Damien Venuto: Credit changes – Govt’s good intentions fall short in lending law fiasco
A Dunedin woman was declined an urgent extension to her mortgage because what she described as a $187 Christmas shopping trip to Kmart.
Another loan applicant claims to have had her social life probed in a series of inquiries on everything from her eyebrow waxing and parking bills.
Elsewhere, headlines have warned that those Uber Eats, Netflix and Spotify bills could bite you if you attempt to apply for a home loan.
These aren’t simply alarmist headlines, outlining worst-case scenarios. They are, in fact, examples of the impact of new legislation being put into practice.
The Government’s fast-tracked updates to the Credit Contracts and Consumer Finance Act came into effect in December – and we are now getting a clearer picture of the impact this legislation is having on Kiwis.
The objective behind the legislation was to finally bring an end to predatory lenders and truck shops, who charged high interest rates to people who simply couldn’t pay back what was owed.
The legislation increased the responsibility on lenders to make sure that those they were lending to could afford to pay back their loans.
Lenders are now required to keep better records to ensure borrowers don’t end up with insurmountable debts.
“Unfair lenders have been cashing in on Kiwi consumers for too long,” Commerce and Consumer Affairs Minister David Clark said upon the legislation coming into effect.
“Today’s changes require all lenders to complete thorough checks to ensure loans are suitable and affordable for their customers, preventing them from getting into debt they simply cannot afford.
“It’s vitally important to protect people and whānau from falling into the trap of taking on unaffordable debt, and to stop those who take advantage of those in vulnerable circumstances.”
This all makes sense in theory, but in practice, it has had the unintended consequences of making it even harder for mortgage applicants – particularly first-home buyers – to secure a mortgage.
Intentions simply don’t matter as much as how the law is applied in the real world.
And the evidence on the impact isn’t only anecdotal.
At the end of last week, data from credit reporting agency Centrix showed home loan applications that result in loans had fallen from 36 per cent to 30 per cent since the start of December.
Centrix estimated the lending slowdown amounted to almost $2 billion, with home loans dropping from an average of 30,000 per month to 23,000.
The blame can’t be solely placed on banks. They are simply following the strict rules that have been imposed under the changes to the law.
The invasiveness of the inquiries also comes down to the fact that our spending habits have been fragmented enormously in the digital age.
The entertainment section alone offers a glimpse at how pronounced this impact has been. Whereas Kiwis once had a single television entertainment bill paid to Sky TV, they could now easily hold a Netflix, Spotify, Spark Sport as well as a Disney Plus account.
Banks need to ask pressing questions on all this spending in order to gain a fuller view of how much money a person has coming in and going out.
The question now is whether banks are perhaps taking too much of a hard line on these rules at a time of enormous global uncertainty.
That is certainly the opinion of Minister Clark, who has asked Council of Financial Regulators (COFR, comprising the Reserve Bank, the Treasury, Financial Markets Authority, MBIE and Commerce Commission) to bring forward an investigation into whether banks and lenders are applying the legislation as “intended”.
Clark further explained that “a number of factors, including increases to the Official Cash Rate (OCR), Loan-to-Value (LVR) changes and an increase in house prices and local government rates had also had an impact on the mortgage market”.
Herein lies the problem. First-home mortgage applicants already have to jump through so many hoops in order to even get their foot inside a massively over-priced home that it’s just barely liveable. And now, this new legislation just rubs further salt into those wounds with probing personal questions.
It’s easy to brush over the Centrix data in its numerical form, showing a simple drop from 30,000 a year ago to 23,000 this year.
But the reality is that those are 7000 stories of dreams potentially squashed, in part, by legislation that isn’t being used as it was intended.
The Government may now be pushing for an investigation into the application of the rules – but that will count for little to those who have already been affected by the changes.
First home buyers don’t need more obstacles to get on to the property ladder; they need fewer.
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