted encompasses all New Zealanders.”
The rules also make lenders’ directors and senior executives personally liable for up to $200,000 if they break the rules, which has made banks extremely risk averse, Shanks said.
New Zealand Bankers’ Association chief executive Roger Beaumont told Stuff the change in law meant banks had “much less flexibility or leeway for lenders than before”.
The Minister of Commerce and Consumer Affairs, Dr David Clark has now asked the Council of Financial Regulators “to advance its investigation into whether banks and lenders are implementing the CCCFA as intended”.
“Banks appear to be managing their lending more cautiously at present, and this is likely due to global economic conditions. had a decision to err unduly on the side of caution.
Clark added that a number of factors affecting the market have occurred alongside the rule changes, including increases in the official exchange rate, changes to the amount a bank can lend against mortgaged property versus to the value of that property, and an increase in property prices and local government rates.