Only time will reveal to what extent the CCLAA reforms will impact borrowers, but we will follow with interest the questions below:
- The increased administrative burden due to the increased requirements for suitability and affordability assessment, and the time and cost implications for granting loans. Delays will frustrate both lenders and borrowers and will not promote efficient transaction execution. The increased administrative costs borne by lenders may ultimately have to be passed on to consumers.
- The extent of evidence collected by lenders to demonstrate how they met the increased affordability and convenience requirements. Evidence and records kept should show that a sound affordability and adequacy assessment has been conducted and that the right internal processes have been put in place to ensure this. If investigated, a lot will depend on a lender proving they’ve got their systems up and running, with a good defenseless outcome for a bad process.
- With the increased penalties for LCCFA violations, lenders may naturally take a more cautious approach in their adequacy and affordability assessments. Credit could become increasingly difficult to access for consumers, and in particular for consumers to whom more complex or non-vanilla circumstances apply.
- The Regulations provide that a suitability and affordability assessment may not be required if it is objectively considered “obvious in the circumstances” that the borrower can make repayments without experiencing financial hardship. This is meant to be a high test. The limited scope of this exception can prevent lenders from supporting good results for clients. For example, a long-time client of a lender may find it unnecessarily cumbersome to be subjected to full income and expenses when requesting an increase (however large) to an existing credit limit.
While the heart of consumer credit reforms focus on consumer protection, the real test will be whether the additional legislative protections and obligations for lenders are proportionate and properly addressed. It remains to be seen whether a viable balance can exist between these and serving consumer credit demand, allowing healthy competition among credit providers (including the entry of new providers) and ensuring that credit remains. reasonably accessible for the benefit of all consumers and the economy more broadly.
This article was provided by Dentons Kensington Swan.
Pauline and Liz are both senior members of Dentons Kensington Swan’s banking and finance team.
Pauline is a Special Advisor with over 15 years of experience working with lenders and borrowers on a wide variety of syndicated and bilateral financing arrangements. She has specialized expertise in corporate and structured loans, funds and financing based on financial institutions and real estate financing.
Liz is a partner with over 15 years of experience in New Zealand and internationally acting for originators, borrowers, funders and trustees. She has particular expertise in acquisition financing, asset and leasing financing, real estate and construction financing, syndicated and club loans, and securitization. Liz heads the banking practice of Dentons Kensington Swan.