Credit law change backfires

In late December 2019, with no fuss and only minor dissension, Parliament passed the Credit Contracts Legislation Amendment Act.

Like most laws Parliament enacts, it had the best of intentions.

As the then Commerce and Consumer Affairs Minister Kris Faafoi said in his third reading speech, vulnerable people were suffering severe harm due to being targeted by "predatory" lenders.

That was why regulations were being tightened, so pay day lenders and mobile traders - often the last resort for people unable to obtain credit from trading banks and other registered lenders - had to ensure the people they advanced money could pay it back.

Almost all subsequent speakers focused on the usurious interest rates some unwitting borrowers had been forced to pay by unscrupulous lenders and commended the Bill to the House.

Few doubted that Parliament had done a good thing, and it was expected that a review of the new law scheduled for three years’ time would show that the vulnerable poor had now been afforded much needed protection.

But that review has had to be accelerated by the now Commerce Minister, Dunedin MP David Clark, after a series of articles in the Otago Daily Times which have highlighted that the law change is having a much broader impact than MPs expected.

The law came into effect on December 1 last year, so as to give lenders time to change their procedures to comply with it.

The law changes included amendments to the responsible lending code, which required lenders to do more due diligence about their customers before granting credit or a loan.

Just a matter of days later, consumers rebelled at what they perceived as overly-intrusive, downright invasive, and seemingly arbitrary provisions that they were now having to navigate.

Dunedin mortgage brokers revealed they had warned clients perceived over-expenditure on things like takeaways or coffee could disqualify them from securing a loan, and a Dunedin woman spoke out after a loan application was turned down after her bank questioned a $187 Christmas shopping trip to Kmart in Invercargill and her husband’s daily trip to the dairy to buy a drink while at work.

A Dunedin mother said she was told by a bank it would only consider giving her a mortgage if she returned to work within 90 days of giving birth.

Perhaps unsurprisingly, mortgage approval rates in Otago and Southland dropped by 6.5% the month after the new lending rules came into effect.

Was this a matter of unintended consequences, or should MPs have seen this coming?

There seems little doubt MPs did not have the inconsequential day-to-day spending of the majority of people in mind when they legislated, but they were most certainly warned that exactly what has happened could come to pass.

In its select committee submission the Bank of New Zealand warned against "prescriptive requirements" and urged that lenders be able to retain the right of discretion.

ANZ was concerned that there should be balance between responsible lending and access to credit, and worried that "in seeking to encourage compliance, the Bill will unintentionally restrict access to credit for those most in need."

MPs seem to have had their eyes firmly fixed on the centre of the target - the predatory lender - but fired away with a blunderbuss and hit the entire banking and lending sector in the process.

First home buyers, already facing a steep uphill battle to obtain a mortgage in a red-hot property market, now face a new high hurdle to clear.

Likewise, established property owners with a history of meeting their mortgage payments now have to leap through extra hoops to borrow, and small businesses are also battling to obtain short-term credit.

The law changes were not expected to create an impediment to business as normal, but they appear to have done just that.

It might afford the Government some small level of embarrassment but it needs to fix this, and fast.

Parasitic lending should be stamped out, but the Credit Contracts Legislation Amendment Act seems to be too big and too blunt an instrument to achieve that end.