Tightened Policies for Bank Lending

October 2021

New lending requirements came into force on 1 October 2021 under the Credit Contracts and Consumer Finance (Lender Inquiries into Sustainability and Affordability) Amendment Regulations 2020 (the Regulations). The Regulations are aimed at protecting borrowers from unaffordable loans and ensuring that lenders are making due inquiries into their borrowers. This responsible lending incentive has been driven by the recent financial hardships New Zealanders have faced, as a result of Covid-19 implications as well as general harm caused by unaffordable loans.

The new Regulations sets out that a lender must;

1. Make reasonable inquiries to enable the lender to estimate both the borrower’s likely income and the borrower’s likely expenses on a corresponding basis; and
2. Be satisfied on reasonable grounds that it is likely the borrower will be able to make repayments without suffering financial hardship.

What can you expect from your lender?

• The key responsibilities for lenders, is that they must:
• Ensure the loan is suitable for your needs;
• Check that you are able to afford the loan;
• Ensure you understand the key terms of the loan; and
• Ensure the loan is not oppressive.

When determining if the loan is suitable, a lender is likely to ask questions regarding:

• The amount of credit needed;
• The purpose of the loan;
• Whether any flexibility is appropriate/needed; and
• Whether you want to pay the lump sums during the loan.

When determining if a loan is affordable, a lender is likely to ask questions regarding:

• Your income;
• Your expenses;
• Your credit history; and
• Whether you are in a position to repay the loan.

What does this mean for borrowers?

Inquiring into expenses is now a requirement for lenders which means they will be checking your income and comparing this to how much you are spending. These expenses include things such as rent, power, food, travel, and other household costs. It is essentially a deep dive into your spending history and habits to assess whether your spending patterns could lead to an inability to make your repayments under a loan agreement.

These Regulations are designed to protect borrowers from unaffordable lending, which means that future borrowers will need to ensure that they are implementing responsible spending practices in the lead up to applying for a loan. Responsible lending practices may include:

• Responsible budgeting;
• Avoiding credit services such as Laybuy or Afterpay;
• Maintaining a good credit score; and
• Paying off debts.

Although the new Regulations could make it harder for borrowers to obtain lending, it should increase the ability of borrowers to make repayments and reduce their likelihood of falling into financial hardship. Future borrowers will need to ensure they are not relying on the “idea” that they will become responsible spenders once they have obtained a loan, as lenders need to be satisfied of this before they are granted a loan.

How can we help?

If you have an existing loan approval from a bank and are concerned about whether it is still valid, feel free to get in touch and a member of our friendly team can assist.

Claire Brownlie
claire.brownlie@tp.co.nz
027 371 4376

Honor Mills
honor.mills@tp.co.nz
027 772 6973

IMPORTANT: The information in this article is of a general nature only and does not constitute legal advice. Tavendale and Partners do not accept any liability for any reliance placed on the information contained in this article and shall not be liable to you or anyone else for doing something, or omitting to do something, on the information provided above.