The return of lender discretion
New Zealand's Credit Contracts and Consumer Finance Act (CCCFA) reforms are set to bring a more nuanced approach to lending, and non-bank lenders are positioned to benefit from the changes.
Industry leaders from Pepper Money, Avanti Finance, and Resimac shared their perspectives on the upcoming regulations in an exclusive interview with NZ Adviser.
A background to the everchanging CCCFA
While the CCCFA has been around for over two decades, it wasn't until 2021 that it became a major talking point again when the Labour government changed the policy.
Olivia Meo-Groser (pictured above centre), chief risk officer at Avanti Finance, said these 2021 CCCFA reforms introduced “a number of welcome borrower protection measures”, particularly for vulnerable customers accessing high-cost credit.
“However, the prescriptive lending requirements also removed lending discretion from responsible lenders resulting in a move towards more conservative lending practices,” Meo-Groser said.
These revisions required lenders to follow a standardised method for assessing borrowers' ability to repay loans. Everyone was treated with the same level of risk, regardless of whether they were applying for a small overdraft of $1,000 or a significant home loan of $1 million.
The changes led to immediate backlash, with one adviser labelling it “the most draconian piece of legislation” they had ever seen.
In 2022, the then-government commissioned an investigation into the changes, leading to further amendments, the first of which came into effect on July 7 of that year.
By April 2023, the government backtracked from its original position, announcing new rules that explicitly excluded discretionary expenses from affordability testing.
However, the National Party thought even these changes didn’t go far enough.
With the National Party winning the general election in October, CCCFA reform was prioritised, and by April 2024, Commerce and Consumer Affairs Minister Andrew Bayly revoked 11 pages of the affordability regulations.
And while this was “only the first phase” of reforms, Bayly had previously told NZ Adviser that in his view, the CCCFA regulations should be tailored towards high-cost lenders (such as payday lenders), rather than banks and tier 2 products, such as credit unions.
Giving lenders discretion to strike the balance
Overall, Avanti Finance, Pepper Money NZ, and Resimac all supported the latest round of CCCFA reforms, with Campbell Smith (pictured above left), Pepper Money NZ country head, calling the proposed amendments a “welcome improvement”.
“Lenders will once again be empowered to use our experience and judgement when assessing the suitability of an applicant for credit,” Smith said.
“Currently, lenders have been obligated to operate with prescriptive assessment requirements, that were in my view an intrusive overreach, that at times resulted in lenders treating our customers as though they were not financially responsible or reliable.”
From a non-bank perspective, giving lenders discretion again is the crux of the issue.
Luke Jackson, (pictured above right), general manager of Resimac, said the non-bank lending space has talented and skilled professionals who are adept at deciding the best course of action, even for out-of-the-box clients.
“It’s what we do best and hopefully the CCCFA changes will help reinforce our expertise while still reinforcing responsible lending.”
As Meo-Groser put it, the new reforms appeared to “strike a better balance between borrower protection and access to credit”.
Essentially, it’s about shifting the narrative from where responsible lending meant no nuance and assessing a client’s eligibility with a fine-toothed comb.
Smith argued that responsible lending requires both reliable affordability checks and minimal “intrusive and unnecessary” inquiries to understand the borrower's situation and offer suitable loan options.
“The adviser and customer experience are at the centre of any decision we make, and this extends to completing affordability assessments, which are critical for delivering the right customer outcomes.”
Smith said that according to some estimates, around 10% of otherwise eligible customers would have qualified for a suitable credit arrangement were it not for the prescriptive affordability assessment requirements.
“By allowing lenders to rely on our experience and exercise our own judgment, we can now consider applicants that undertake to reduce their discretionary expenses, which is a reasonable approach and a realistic expectation,” Smith said.
Will the latest reforms swing the pendulum back?
Non-bank lenders play a valuable role in the banking sector, offering an alternative source of funding from traditional banks. Borrowers who use non-bank lenders typically require a more tailored approach and individual solution.
As the CCCFA reforms will allow lenders to exercise discretion around how they collect information and assess a loan, Meo-Groser said Avanti Finance expects an increase in the number of borrowers being able to access mortgages from non-bank lenders.
“As a non-bank lender, we’re experienced in treating all borrowers as individuals and considering their unique circumstances and requirements,” Meo-Groser said.
“At Avanti, we feel that we’re well placed to adapt and adjust to these changes to provide the best solutions to our customers while continuing to always do what’s right.”
Smith said Pepper Money’s “customer-centric approach” had always considered an individual’s unique set of circumstances, in a way that other lenders with a more algorithmic and prescriptive approach were unable to.
Regardless of legislative limitations and challenges, Smith said Pepper Money’s client-oriented mindset has allowed them to deliver solutions through its scenario workshopping service. “We’ve always evaluated applications with an appreciation and understanding of unique circumstances, be they life events, or irregular or unusual income,” Smith said.
“Our ability to swiftly adapt to change, be it regulatory or otherwise, is a core component of our nonbank proposition. Therefore, we are confident that we will competently navigate the imminent amendments to the CCCFA and continue in our commitment to serve the underserved.”
Jackson said the pendulum probably did swing a bit too far in recent years, but as it swings back, the non-bank sector’s “speed and ability to adapt allows us to come into our own”.
“When you’ve got big organisations with a lot of people involved, even though the opportunity might shift, it takes a lot of time internally and culturally to shift.”
Jackson said that culturally, the essence of non-banks is adaptability – “it’s what we know”.
“The employees of larger organisations in the banking sector, all many of them know is the last few years,” Jackson said.
“Regardless of what the final iteration of the CCCFA becomes, our systems and processes are nimble enough to seize any opportunities that may arise.”
