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What does Government reversal on CCCFA mean for buyers?

First home buyers can breathe a sigh of relief.

By Trade Me Property team 18 March 2022

The news came last week that the Commercial and Consumer Affairs Minister, David Clark was pulling back on new rules in the Credit Contracts and Consumer Finance Act (CCCFA) put in place to encourage more responsible lending.

The Act, which came into effect on December 1, 2021, required lenders to follow a more robust process ensuring that lending was affordable and suitable for borrowers of all kinds of assets. It was meant to protect borrowers of all credit from predatory and irresponsible lending.

The unintended consequences of the law were that many quality borrowers found themselves turned down on loans to buy homes and other assets that they would normally have expected to be given approval on. The real estate industry has been particularly hard hit.

The value of new residential mortgage loans fell 21% in January compared with the previous year and the proportion of mortgage applications resulting in approval fell to 34% in February down from 40% in October last year, according to the credit reporting agency, Centrix.

Centrix Managing Director, Keith McLaughlin, says the home lending conversion rate dropped 5– 6% from December to February while personal credit loans dropped 7-8 %. That figure of 5 – 6% is a lot of money taken out of the home lending market – loans that prior to December 1 would have been approved, were declined, he explains.

After consulting with lenders and consumers, Minister Clark has moved to announce some practical amendments so borrower-ready consumers can still access credit.

In a media release, the Minister said that when borrowers provide a detailed breakdown of future living expenses, there was no need to inquire into current living expenses from recent bank transactions.

Changes to lending rules have had unintended consequences, with many unable to secure finance.

The requirement to obtain information in ‘sufficient detail’ only relates to information provided by borrowers directly rather than relating to information from bank transaction records, he added. He also undertook to provide alternative guidance and examples for when it was “obvious” that a loan is affordable.

A broader investigation, led by MBIE and the Council of Financial Regulators, into the early implementation of the CCCFA amendments, is ongoing, the remainder of the investigation due in April. Changes are expected to kick in from June this year.

June may seem like a very long time away to those impacted by the December changes, warns the Real Estate Institute of New Zealand (REINZ) Chief executive, Jen Baird, who has met with Treasury and MBIE to explain the negative effect the December 2021 CCCFA changes have had on the market with REINZ property stats to back her up.

“While intended to curb predatory lending, instead it curbed many first home buyers’ ability to access finance and get on the property ladder,” she says.

Jen adds: “We were pleased to hear the Government intends to tweak the responsible lending rules, although REINZ questions whether this will be enough in the current economic landscape.”

Mortgage advisers respond to Government’s decision

John Bolton, Managing Director of mortgage broker Squirrel, launched two petitions, one with 10,000 signatures on it, protesting that the new CCCFA responsible lending laws were using a sledgehammer rather than a scalpel to change industry behaviour.

The Squirrel MD says he’s thankful that the Minister has come out so quickly with amendments or clarifications, after only receiving the inquiry a little over a month ago. JB sees the move as a “massive backtracking.”

“The Minister has come back with outcomes already so it’s going in the right direction and it’s being treated with urgency,” he says.

The new rules were hitting everyone, not just vulnerable first home buyers who might be tempted to over-commit, JB explains.

The biggest issue to be addressed by the Government in its recent reappraisal of the CCCFA is that borrowers and their mortgage advisers won’t have to rely on bank statement data to calculate people’s living expenses as was happening. 

Another thing was giving lenders information on non-statistical expenses like insurance, he says. When doing mortgages you should be able to rely on customers to tell you as long as it fits within statistical perimeters, JB explains.

Mind your P’s and Q’s on the lending rules

The wording in the amended CCCFA also led to confusion, says JB, who says the devil was in the detail. Using the wording that a loan could be approved if it was “obvious” that the loan was affordable for the applicant, was a mistake, says the mortgage adviser.

“What’s obvious? Is it driving around in a Porsche and debt-free?

“It could mean they’ve got a good credit record, that they don’t have outstanding consumer finance debt that’s going in the wrong direction or they have lots of assets, '' he adds.

“They crashed the whole credit market with a few words, that’s the risk with this stuff,” he says.

“The problem comes when they write regulations and don’t put a definition in,” adds the Squirrel MD.

There’s a risk when you use the word “obvious”, a bank will be very conservative with that. Banks are inherently conservative, they don’t want to break the rules. And the CCCFA is a really nasty law to break so banks don’t want to risk it, says the mortgage adviser.

The CCCFA rules meant that senior managers and directors would personally be fined around $200,000 if they were seen as irresponsible in their loan decisions, says JB.

Who has been affected by the December CCCFA?

One of the big changes wrought by the CCCFA's new lending rules has been the way they’ve reduced how much people can actually borrow, says Bruce Patten from Loan Market.

“It isn’t just people getting declined, it’s people getting the amount they want. They might be wanting to borrow $1.5 million, but with the new rules, they’ve only been allowed $1 million.

“We’ve been seeing that consistently. People would apply for a figure and it would be reduced because they’d gone through the bank statements,” says Bruce.

The Loan Market mortgage adviser is hopeful the lending industry will be back where it was six months ago before too long.

Credit scores are way more important, says Bruce. With these, someone’s bill payment information from telcos and credit cards are all fed to a credit agency.

“If I can look at a person’s credit score, I used to be able to confidently quote my client a figure of how much they could borrow and I’d be 99% sure they’d be approved, now I’m 99% not sure.”

Many first home buyers have been unable to secure lending, under the new rules.

The Loan Market adviser is unhappy about the latest CCCFA amendments not kicking in until June or July.

“They should change it tomorrow. Westpac introduced the CCCFA changes on 1 October 2021. If they can introduce it early, why can’t they reverse it early?” he asks.

“We shouldn’t have to wait, we know what the changes are. It’s a crock if they say June, it will slow things down even more,” says the Loan Market mortgage adviser.

“The Government should be able to say to the banks: “You guys know what you’re doing, you can interpret it the way you believe it should be, go back to the old way,” he adds.

Fellow Loan Market adviser, Cameron Marcroft, is optimistic that banks will start preparing to unwind the strict regulations in the coming months.

“When they put these in place in December, they’d spent three months in preparing and training. Hopefully, they’ll start working towards some common sense on some deals,” he says.

Meanwhile, his advice to buyers, their first port of call is to talk to a mortgage adviser and use the next few months to see what you can get across.

Good news for first home buyers

What do real estate agents make of it all? Harcourt's managing director Bryan Thomson is looking on the positive side. It was laudable of the people charged with bringing this legislation into play to try to protect them from loan sharks, he says. At the same time, they were told about the impact the CCCFA rules would have on normal borrowers.

“The good thing is it’s being addressed,” he says. And this is heartening news for first home buyers and others trying to make home buying decisions across the board.

He thinks the banks will welcome a more pragmatic approach to the CCCFA rules. “The one thing I know is banks make money by lending not by keeping it, so they’ll keep adjusting,” he says

Real estate transactions will continue while the industry undergoes the amendments, as most people don’t buy and sell on a whim, he predicts.

“They don’t time their sale or purchase with the market, only a small percentage will hang back,” he predicts.

“They sell because the kids have left home, or because of a new marriage, a divorce, a new relationship, or a death or maybe they’ve had a salary boost.” People are making home-buying decisions when opportunities arise, he says.

Homebuyers should be working with a quality mortgage adviser remaining in very close contact, as CCCFA rules change and getting updated when rates go up, he says.

“I would suggest people are reviewing their situation weekly if not on a daily basis,” he says.

Commenting on REINZ figures out this week, reporting that sales dropped in February, by 40% in Auckland compared with the same month last year, Bryan says he’s not surprised.

“There’s never been so much uncertainty, Omicron is circulating, we’ve had interest rates sneak up to 4%, seen CCCFA come into play, there’s a horrific war happening in Ukraine, a number of issues have all occurred so it’s no surprise that sales are lower.”

Compared to February 2022, house sales during February 2020 and 2021 were very busy so you’ve got to put that in context, he explains.

Wait and see or make hay while the sun shines?

CoreLogic chief property economist, Kelvin Davidson imagines buyers and sellers will be digesting the latest news and weighing up their options in the coming months.

Some buyers may think they’ll wait until after June when they can borrow more easily and prices drop later in the year. But Kelvin warns if they wait till later in the year, that'll mean they’re paying higher interest rates when they buy, so it’s about figuring out the best option for them and thinking about the long term.

Kelvin isn’t convinced that the CCCFA lending code is the only contributor to a slowing property market. Looking at CoreLogic buyer statistics, LVRs and interest rates have also had a big impact on buyers and their ability to buy.

“If you look at LVRs, mortgage rates, and CCCFA, and you take away one of those, the game isn’t going to change altogether, there are still a lot of challenges,” he says.

Days to sell have gone up quite a bit, adds the economist. “I was anticipating a shift to a buyers’ market in the second half of the year but maybe it’s come through sooner,” he says. Though there may be more to come, he adds.