The Impact of the CCCFA on Business Lending

On the 1st of December 2021, major changes to the Credit Contracts and Consumer Finance Act 2003 (“CCCFA”) came into force. These changes materially impact all applications for consumer credit including home loans as well as lending to purchase assets such as vehicles or boats. However, they are also impacting the lending assessment process for business lending, particularly for the main trading banks.  

As background, changes were last made to the CCCFA in 2015. Regulators had concerns that these did not go far enough to restrict predatory “loan shark” behaviour so additional changes were introduced. However, the changes introduced in December 2021 go far beyond correcting that sort of behaviour and will impact the whole banking and consumer finance sector.  

For consumer borrowers the immediate impact is that lending applications will become longer and more complex. Borrowers will be requested to supply additional information to evidence in detail actual income and expenditure. Lenders will conduct greater levels of due diligence on each individual application, for example scrutinising actual levels of historic expenditure for individual clients rather than relying on estimates of “normal” living expenses. 

The CCCFA changes impact the following key areas within the lending process.  

Firstly, every director or senior manager of a lender will have a new duty to exercise “due diligence” to ensure that the lender complies with their CCCFA obligations. Lenders will need to have detailed procedures for ensuring compliance with the CCCFA, methods for identifying deficiencies in the effectiveness of the procedures and must promptly remedy any deficiency. The consequence of a breach is significant on individual directors and senior managers who fail to meet these obligations. Civil pecuniary penalties are up to $200,000 per individual, plus a court may also order that a director or senior manager is jointly and severally liable with the lender to pay statutory damages or compensation.  Lenders are not permitted to indemnify any director or senior manager to protect individuals from these penalties. In short, directors and senior managers are directly in the firing line if they get this wrong. We expect this will make lending organisations more risk adverse when making their lending assessments, and less flexible to go outside formal policy and procedure to make “common sense” lending decisions.

Secondly, while the CCCFA has included responsible lending obligations since 2015, these were broad and provided the lender discretion to make “reasonable enquiries” before issuing loans. The new changes introduce more prescriptive requirements around the lender needing to prove affordability and suitability before providing funding. They must prove that a borrower has a “reasonable surplus” after considering individual income and expenses. In short, lenders are asking for much more detail within lending applications. Lenders are placing much more scrutiny on actual levels of personal expenditure and on what future changes may impact the income or expenditure of individual borrowers. For many borrowers, these enquiries can seem intrusive. We have seen a number of lender requests for information that fail the “common sense” test. For example, lenders are more reluctant to rely on the dollar value of expenses declared by borrowers in the application process, but are now scrutinising bank statements and diving into the detail of what individuals actually do spend and then asking for evidence of that expenditure. The linked articles provides some context of frustrations within the lending sector and the impact on borrowers: https://www.stuff.co.nz/business/money/300482920/credit-crunch-mortgage-brokers-hit-back-at-lending-rule-changeshttps://www.nzherald.co.nz/business/small-loan-applicant-asked-to-explain-eyebrow-waxing-parking-costs-to-bank-staff/TBKODUM2RQJVZQBFSGBCPV6LKQ/https://www.nzherald.co.nz/business/new-lending-restrictions-lock-prospective-homeowners-out-of-the-market/4PF7KMDTELP7WGMDJEO5ORGAJE/

Thirdly, the new assessment requirements are applicable upon any “material change” to a loan. A “material change” is defined as a new advance or extension in credit limit.   Lenders who extend credit to existing borrowers on current facilities will need to ensure they run the same affordability and suitability assessments as a new loan. For customers with clean payment histories, this can feel very frustrating when requesting relatively small lending top ups. For example, adding modest amounts to a home loan for a kitchen extension would likely have been a fairly simple “top up” application, but now it requires a full application with the higher level of scrutiny required under the new legislation.

The legislation also places additional requirements on lenders around record keeping. They must keep detailed records showing how they were satisfied each borrower met the affordability and suitability requirements and how they have advised the customer of this. The regulation also introduces a new certification requirement for lenders providing consumer credit.

Finance New Zealand does provide advice relating to home loan lending as well as consumer loans for acquisition of assets such as vehicles and boats. These transactions are directly covered by the CCCFA changes. Finance New Zealand customers should expect that we will need a greater depth of information prior to submission of these applications, and lenders may require additional clarification as they work through approvals. Turnaround times for home loans have also increased significantly as lenders struggle to resource their lending assessment teams for the increased level of due diligence each loan approval requires, so it is important that home loan customers discuss their requirements with the Finance New Zealand Business Partner as early as possible and set realistic timeframes for loan approvals and property settlements.

So what does this mean for a business borrower?

The vast majority of Finance New Zealand’s business is providing advice relating to business lending transactions. Business lending is not directly covered by the CCCFA, but indirectly we are seeing the impacts on some business lending applications. Over 2022 we expect some potential impacts to be as follows:

Firstly, there are impacts on small to medium sized business borrowers seeking lending from main banks, even where the primary purpose of the lending is for business purposes. Banks are applying an approach of assessing both the business borrower plus assessing related consumer borrowers. The business loan assessment itself has not changed materially. As always, it is based on ensuring that the business can afford the requested loan commitments from its own cash flow as well as meeting other general credit criteria such as equity levels, working capital ratios etc. What has changed is that the banks are diving deeper into associated consumer debt and applying the CCCFA lens to that lending. When providing business lending applications to main bank lenders we are being asked to provide a greater level of detail relating to the personal income, expenditure and debt commitments of individual consumer borrowers related to the business such as shareholders or directors. Bank lenders want to ensure that not only can the business afford its debts, but that the consumer borrowers linked to the business can also afford theirs. Related parties who are consumer borrowers need to demonstrate adequate income from either the business or outside sources to service their personal debts after actual personal living expenses. Finance New Zealand works closely with several main bank funders and for many of our clients’ main bank products are the most suitable product solution. When lending applications are made to the main banks, both Finance New Zealand and our clients need to factor in the information requirements of the banks, be aware that the banks may require a higher level of due diligence, as well as considering that turnaround times are often slower than non-bank lenders.

Secondly, bank processes do vary between different lenders and also within different lending teams. We are seeing an increased difference between how “business bank” and “commercial bank” applications are processed. Business bank credit assessment processes tend to be more formula based, with less lender discretion, and are more focused on the CCCFA processes when assessing the consumer portion of an application. In general, business bank lenders are less experienced and have less discretion in their loan assessment process. Commercial lending teams focus more on the business borrowing requirements, have greater discretion in assessing affordability for related consumer debt and, in general, experienced commercial lenders will have a greater ability to apply discretion within their lending decisions.   

Thirdly, with the CCCFA adding complexity for main bank and consumer lenders the variation in processes between bank and non-bank lenders has increased. For the funding of vehicles, plant & machinery, non-bank lenders continue to assess the funding requirement against the business borrower and the recent CCCFA changes have had very little impact on the loan application process. In the property space, we are seeing an increasing range of non-bank options. Many of these lenders focus solely on business property lending and apply a traditional business focused assessment without needing to get tied up by the CCCFA. Some provide consumer home loans but with a slightly higher risk profile than main trading banks and may approve transactions that main banks will now decline. In general, where borrowers are seeking a fast turnaround or are seeking ease of process, non-bank options can provide a viable alternative. This needs to be balanced against higher interest rates that are typically charged by non-bank lenders.

The finance landscape is always evolving and the CCCFA changes are just part of this.  Funder processes, pricing, appetite for risk and products change constantly. By working closely to understand what is most important to our clients, the Finance New Zealand team is able to advise on suitable product solutions and put these transactions on the right desk within our funding partners to get a deal done.

It will be interesting to see how the CCCFA changes impact the borrowing landscape over 2022. The new regulations provide lots of uncertainty to lenders, and it is likely that the impacts we have seen over the last month will be resolved in the medium term as regulators provide the industry greater guidance. Certainly, many commentors are concerned that while the changes are well intentioned, their prescriptive approach will have an adverse consequence on many borrowers. Interestingly, Australia implemented similar changes a few years ago and inspired the introduction of responsible lending in New Zealand. Nevertheless, the Australian government is now seeking to roll back and ease restrictions on lenders, warning against “unnecessary barriers to the flow of credit households”. Time will only tell if New Zealand needs to follow a similar path.