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What has happened to mortgage lending?

Analysis: New rules have turned the mortgage market on its head. Have the banks gone too far? Susan Edmunds reports.

Since the start of December last year, it’s been hard to go a day without hearing about a person turned down for a home loan, seemingly over a minor infraction.

One person was told they spent too much money on their dog. One was turned down despite having a deposit of 57 per cent, because she had been on maternity leave. One couple lost their pre-approval just days before an auction and saw the property sell for less than they would have been willing to pay.

Part of the issue for borrowers has been the tighter loan-to-value restrictions, which limit how much lending banks can do to low-deposit borrowers. But a bigger issue for many is the change to the Credit Contracts Consumer Finance Act (CCCFA) that took effect on December 1.

So what’s actually happening?

The CCCFA reforms brought new rules for all lenders, including banks.

The changes make it clearer what lenders are expected to ask, and also introduce new personal liability for directors and senior managers, with penalties of up to $200,000 if their organisation breach the rules.

The regulations require that the lender creates an estimate of the borrower’s income (if they will rely on this to repay the loan) and then expense estimates using various specified tests including new requirements to verify information received.

The lender must ensure there is a reasonable surplus in a borrower’s budget, including reasonable buffers, but Sophie East, a partner at Bell Gully, said it had not been established what counted as “reasonable”, and no guidance had been offered.

The legislation says outgoings include accommodation costs, insurance, rates, body corporate fees, school fees, child support, debt payments, utilities, food and groceries, clothing and personal care, child care, medical expenses, transport expenses, other frequently recurring outgoings such as savings, investments, gym memberships, entertainment costs or tithing.

Brokers say even putting more money into your KiwiSaver account can count against you unless you tell the bank you plan to reduce your contributions once you have bought a home.

But weren’t they already checking that people could afford their loans?

Yes, but not to this extent.

John Kensington, a financial services specialist at KPMG, said banks would previously have checked affordability “to a slightly different level and not this new level. What this new legislation has said if you’re going to lend to someone you really better make sure they can repay.”

He said the new rules outlined “very clearly” the minimum that banks were expected to do.

“You can’t use a formula any more that says if you’re earning $50,000 you’ll spend 80 per cent of your money, or whatever, on living expenses, or if you’re earning $200,000 you’ll spend 40 per cent. You can’t do that, you have to get the person’s data, scrape it and find out exactly what they are doing.”

He said people might normally cut down on their spending once they had a mortgage to worry about, but the banks no longer had a clear way to manage that.

“As they get older people’s priorities change and they might pull back into their shell a bit but if someone is turning up to the bank and turning over details showing all that, the bank has a problem – the bank could take a view that the person will change their discretionary expenditure but if they don’t and they get in trouble, the bank will get in trouble.’’

He said the Commerce Commission had not offered enough guidance on how to interpret this situation.

Banks were in a difficult position, Kensington said. No one wanted to be the first lender accused of acting irresponsibly.

‘‘Because the ComCom is not prepared to give guidance and say you can use your judgement, they’re probably not going to use judgement, they’re going to get all the data and make calls that are tougher than they normally would.’’

New Zealand Bankers’ Association chief executive Roger Beaumont said banks no longer had as much discretion as they had previously.

He said each had to design and implement changes to their own lending policies and processes, including staff training, to ensure they complied with the new rules.

‘‘There is not a uniform approach across the industry because banks work in a commercial and competitive environment and are responsible for managing their own risk, including their compliance with the law.

‘‘Banks are very much in the business of lending. They are also responsible lenders and take requirements to comply with the law very seriously.’’

Brokers say even putting more money into your KiwiSaver account can count against you.

Are they taking it too far?

There have been reports of some people being turned down because the bank was not happy with the number of times per week they had takeaways.

Banking expert Claire Matthews, of Massey University, said that sounded ‘‘Big Brother-ish’’ at first glance, and it would be inappropriate to set an arbitrary rule on how many nights out a borrower was

allowed to have. What mattered was whether they could afford them, she said.

‘‘It’s reasonable for the lender to be asking about takeaways as part of understanding what is spent on ‘food and groceries’ for example. But these definitions are about how much people are spending and therefore how much surplus they have to fund the loan repayments – they are not (or at least should not be) about the items on which people are spending their money.’’

She said the legislation’s definition of expenses that should be included was designed to ensure that everything relevant was captured.

‘‘Looking at how much is spent on groceries without also including regular restaurant meals and/or takeaways doesn’t provide a proper picture of how much a borrower is spending on food as the grocery bill will be smaller if it is for fewer meals. If a borrower eats out every night but still has a substantial surplus to cover their payments, it should not be relevant.’’

She said the new requirements might have made banks a bit more cautious, and they might not be lending to people they would have in the past. But in some cases, it could be to simplistic to conclude that a loan was turned down because of takeaways was too simplistic.

‘‘If they are simply applying the new rules that’s possibly reasonable. And the increased cost of houses will also have made it more challenging, along with concerns about increasing interest rates needing an increased buffer to be allowed.’’

What kind of impact is it having?

Centrix estimated that there had been a slowdown of about 23 per cent in lending after the introduction of the changes and the number of home loans processed was down by about 7000 compared to normal levels.

Can you avoid the scrutiny by using cash?

Matthews says that’s not the solution.

‘‘I don’t see that’s going to help. If they take the money out of the bank, the bank will still ask for evidence of how they’re spending their money.’’

Broker Glen McLeod said banks would question regular cash withdrawals.

‘‘I guess the simple thing is that if they are every Friday taking money out for the weekend, then that would be considered recreational expense. My advice would be to settle down all of your spending for three months leading up to your mortgage application. Keep it clean and keep it simple.

‘‘We are waiting on a new processing tool which is being trialled by the banks and us that will take bank statements and analyse them and split the spending into categories. There is no escaping.’’

Is this what the Government intended?

When the changes were announced, there was talk about protecting vulnerable people from lenders charging triple digit interest rates. Were the reforms really aimed at it harder for first-home buyers to get a loan?

Commerce Minister David Clark said he had asked the Council of Financial Regulators to bring forward their investigation into whether the CCCFA was being implemented as intended.

‘‘Banks appear to be managing their lending more conservatively at present, and this is likely due to global economic conditions.

‘‘It may also be that in the initial weeks of implementing the new CCCFA requirements there has been a decision to unduly err on the side of caution.

‘‘It must be said, a number of factors affecting the market have occurred at the same time as the CCCFA changes, including increases to the OCR, LVR changes and an increase in house prices and local government rates. An investigation by COFR will determine the extent to which lender behaviour, in respect of the CCCFA, is a significant factor in changes to banks’ lending practices.’’

Kensington said there were likely to be unintended consequences, such as problems for small businesses.

‘‘So many small or medium businesses have survived through the pandemic thus far by their owners putting money in. Some of those owners’ capital is coming to an end but they don’t want to relinquish the business yet. How will they get a loan from the bank now?’’

The CCCFA does not apply to business loans but many small businesses are funded by loans secured against a house.

The New Zealand economy would need money pumped into it to open up again, but it was difficult for the banks to lend, he said.

‘‘There’s no easy answer.’’ Some people might not get lending that they should have been offered, and might go to a finance company, where they would have to pay more.

‘‘What you’ve got here is good intentions but it needs to be tailored to fit the purpose better.’’

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2022-01-16T08:00:00.0000000Z

2022-01-16T08:00:00.0000000Z

https://fairfaxmedia.pressreader.com/article/282776359902701

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