Borrowing is expected to get harder for self-employed people, first home buyers and retirees under changes to the credit law designed to ensure lenders only give loans to those who can afford it.
From Wednesday changes to the Credit Contracts and Consumer Finance Act (CCFA) mean lenders have to do much more to gather and check detailed information from potential borrowers before they will give approval.
Mortgage brokers say banks are already requiring three months worth of bank statements so they can scrape the data to check a borrowers income level, debt and regular expenses which will now include subscription services like Netflix or Sky TV as well as regular trips to the pub.
Loan market mortgage broker Bruce Patten said he could no longer use average cost of living data in mortgage applications.
“They are asking us to analyse a person’s statements and there is a bank that already has a tool in place that we have to send bank statements in pdf format and they run a programme through those statements to pull out the fixed expenses.
“We can no longer put in an average cost of living for a family with two children. It might have been $1350 for a couple and $250 for each child (per week).”
“Our expense breakdown used to be about 10 boxes. Now it’s a page long and it’s Netflix, Afterpay, Sky TV, and if it is an AP [automatic payment] or direct debit it’s an expense line and they will include that as a fixed commitment which basically means your borrowing capacity reduces.”
Patten said it was advising prospective borrowers to come armed with a budget and get their financials in order before applying for any loans.
Already the change had resulted in decline rates going up from about one in 20 applications to five in 20 with banks already moving to meet the law change ahead of it coming into force.
“We are being really careful now to not even submit an application. We will go back to a customer and go ‘this is not going to work. I need you to do these five things over the next three months and then we are going to revisit this.”
Squirrel managing director John Bolton said the law change was designed to protect vulnerable borrowers but would make it harder for those who were self-employed and older borrowers.
“The problem we have got is so many small businesses in NZ fund their business through their property. Just about every business customer I know has a mortgage and uses the equity in their property to support their business. All of a sudden this is all covered with the CCCFA.”
He pointed to a business owner in Auckland at the moment whose business was operating at a loss due to Covid.
“How does the bank assess his residential mortgage for CCCFA? What if he doesn’t want money for the business, just wants to put his loan on interest only. The bank is assessing it – he can’t afford it.”
He said he had a customer the other day that was 70 years old and had cancer.
The bank had refused to let the man put his mortgage on interest only meaning he will have to sell his house or try and refinance it elsewhere.
“The regulations are forcing bankers to have to make judgement calls.”
He said it would result in inherent conservatism in banks.
“If there is any doubt, any grey they will just say no. And the problem is a lot of that grey is going to be with self-employed people and older borrowers.”
The changes apply not just to new loans but to those seeking an increase in their credit facility like a top-up to their mortgage for a home renovation or to buy a spa pool or an extension of a credit card limit.
Borrowers also have to tell their lender exactly what the money will be used for.
Keith McLaughlin, chief executive of credit bureau Centrix said the feedback it was getting from its clients which include banks, finance companies and payday lenders was the level of disclosure from the borrower is going to be far greater than it ever has been in the past.
“What they are looking for is affordability. What income are you getting, how regular and what is it that hits your bank account. Then of your outgoings how much of that is fixed and how much is variable or discretionary. Then they are building a buffer and each organisation has its own buffer.”
McLaughlin predicted banks would be more conservative in their approach would could see some borrowers pushed into using second or third-tier lenders – pushing up their borrowing costs.
Second and third-tier lenders tend to have higher interest rates and fees than the banks.
“I don’t think that the borrowers have any idea what is about to hit them. For some people who are retired or who are self-employed it is going to catch them right off guard.”
McLaughlin also described the level of data gathering as invasive and said there could be privacy issues over it.
“We deal with the credit reporting privacy code and the office of the privacy commission on a regular basis and it is always about what information must be passed across to enable the process and if it not needed you don’t get it or you shouldn’t ask for it. All of a sudden this whole new band of information that has to be provided to lenders is going to come as a hell of a shock to consumers.”
A spokesman for the Privacy Commissioner said lenders such as finance companies and banks must comply with a range of principles under the Responsible Lending Code and the Credit Contracts and Consumer Finance Act.
“These obligations require lenders to make an informed decision about an individual’s creditworthiness before granting a loan. To do so, lenders can collect an appropriate amount of personal information to assess the individual.”
But he said under the Privacy Act, organisations must only collect personal information if it is for a lawful purpose connected with their functions or activities, and the information is necessary for that purpose.
“When asking people for their personal information, you should carefully consider why you are collecting it. If the personal information you are asking for isn’t necessary to achieve something closely linked to your organisation’s activities, you shouldn’t collect it. These responsibilities apply to banks and finance companies as well.”
The spokesman said If a person thinks their privacy may have been breached, they can contact the privacy office.
McLaughlin said the best advice was not to leave a credit application to the last minute.
“If you are looking at getting a credit facility move earlier. If you are going to buy a house make sure you have done the work in advance because things will take longer.”
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