Credit Contracts and Consumer Finance Act - Prescribed Suitability and Affordability Assessments for Consumer Credit Contracts - Is Your Business Ready?

On 1 October 2021, the long anticipated Credit Contracts and Consumer Finance (Lender Inquiries into Suitability and Affordability) Amendment Regulations 2020 ("Regulations") came into effect after being passed into law by the Government in November last year. The changes are well-intentioned, with the purpose being to tackle high-cost consumer loans and minimise borrower hardship that had been well documented in recent Ministry of Business, Innovation and Employment inquiries into mobile trading. However, like all regulation, there is a trade-off, and these highly prescribed regulations place a significant compliance burden on responsible lenders, particularly small and medium enterprises.

In this article, we provide an overview of these Regulations and what they mean for your business.

Overview of Lender Responsibility Principles

Section 9C(3)(a) of the Credit Contracts and Consumer Finance Act 2003 (CCCFA) requires, among other things, in relation to a consumer credit contract with a borrower, that a lender:

        "(a) make reasonable inquiries, before entering an agreement, so as to be satisfied that it is likely that –

                (i) the credit or finance provided under the agreement will meet the borrower's requirements and
                       objectives [suitability]; and

                (ii) the borrower will make payments under the agreement without suffering substantial hardship [affordability]."

Until the Regulations were introduced, the CCCFA was light on prescriptive requirements for assessing affordability and suitability. From 1 October 2021, however, lenders will have to make inquiries as well as follow prescribed practices and procedures when making these inquiries and significantly, will need to record these processes for each borrower.  

These requirements will need to be followed where the borrower enters into a new contract or there is a material change to an existing contract.

Suitability

Lenders will need to determine the requirements and objectives of the borrower seeking credit, or suitability.

This requires inquiring into the purpose for which the borrower seeks credit. Among other factors, the Regulations require lenders to make reasonable inquiries into:

• the amount of credit, or credit limit, of credit or finance that the borrower seeks;

• the purposes for which the credit or finance is to be used or is intended to be used;

• the term of the credit or finance or, if the agreement is a revolving credit contract, whether the borrower requires credit on an ongoing basis; and

• whether the agreement will include any non-avoidable fees or charges for any additional goods or services that were not part of the borrower's stated purpose.

The Regulations prescribe further and more specific inquiries if:

• the agreement will include any non-avoidable fees or charges for any additional goods or services that were not part of the borrower's stated purpose for obtaining credit;

• the agreement provides for financing of any fees or charges that could be paid for separately;

• the agreement will require the making of one or more lump sum payments instead of, or in addition to, any regular payments;

• the agreement is a credit sale and the borrower will not have the property within 20 working days of the agreement;

• the borrower is refinancing; or

• the agreement is for a reverse mortgage.

These lists are non-exhaustive and the lender may be required to take into account other circumstances or factors if the context requires it. Additional requirements will also apply in respect of a repayment waiver or extended warranty being financed or an insurance agreement being entered into.  

Once the lender has determined the borrower's requirements and objectives, the Regulations require the lender to compare these against the agreement and make an assessment of whether the features of the agreement meet the borrower's requirements and objectives. Note that it is not an assessment of whether the agreement best meets the borrower's requirements and objectives, but rather whether the type of credit or finance is within a range of finance or credit products that will meet the borrower's requirements and objectives.

Affordability

Before entering a new agreement or making a material change to an existing agreement, lenders will need to satisfy themselves through reasonable inquiries whether the borrower will be able to make repayment without suffering substantial hardship. In addition to the following prescriptive requirements, the lender may need to inquire into other matters should context require it, for example where there is conflicting information.

When Borrowers Rely on Income to Make Payments

If the borrower represents that it will be relying on income to make repayments under the credit contract, the lender will be required to conduct full income and expense assessments to determine affordability. The lender will have to make reasonable inquiries into the borrower's likely income and expenses on a weekly, fortnightly or monthly basis. These are separate inquiries and once an estimated figure has been determined for each, the lender will also have to ensure that there is a reasonable surplus, buffer or adjustment to adequately address the risk that income is being overstated and/or expenses are being understated, and as such that the borrower will be able to make repayments without suffering substantial hardship.

The Regulations comprehensively prescribe how these calculations are made and the verification required in respect of both the borrower's likely income and expenses. For example, the use of benchmark statistics in these calculations are prescribed.

There are two major exceptions to these prescriptions, notably that:

          (a) After reasonable inquiries it is obvious that the borrower will not suffer substantial hardship,
                 as requiring them to conduct an affordability assessment would be disproportionate; and

          (b) An existing contract between the same borrower and lender is replaced or varied, and for which:

                (i) The lender will not make an additional advance that was not contemplated in the initial affordability
                        and suitability assessments; and

                (ii) The total credit limit under the contract will either not increase or increase only to reduce or
                        postpone existing repayments due to the borrower's financial difficulties.

When Borrowers Rely on Income to Make Payments

If the borrower seeks to rely either wholly or partly on other sources to make repayment, the lender will need to make reasonable inquiries into the sources from which the borrower intends to make payment from. This might include, for example, relying on the proceeds of a sale of property. The lender must be satisfied on reasonable grounds that it is likely that the borrower will be able to make repayment from the alternative source without suffering substantial hardship.

Preparing your Business

The Regulations are highly cumbersome and place a very heavy compliance burden on small and medium-sized lenders. Given the media attention that credit providers have been subject to in the past few years, the Commerce Commission are likely to be lying in wait to tackle noncompliance and expect lenders to go to a very high degree of enquiry on a borrower's individual circumstances.  

Our team at McVeagh Fleming is ready to assist lenders and credit providers of all sizes with guidance on the best method of approaching compliance with the new Regulations.

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