The Government is seeking feedback on a Responsible Lending Code to support the reforms to the Credit Contracts and Consumer Finance Act 2003.
Submissions close on 13 August 2014.
The proposed code is intended to assist compliance with the responsible lending principles set out in the Act, and is due to come into effect from June 2015. The discussion document, put out by the Ministry of Business, Innovation and Employment (MBIE), seeks feedback on the code’s contents, including:
- whether it should differentiate between lenders and loan types
- how prescriptive it should be (i.e. getting the right balance between certainty and flexibility)
- the restrictions which should be applied to credit advertising (e.g. prohibiting advertising a monthly interest rate instead of an annual interest rate)
- the explanations to be given to borrowers as to the content of credit agreements and their variations (e.g. oral disclosure of certain key features or providing video clips on line)
- how to ensure that borrowers and guarantors are able to meet their obligations without substantial hardship. Possibilities include:
- following the Australian presumption of substantial hardship if the borrower can only repay the loan by selling their home (this would require the lender in circumstances where a person wants to take out a home loan which will stretch beyond their retirement to ascertain at the outset whether the borrower will be able to keep up the payments when retired)
- the more controversial option is to set a specific debt-to-income ratio, as the UK has done in an attempt to cool the UK property market. MBIE admits that there are difficulties with such an approach
- how to ensure that loans and credit related insurance are likely to meet the borrower’s requirements and objectives (this may require sales staff to give personalised financial advice and therefore be qualified under the Financial Advisers Act 2008)
- when verification of information provided by customers will be required
- how lenders should assess whether the security to be taken in relation to a loan is “excessive”. (It will be interesting to see what the code provides in this area – taking a small home loan over a valuable property should not be prohibited in circumstances where, say, the mortgage is nearing its end and has been transferred to a new lender because of better interest rates)
- what lenders should do prior to enforcing if a customer defaults and how they should treat the borrower, any guarantor and the property on a default
- what processes lenders should have to ensure that fees are reasonable, and
- whether lenders should be required to release any security at the end of a loan. We doubt this would be practical for large lenders.
The code will apply to lenders under consumer credit contracts and to credit contracts which are secured by consumer goods. The code will not be binding on lenders but will provide them with a safe-harbour so that, if they comply with its terms, they will be treated as complying with the responsible lending provisions.
The code is expected to be finalised in March 2015.