A draft Responsible Lending Code has been released for comment by the Ministry of Business, Innovation and Employment (MBIE).
Submissions are due by 5pm, 23 December 2014.
The Code seeks to provide an implementation guide to the Responsible Lending Principles (the Principles) contained in the Credit Contracts and Consumer Finance Amendment Act 2014 (the Amendment Act).
It will necessarily create new costs for lenders. The skill for policy-makers and regulators will be to get the balance right so that the vulnerable borrower is protected without creating an unnecessary compliance burden on business.
The Code is non-binding and does not act as a “safe harbour” for lenders, but compliance will be deemed to be compliance with the Principles.
We outline a few areas for potential submission.
The Code proposes a series of rigorous checks and procedures that a customer would need to go through before gaining a “pre-approval”. These may make it difficult for lenders to grant pre-approvals to home buyers.
Policy and processes
Lenders would need to put in place specific policies and processes in areas such as approving advertising material, approving or declining applications, handling complaints and training staff on the Principles. Implementation of these could be time and cost onerous, especially if a lender needs to overhaul its IT systems.
An example is the proposed requirement that a lender should highlight key features of the credit contract “regardless of the channel through which credit is provided.” This may be difficult to achieve over the phone to the same standard as could be achieved in person. Lenders must ensure that all methods of communication are at the same standard.
Ensuring the agent’s policies
Lenders must ensure that their agents understand and comply with all relevant legal obligations and policies, and that they have appropriate processes in place. Agents for this purpose include brokers, debt collectors and retailers or motor vehicle dealers providing point of sale access to credit.
The level of scrutiny implied by this requirement would be difficult to achieve where the agent is independent. It is unlikely that a bank, for example, could gain such a high level of access to an independent agent’s internal processes.
The draft Code also explicitly states that, even if a lender has adequate systems and procedures in place, the Court does not have to believe that these have been adhered to. This is not a major departure from current Court practice but it is an express statement in the Code.
Knowledge of borrower requirements
A lender should have an in depth understanding of the borrower’s requirements such that an assessment can be made as to whether the credit arrangements will be likely to meet the borrower’s needs. Further, a lender cannot sell a product to the borrower that he or she does not need. The example the Code gives is that an unemployed borrower will not generally need insurance to cover against the possibility of unemployment.
MBIE is awaiting the Court of Appeal decision, due next year, in Sportzone/MFT v Commerce Commission before determining what fees a lender can reasonably charge and what connection those fees must have to the credit contract in question.
The Code states that lenders should re-evaluate fees as soon as possible after they realise that they generated profit from fees.
The Code enhances consumer protection, predominately in the realm of default and repossession. Here, the Code aims to ensure that repayment occurs, and that lenders are not punishing a borrower in a default situation.
What if the lender does not comply?
If lenders do not comply with the Code they may be held in breach of the Principles in the Amendment Act. As a result, the Court may order compensation or injunctions and the lender may be banned from lending in future.
Non-compliance is also one of the factors that could lead to a contract being reopened for oppression.