Banks in New Zealand are rejecting home-loans over minor frivolous spending, including a $187 Kmart Christmas shop and a daily drink bought at a corner store, and money spent on pets or petrol, pushing the government to investigate whether banks are overreacting to new finance rules designed to protect vulnerable borrowers from predatory lenders.
The Credit Contracts and Consumer Finance Act (CCCFA), updated in early December, requires all lenders to complete thorough checks to ensure loans are suitable and affordable for their customers.
But finance leaders and opposition politicians say the rules have compelled banks to take an ultra-conservative approach to lending, pushing homeownership further out of reach for many as the country battles a housing crisis.
There has been a sharp dip in home-loan approvals since the new rules were introduced – from about 30,000 a month to 23,000 in December – according to Centrix, a credit reporting agency.
“One in five mortgage loan approvals appear to have been hit by the new CCCFA regulations. Consumers that were previously approved are no longer,” its managing director Keith McLaughlin said, adding that this amounts to a decrease in lending of $1.9bn from November to December.
The chief executive of Financial Advice NZ, Katrina Shanks, said the new rules required banks and other lenders to go through an individual’s spending habits with a fine-tooth comb. Entertainment, food (including take-aways), gym memberships, clothing, personal care, childcare and more are included. Before the rule changes, the banks had the ability to determine some of these costs as “discretionary spending”.
A December survey of Financial Advice NZ’s members revealed roughly 300 examples of lenders being restricted in the loans they could offer to would-be borrowers because of the rules, Shank said.
“What has happened is the net is so wide on who this new prescription is applied to, that it has hit the average New Zealander. Most New Zealanders wouldn’t be considered vulnerable, but the way this legislation has been written, it captures all New Zealanders.”
The rules also make directors and senior managers of lending organisations personally liable for up to $200,000 if found to be breaking the rules, which has made banks extremely risk-averse, Shanks said.
The New Zealand Bankers’ Association chief executive Roger Beaumont told Stuff the law change meant banks had “much less flexibility or room for lender discretion than was previously the case.”
The minister of commerce and consumer affairs, Dr David Clark, has now asked the council of financial regulators “to bring forward their investigation into whether banks and lenders are implementing the CCCFA as intended”.
“Banks appear to be managing their lending more conservatively at present, and this is likely due to global economic conditions. It may also be that in the initial weeks of implementing the new CCCFA requirements there has been a decision to unduly err on the side of caution.”
Clark added that a number of factors affecting the market have occurred at the same time as the rule changes, including increases to the official cash rate, changes to how much a bank can lend against mortgaged property compared to the value of that property, and an increase in house prices and local government rates.