New CCCFFA Rules Will Magnify Debt Hardship For Kiwis

The loosening of rules in the Credit Contracts and Consumer Finance Act (CCCFA) this week will open the door to an escalation in ‘fictitious’ consumer budgets.

Full Balance Financial Coaching’s Shula Newland said she is concerned that this will mean continued harm done from unaffordable loan payments that will leave many New Zealand working families unable to provide for their children.

Newland said she has grave doubts about whether the legislation, now with the amendments and a backup media statement, will have the impact that it was intended to have in alleviating harm to consumers.

“I think people have forgotten why this legislation had to be upgraded in the first place, to protect the harm done by consumer short term lending. Unfortunately, due to the unintended consequences to mortgage borrowing, the legislation has been watered down.”

Newland said the media statement on the legislation states that borrowers can estimate their future living expenses, without looking at how they spend their money at the moment. This can then be compared to the lender's statistical benchmark data—but without scrutinising the borrower's bank accounts to verify their current spending.

“This is opening the door for made-up budgets because the borrower often does not understand how they spend their money in the first place, and they just come up with any basic figures. They are also biased because they just want to get their loan approved.

"If it goes to court due to unaffordable payments, lenders will blame their decision to lend on the information the borrower provided. The more desperate the borrower, the more likely they are to make things up—which was the issue with the original legislation before the 1 Dec changes.”

Newland said the assumption by the lending industry is that people will just reduce their spending to bare basic living costs be able to afford the loan.

“But we know that it is extremely hard for people to change their spending—we see clients continue to spend after getting a new loan, and then not understand why they are struggling.

“They then burn through any savings they may have had, which can then lead onto continue borrowing when they do not have savings to draw on for those bigger one-off costs. And so the cycle continues, keeping them in a poverty trap."

Newland said there is also a massive gap in the legislation. At no time does the borrower have the ability to check the outcome of the affordability assessment. The assessment figures go into a black box and the borrower is none the wiser—all they know is that their application was accepted or declined.

"However, one of the Responsible Lender principles is that the consumer can make an informed decision about entering into the contract. But how do they do that when they do not have a record of their affordability, nor how they were assessed? Nor do they understand how the new loan payment will affect their life once they get the loan.

"Consumers cannot check the figures overall, nor understand the changes they are going to need to make. They cannot confirm that they the assessment number are accurate once lender has added them up. This seems a huge under-sight,” Newland said.

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