The Government is making changes to responsible lending regulations that banks blamed for creating an artificial credit crunch.
The changes remove some of the most controversial aspects of the tougher responsible lending laws, including borrowers being asked about their current living expenses based on recent bank transactions.
People reported being turned down for loans based on things like spending too much on a dog after the regulations were introduced in December as part of an effort to protect vulnerable borrowers from loans they could not afford.
Mortgage advisers and opposition politicians claimed the regulations prompted banks and other lenders to become “ultra conservative”, declining loans they would previously have made.
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In a letter to lenders and finance industry associations on Thursday, the Competition and Consumer Policy unit of the Ministry of Business, Innovation and employment confirmed how the responsible lending code would be updated.
Lenders would not need to ask about borrowers’ current living expenses from recent bank transactions, and living expenses breakdowns would need to be benchmarked against “robust statistical data”.
The changes removed regular ‘savings’ and ‘investments’ as examples of outgoings that lenders need to account for when assessing the borrower’s likely expenses.
Some people had reported having a higher KiwiSaver contribution rate while they saved a deposit had counted against them, because banks calculated how much they could afford on the assumption that contribution level would continue.
If a lender estimated expenses from recent bank transaction records, they could also ask how borrowers’ expenses were likely to change after the loan was approved.
Brokers had complained that banks had assumed that current expenses would continue once a mortgage was issued, allowing no leeway for borrowers to adjust their spending when they had a loan to repay.
A “reasonable surplus” was no longer required if a lender applied adequate buffers and adjustments to income and outgoings.
The changes also included guidance for when it was “obvious” that a loan was affordable.
The requirement to obtain information in “sufficient detail” related only to information directly from borrowers, not information from bank transaction records.
Commerce and Consumer Affairs Minister David Clark had ordered an inquiry into the new lending laws and regulations.
The changes, made after feedback from banks, other lenders and consumers, have now been finalised and will come into force on July 7.
The update aimed to tackle the most pressing problems raised after the changes to the CCCFA were introduced, while the rest of the investigation continued.
The final report was due to be released in July.