The overall effect of the changes remains modest in scale – a fine-tuning rather than a rebuild – and the overarching structure of the regulations remains largely unchanged .
Controversial changes were made to the consumer credit laws in December 2021 by the government. Modifications have now been made after urgent consultation earlier this year. The changes address widespread concerns about the effect of the December amendments. The December laws imposed the same detailed suitability and affordability requirements on all lending types and all consumers, with limited lender discretion and narrow exceptions. The government’s changes are due to take effect from 7 July 2022.
So What are the Changes to the CCCFA at 7 July 2022?
Changes include new guidance in the Responsible Lending Code and specific amendments to the Credit Contracts and Consumer Finance Regulations 2004. These are:
Removing ‘Savings’ and ‘Investments’ from the definition of “Expenses”
Currently the law requires lenders to estimate borrowers’ expenses to ensure a loan is affordable. ‘Expenses’ are currently defined as including ‘savings’ and ‘investments. The amendments to the Regulations remove ‘savings’ and ‘investments’ from the list of expenses which reflects these are optional, and different in nature to a borrower’s outgoings or other necessary expenses. So, savings and investments will not need to be considered as part of the assessment of whether a loan is affordable.
Qualifying the Requirement for Detailed Expense Information
Currently the Regulations require lenders to ensure the information used to make an initial estimate of a borrower’s expenses is obtained in sufficient detail to minimise the risk that expenses are missed and/or underestimated that are material to the estimate. The amendment clarifies that the above requirement applies only where the expense estimate is based on “asking the borrower” about their expenses. It does not apply where the estimate is based on other sources, for example, bank transaction records. Thus, lenders do not need to check multiple sources of information to verify a customer’s expenses.
Excluding Certain Expenses
Currently when calculating expenses, the Regulations require the lender’s estimate to be based on the borrower’s current financial position and spending habits. There is no express provision allowing the lender to take into account changes in the borrower’s spending habits which are likely to result from entry into the loan. The Code will clarify that a lender can exclude an expense from the affordability estimate where it is clear in the circumstances that the expense will stop.
Reducing the Need for a ‘Reasonable Surplus’
Currently the Regulations require lenders to ensure borrowers have a ‘reasonable surplus’ after deducting expenses from income, but there is no current guidance as to what that surplus should be. The Code states that lenders do not need to apply a reasonable surplus in circumstances where the lender applies buffers or adjustments that adequately address the risk that likely income may be overestimated, that likely relevant expenses may be underestimated or that the borrower may need to incur other expenses that cause them to suffer substantial hardship.
Clarifying the ‘Obviousness’ Exemption
The regulations currently provide an exemption from the detailed requirements to estimate income and expenses where it is ‘obvious’ that a borrower can make loan repayments without suffering substantial hardship. The amendments to the Code will provide additional clarity on this exemption with clearer guidance (see box above).
Overall, and from a lender’s perspective, the most significant change is likely to be the clarity on the ‘obviousness’ exemption. The guidance will be helpful for lenders and should partially facilitate the provision of credit to consumers. However, commentators generally agree that the overall effect of the changes remains quite modest. Effectively lenders will still be required to conduct a very detailed, lengthy and invasive analysis of a borrower’s financial position. There is still little flexibility or discretion for lenders, who remain subject to formidable enforcement consequences and responsible lending practices/requirements. The government has advised that the Minister of Commerce and Consumer Affairs is considering what, if any, further actions are required and a final report on the wider review of the consumer credit regime is due later in July 2022.
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