New Zealand Relaxes Responsible Lending Code After Backlash

June 15, 2022
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After criticism for the new code being overly onerous on both banks and borrowers, the latest version of New Zealand's responsible lending code has largely reversed to the pre-2021 edition, but complications remain.

After criticism for the new code being overly onerous on both banks and borrowers, the latest version of New Zealand's responsible lending code has largely reversed to the pre-2021 edition, but complications remain.

The government of New Zealand has published the revised responsible lending code, approximately six months after it initially changed the rules.

The initial revision, which came into force on December 1, 2021, faced a backlash for its unnecessary and more onerous requirements, such as requiring lenders to inquire into and judge creditworthiness, based on living expenses from bank statements.

This included the case of a bank reducing how much a consumer could borrow by 15 percent because they were spending too much money on their dog.

The new rules, which are expected to come into force on July 7, have partly been influenced by a submission from the New Zealand Bankers' Association (NZBA), with most of the discussion around how lenders should gauge the potential for hardship by giving out credit. Contrasting with the older code, the specific changes have been:

  • Excluding savings and investments as expenses that lenders would need to inquire about.
  • Ensuring expenses should be relevant and continue after the loan agreement. For example, lenders should not ask after rent payments when the customer’s loan is for the purpose of buying a home.
  • Being able to rely on the consumer’s word, rather than requiring bank statements for sufficient detail.
  • Providing a set of examples highlighting where it is obvious that the borrower can afford the loan.

Despite these improvements from a lender's perspective, with the new version of the rules now filled with scenarios and examples of what should be considered relevant and obvious, the NZBA was less than impressed.

According to Roger Beaumont, the association’s CEO, the government’s “rushed attempt to fix the problem” will not make a difference to most borrowers.

“Most of the existing requirements remain in place, meaning customers will still have to provide detailed information about their spending, resulting in a more painstaking process and more loan applications being declined than before the December rule change.

“While we agree with the government’s aim to protect vulnerable consumers from unscrupulous lenders, the one-size-fits-all approach for all lenders and all loan types means banks don’t have the same discretion or flexibility they used to.”

Stating the obvious

Despite changes to the code and some loosening of the rules that the NZBA wanted, in attempting to create more clarity, it has extended the document with more scenario-based guidance.

For example, in Section 5.9, lenders, the rules suggest, may need to check if borrowers are prepared to reduce their dining out or takeaway budget in favour of eating at home, which could help them qualify for a loan. Similarly, it says the lender can inquire and discuss with the borrower plans to reduce other expenses, such as entertainment.

It is up to the lender then to assess whether any lifestyle changes that the borrower agrees to make to reduce outgoings is likely.

Combined with a lack of a “safe harbour”, where compliance with the code cannot be considered compliance with “lender responsibility principles”, it could incentivise firms to continue “interpreting regulations too conservatively”, as has been the current outcome of the 2021 rules.

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