Activating DTIs and loosening LVRs

In a submission to the Reserve Bank on its DTI proposals, the association says there may be some impact to owner-occupier borrowers under the proposal of a DTI of six with a speed limit of 20%.

It says a higher limit at a minimum of 25% should be set for this borrower group to allow for additional bank conservatism.

The NZBA, which has 18 registered bank members, now supports DTIs after previously opposing them, saying in 2022 that there would be “a real risk of adverse customer impact” if they were introduced.

However, the association says the loan-to-value ratios need to be loosened for investors as well. It argues there may also be some impact to investor flow at the proposal of a DTI of 7 with a speed limit of 20% due to complex lending scenarios

It says a higher speed limit should be set at 30% to allow these borrowers to still participate in the market as their DTIs tend to be higher.

The lobby group says the full operational effects of DTIs will not be known unless or until the policy is implemented, and it wants open communication to determine whether negative or unanticipated operational impacts occur.

Education

It says public education is essential as some comments have likened the introduction of the DTI framework to a full handbrake that will chill lending, especially for first home buyers.

“For instance, some commentators have asked questions about whether implementing a DTI could inadvertently bias lending toward high-income earners, since the focus is only on income and not on expenses, or whether it could inadvertently affect small businesses since banks may secure business loans with personal guarantees tied to the owner’s residential property,” the association says.

“To maintain confidence in the banking system, it is important the RBNZ is clear about whether these kinds of effects are likely or possible and, if unlikely, explain why.”

In particular, the following points need further public clarification:

1. Banks do not necessarily have to lend if an assessment falls within the DTI setting.
2. Banks are legally required to ask certain prescribed questions.
3. Banks cannot, when calculating business income for DTI, use forecasted or projected income (rather, the calculations must always be based on historical data).

The RBNZ will issue its final decision on DTI implementation in June and if the policy is approved it will be implemented as soon as possible.

The central bank expects trading banks to be operationally prepared for the new reporting from 1 April, but any DTI restrictions will not be imposed until July at the earliest. This gives the banks a minimum of three months to ensure they have their systems calibrated and are producing the new reporting efficiently and effectively.

The initial six-month regulatory measurement window is, in the association’s view, a practical approach as lenders navigate the new regulatory framework and the scale of complex
lending scenarios.

Difficulties

Making the landscape more difficult for banks is the government’s proposed changes to the Credit Contracts and Consumer Finance Act (CCCFA) this year.

Impending changes to the CCCFA may create uncertainty or confusion for front-line lenders and consumers if these changes and the activation of DTI restrictions are rolled out in quick succession, the association says.

It says the two changes will pull in opposite directions, with CCCFA changes loosening restrictions and DTI implementation tightening restrictions and it will be useful if the RBNZ remains aware of these other changes when activating its proposed DTI restrictions.