CCCFA wrecking ball to be turned on its head

Big changes are looming for the Credit Contracts and Consumer Finance Act (CCCFA) legislation.

Seen as the biggest wrecking ball the property market has ever encountered, Commerce and Consumers Affairs Minister Andrew Bayly says reforming the CCCFA is a priority.

Rewriting it to protect vulnerable consumers without unnecessarily limiting access to credit, was included in National’s coalition agreement with ACT.

Speaking to the Financial Services Council, Bayly says firstly responsibility for the CCCFA will be transferred from the Commerce Commission to the FMA, which will become the financial services conduct regulator while the Reserve Bank will be the prudential regulator.

In a specific two-pronged reform, the prescriptive affordability requirements for lower risk lending will be removed and a more substantive review of the CCCFA will be done. This will include reviewing its penalty and disclosure regime, and its relationship with CoFI.

Bayly says regulation changes will be identified by March/April and legislative changes will be ready by the middle of the year.

After the 2021 changes were made to the CCCFA, mortgage loan approvals slumped by 40% within six months. In December 2021 81,900 mortgages were completed but by May 2022 this had sunk to 45,440.

Bayly says processing times for lending applications increased by 50% across all loan types and banks estimated 6-7% of applicants who would otherwise have qualified for a mortgage had to be turned down.

“Change is needed. It is the detailed regulations and the strong liability regime that need to be reformed. Together, these two things have led to overly risk-averse lending decisions, created unnecessary compliance costs and reduced access to credit for consumers.”

He says the original intent of CCCFA was not to undermine good conduct requirements.

The 2021 changes unfortunately led to a significant decline in both traditional and short-term lending. “The result has been that vulnerable borrowers have had to turn to alternative unregulated high-cost sources, the very people the changes were seeking to protect them from. We aim to subject high-cost lenders to adequate regulation surrounding lending practices.”

Reforms positive

Mortgage adviser David Green, says while the CCCFA caused a giant credit crunch, there were other anti-property investor/landlord plays in the mix.

Labour not only pushed through the CCCFA legislation but the phasing out of tax deductibility and extension of the Brightline test. “There were a number of changes in the October period of 2021 that has a huge effect  and are still having on the property market.

The changes the coalition government signalled definitely need to happen. The CCCFA reforms are positive. They will allow banks to get back to common sense lending and ask the right questions for the right risk. They won’t ask pointless questions, such as how many coffees a customer with $200,000 of income is buying. On the other hand, those questions are appropriate if a customer who has a handful of credit cards is applying for a car loan.

“Hopefully these reforms will remove a lot of red tape for banks and consumers and help mortgage advisers focus on the right outcomes rather than ticking boxes. A lot of red tape was introduced over the past few years trying to solve a problem that wasn’t there. All anyone asks for is a practical system for lending.

Sound lending

David Cunningham, chief executive at Squirrel Mortgages thinks the CCCFA reforms will return mortgage advising back to the way it was.

“What was the stated intent of the CCCFA changes that made it prescriptive? It was about loan sharks, who are a fraction of the market. Instead it imposed onerous conditions on organisations such as banks, who haven’t and do not do risky lending.”

Banks, which make up the bulk of the financial markets, don’t want to do risky lending, Cunningham says. “Maybe loan sharks are happy to charge big interest rates, but the CCCFA was a sledgehammer taken to an ant and missed.”

Banks should be able to determine what is risky and what is not and make their own assessments without being overly prescriptive, he says. “They practice sound lending every day. That is what we need to go back to. These reforms are a step in the right direction.”

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