Government tweaks CCCFA stricter lending law change after 'significant drop in mortgage activity'

The Government is tweaking a recent law change following a "significant drop in mortgage activity" at a time when housing is increasingly unaffordable. 

In December the Government amended the Credit Contract and Consumer Finance Act (CCCFA) to require stricter scrutiny of borrowers' financial health. 

But since the CCCFA changes, bank customers have complained about having home loans declined based on spending too much on takeaways and Christmas shopping

Last month ASB Bank said about 7 percent of its customers missed out on loans due to the changes, while Core Logic last week noted the "significant drop in mortgage activity, adding additional weight to the worsening housing outlook". 

Reserve Bank data shows total lending commitments at $7.9 billion​ in December down to $4.6 billion in January.  

The latest Real Estate Institute data showed housing unaffordability hit a new record: it now takes 11.7 years for Kiwis to save a house deposit, up from 9.3 a year ago. 

The Government is standing by the CCCFA changes to "protect those most at risk from predatory and irresponsible lending". 

But Commerce and Consumer Affairs Minister David Clark said on Friday the Government is "making practical amendments to responsible lending rules to curb any unintended consequences being caused" by the law change. 

The Government is removing regular 'savings' and 'investments' as examples of outgoings that lenders need to inquire into when assessing the borrower's future expenses.

The legislation will also be clarified so that when borrowers provide a detailed breakdown of their future living expenses, there is no need to also inquire into their current living expenses from recent bank transactions. 

It will also be clarified so that the requirement to obtain information in 'sufficient detail' only relates to information provided by borrowers directly rather than information from bank transaction records.

Commerce and Consumer Affairs Minister David Clark and Prime Minister Jacinda Ardern.
Commerce and Consumer Affairs Minister David Clark and Prime Minister Jacinda Ardern. Photo credit: Getty Images

But don't expect an immediate change. Clark's office told Newshub the tweaks won't take effect until "early June after brief consultation with stakeholders". 

ACT leader David Seymour, who wrote to Clark on January 8 raising concerns about the law change, said the effects were crippling for those seeking a loan. 

"The occasional flat white should never have been a reason to keep a first home buyer out of the market."

Clark said the amendments were informed by feedback he received from banks and other lenders.

"Following my meetings with the banks at the end of last month to hear their concerns, I detected little enthusiasm for wholesale changes to the Act, but instead a preference for some practical amendments to be made to ensure the purposes of the legislation are best met."

A broader investigation, led by the Ministry of Business, Innovation and Employment (MBIE) and the Council of Financial Regulators, into the early implementation of the CCCFA amendments is ongoing.

Clark denied the CCCFA changes caused the drop in mortgages. 

"Thus far investigations have thrown up no reasons to believe the CCCFA is the main driver in reduced lending," he said. 

"The Reserve Bank's December figures highlight seasonal variation as a prominent contributor. In fact, December 2021 was still above trends from the same month in 2017, 2018 and 2019.

"It is also important to note that banks may be managing their lending more conservatively and this is likely due to global economic conditions. 

"And that a number of factors affecting the market have occurred at the same time as the CCCFA changes, including increases to the OCR, LVR changes and an increase in house prices and local government rates."

Tightening housing market

The Reserve Bank tightened restrictions on lending in November, with a 2013 measure known as loan-to-value ratio (LVR). 

LVRs were removed in response to the economic impact of COVID-19 in 2020 and later reinstated in March last year. 

Banks are now only able to lend 10 percent of their new lending to owner-occupiers wanting to borrow more than 80 percent of a house's value. 

According to the Real Estate Institute, currently 48 percent of household income is required to service an 80 percent LVR mortgage, based on the average property value, with the mortgage over a 25-year term. It's up from 33 percent in 2020. 

The Reserve Bank has also been creeping up interest rates to cool down the housing market - a fire it started after dropping interest rates to record lows to keep money flowing during the COVID-19 economic downturn. 

ASB Bank chief economist Nick Tuffley anticipates "a steady sequence" of interest rate hikes by the Reserve Bank as it tries to ease inflation, which will add additional financial pressure to homeowners with mortgages. 

The Official Cash Rate (OCR) hit 1 percent last month, up from the historically low 0.25 percent setting imposed at the start of COVID-19 to stimulate the economy. 

The 25-basis-point OCR hike would cost the average mortgage holder an extra $825 a year, or $16 a week, according to Reserve Bank Governor Adrian Orr.

ANZ and Westpac's economists pick the OCR to hit 3 percent around the middle of next year, while ASB is picking 2.75 percent in early 2023.