Changes to NZ's lending law - what the responsible lenders have to say
Q&A with Lyn McMorran, FSF Executive Director
FSF Executive Director Lyn McMorran discusses the pros and cons for proposed changes to the CCCFA, including interest rate caps, duties on directors, and prescriptive affordability assessment requirements. See the FSF's full submission here.
1. Do you support Minister Faafoi's review, will new law fix the problem?"We share the Minister's concerns about the practices of the dodgy lending brigade, they are the same sorts of practices that sparked a review in 2014 which hasn't combatted the problem because the law has not been sufficiently enforced.
"It is already against the current law for a lender to provide a loan that cannot be repaid so the key to protecting vulnerable consumers is enforcement of this current law and to provide a real message to these predatory lenders that their behaviour is unacceptable and that if they continue with it, they will be put out of business."
2. What proposals does the FSF agree with?
"FSF does have some support for the proposed interest rate cap option where interest and fees on "high-cost loans" is limited to 100% of the loan amount borrowed, so for example if a consumer borrows $500 they repay no more than $1,000. The question is how "high cost loans" are to be defined. At the FSF conference in October, when Minister Faafoi was asked this question, he said he expected a high-cost loan would be described in a way similar to that of the current Responsible Lending Code: that is where the annual interest rate expressed in terms of a percentage is 50% or greater. On this basis, FSF would not object to this proposal as it would likely not affect any of our members.
"FSF supports proposed rules about disclosure and advertising, where if a lender advertises their credit products in a language, they will also have to provide the loan disclosure documents in that language. It is currently something the Code says "should be" done and a lender would need a pretty strong reason in our view why they were not complying with this already. So making it a requirement seems sensible.
"FSF supports greater transparency and access to redress during debt collection. FSF was approached by MBIE during the review process to put together a meeting of responsible debt collection agencies from amongst our existing debt collector members and others that our credit provider members use because they were recognised as already behaving responsibly. The Ministry wanted to test some proposed changes to make this part of the industry more responsible without putting too much compliance burden on those who are already responsible providers. The proposed changes to require increased disclosure requirements at the commencement of the debt collection process is good practice currently employed by responsible debt collectors so not at all an issue for FSF's members in this sector.
3. What proposals does the FSF disagree with?
"The FSF does not support the introduction of mandatory minimum standards for the assessment of affordability and suitability of loans. Responsible lenders do not lend to borrowers who cannot afford to repay the loan, apart from this being against the current law, it is not a sustainable business model. We believe it is the lender's prerogative to set their credit criteria in accordance with their appetite for risk, innovation, and their business model.
"A credit contract is an agreement between two parties - the lender and the borrower - and each party has obligations towards each other. Therefore, we are particularly dubious about the proposal to remove Lender Responsibility Principle 9c(7) from the CCCFA, which says that the lender may rely on the information provided by the borrower unless they have reasonable grounds to believe it is not reliable. This Lender Responsibility Principle is a fundamental part of forming a credit contract."
4. Could there be unintended consequences of introducing more prescriptive requirements in the law?"The FSF believes that an unintended consequence of tightening laws in the 2015 CCCFA reforms is that vulnerable consumers have been further shut out from accessing credit from responsible providers.
"Where once a responsible lender might have used their hard-earned credit assessment experience to make a judgement call that a loan application that didn't quite fit the box was still a sound credit decision, now they wouldn't take the risk of falling foul with the regulator. Meanwhile, the lenders of last resort wait with open arms. A very real concern is that further law reform without enforcement will only worsen the issue."
5. Is all debt bad debt?"Access to credit is a perfectly normal part of life and to say it should be avoided at all costs is simply naïve. A loan can mean the difference between the independence of having a vehicle, tools for work, capital for a start-up, being able to attend a family gathering, owning a home, or replacing the washing machine if it breaks down. But regardless of what a loan is for, what's important is that consumers have a choice of responsible lenders in whose interest it is that the loan can be repaid.
"While harmful lending practices absolutely need to be stopped, this is in no way the normal, common experience for the majority of New Zealanders who take out a loan with a responsible lender such as an FSF member who takes their obligations very seriously, the loan is paid off without issue and it is a good outcome for both parties. It is important to understand this before considering law change that will affect all consumers."