Natalie Vincent, who previously headed Ngā Tāngata Microfinance and was the head of financial wellbeing at Good Shepherd, says the decision to cut funding to organisations that help people get out of debt, at the same time more people would be getting into debt, is “crazy”.
“When we’re in a time of cost of living pressure and making adjustments to the responsible lending code which is going to open up greater access to credit – there’s no doubt people will be getting loans that they can’t afford.
“They’re taking down the guardrail at the top of the cliff and at the same time removing the ambulance at the bottom.”
Ngā Tāngata Microfinance and Good Shepherd are debt solution services, which, with Debtfix and Christians Against Poverty were funded by the Government in 2020 to provide debt consolidation loans as well as support and counselling for those in debt.
A 2022 external review commissioned by the Ministry of Social Development found the organisations provided “immense value” and strongly urged their continued funding.
“[These] products are highly effective, in terms of both reducing debt servicing costs and improving client experiences.
“On average, Debt Solutions Services intervention saw over $3,300 reduced from the debt level of Good Shepherd clients, $14,500 for CAP clients, and $20,750 for Debtfix clients.
“The lack of financial viability for providers outside Social Development’s funding poses a significant risk to sector sustainability. Addressing this will be important when planning for a permanent national Debt Solutions Services function. While capital funding could be a constraint for some providers, they are confident alternative sources are available – if operational funding is secure.”
But that operational funding will not continue past June this year.
At the same time, Commerce and Consumer Affairs Minister Andrew Bayly confirmed the responsible lending regulations introduced in 2021, amended in 2022 and again in 2023, would soon be repealed altogether.
“Our coalition Government is committed to rebuilding the economy and making life simpler by cutting red tape. We are revoking 11 pages of overly prescriptive affordability regulations, introduced by the last government, to enable Kiwis to access finance with confidence,” Bayly said.
“When the affordability regulations were introduced … it threw a bucket of cold ice over banks and financial providers by prescribing minimum steps to assess the affordability of a loan. The overly arduous checks meant the time it took to process loans dramatically increased. Lenders told me that a small loan that used to take two hours to process suddenly took up to eight hours.”
Changes to the Credit Contracts and Consumer Finance Act in 2021 did place stricter affordability requirements on lenders, and did result in some customers being denied access to credit they could afford. There were also cries from the industry that the rules stifled innovation, made it harder for customers to switch providers, and resulted in some firms backing out of the consumer lending market.
However financial mentors said it had stemmed the flow of harmful debt.
Vincent agreed: “Having those robust affordability and suitability measures in place was really key to protecting them from getting into lending that’s not sustainable.”
There was no doubt the changes were unfair to some borrowers, and the market saw a reduction in both demand for credit and the conversion rate of applications for credit following the changes.
But the Ministry of Business Innovation and Employment, in preparing a Regulatory Impact Statement for the repeal, said the affordability changes were not solely to blame for this.
At the same time the rules tightened, increased liability fell directly to directors and senior managers of the lending companies, which led to more conservative decisions being made.
“Lenders have tended to take the interpretation that yields a more conservative and easily defensible result. A more conservative approach typically results in lower income estimates, higher expense estimates and more extensive surpluses, buffers and adjustments. This results in a greater likelihood that lending will be declined. It also results in more detailed inquiries than may be strictly necessary, and a reluctance to make use of exceptions to a full affordability assessment,” officials said.
The overall lending and property market at that time was also unfavourable.
In March 2021 the Reserve Bank re-introduced loan-to-value ration restrictions after fully removing them during the Covid-19 pandemic. In May that same year LVRs were tightened for investors and then in November tightened even further for owner-occupiers.
They were not loosened again until mid-2023.
Interest rates and inflation were also starting to rise. In November 2021 the Official Cash Rate lifted again after sitting at 0.25 percent for 19 months.
It continued to rise from then until mid-2023 where it has sat at 5.5 percent.
House prices were also at their peak in late 2021.
In addition to this, the new affordability assessments were stopping people who could have afforded lending from getting it.
A 2022 review by the Ministry found borrowers across all lending types who should have passed the affordability test were being declined, or approved for less.
It concluded this was because of the specific wording of some of the regulations, these then not being interpreted correctly and lenders being overly cautious due to the liability laws.
In mid-2022, the Government clarified regular savings and investments should not be considered as “outgoings”, there was no need to inquire so intently into people’s current living expenses, and provided guidance around when lenders could tell it was “obvious” a loan was affordable.
In 2023 discretionary expenses were explicitly removed as something lenders should consider, and lenders were given greater flexibility about how repayments could be calculated.
The changes were expected to address all the “unintended consequences” that had beset the 2021 law.
But by that stage the damage was done, lenders remained cautious, and the National Party, by then in full election campaign mode, promised to wipe the slate clean and start again.
However, earlier in the piece National had been in favour of targeting the affordability rules rather than winding them all back.
Andrew Bayly drafted a Member’s Bill which would have seen different sets of regulations to be issued for regulated financial institutions than other types of lender.
The ministry’s preferred option in initially making these changes was also to have a more targeted approach and the recent Regulatory Impact Statement gave advice on the more straightforward of these, however given Bayly’s changed position and the request for a “quick and straightforward” solution, these options were not seriously considered.
“We are conscious that these constraints limit us to relatively crude options that may provide less effective solutions to the problem,” officials remarked.
An option to removing the requirements for banks and non-bank deposit takers was explored, although second-tier lenders argued it would be anti-competitive and the Commerce Commission agreed.
Carving out an exception for home loans – the main pain point from the 2021 changes – was considered, although banks said it would be confusing and inconsistent to have two affordability frameworks for the same customer – one who might be approved for a mortgage but not an overdraft or credit card.
Apart from the status quo option, this was the one consumer advocates preferred, however.
An option to remove the requirements based on lower annual interest rates was also looked into – for example under and over 15 or 30 percent – however there were concerns lenders would drop their rates to attract customers, and then make up the difference later with fees.
It was second-tier lenders’ preferred option, but least preferred by consumer groups and the Commerce Commission.
The option chosen of course was to remove the requirements altogether.
“We consider it the option most conducive to lenders investing in improvements to their affordability practices because it would be straightforward to implement … we expect it to be supported by all lenders and opposed by consumer advocates. The Commerce Commission has also confirmed it does not support this option,” the ministry said.
“The risk that the proposal to remove affordability requirements increases the incidence of unaffordable lending, if realised, is likely to disproportionately affect certain population groups. These would be groups who are more likely to be seeking credit from less scrupulous lenders or who are more vulnerable, by being less well equipped to judge affordability of the credit themselves (due, for example, to low levels of financial literacy, a poor understanding of English, financial stress, or pressure from family members to obtain credit). Māori, Pacific peoples and immigrants are likely to be over-represented in these groups,” the Regulatory Statement said.
Lenders will still be subject to general requirements to make “reasonable inquiries” into the affordability and suitability of loans, and will have to determine for themselves how to discharge that more flexible obligation.
Phase two of the reforms promised by Bayly would look at addressing the related issue of liability for directors and senior managers and a review of the Act’s high-cost credit provisions.
In addition the Commerce Commission will no longer be the regulator for this Act, with Bayly confirming that responsibility would move to the Financial Markets Authority.
