Consumer credit law changes and their impact on lenders
The Credit Contracts Legislation Amendment Bill that we reported on last year has now been passed into law.
The Credit Contracts Legislation Amendment Act 2019 was passed in December 2019. The Act sets out a number of changes to the Credit Contracts and Consumer Finance Act 2003 (CCCFA), including some new requirements for lenders. Some of these changes are now in force but it is proposed the bulk of the amendments will not apply until 1 April 2021. Below is a summary of the key changes and when they apply:
From 20 December 2019 increased enforcement and tougher penalties apply under the CCCFA. (There were also other minor changes, including to disclosure requirements and creditor enforcement rights).
On 1 June 2020:
- Mobile traders and high-cost lending: New provisions relating to mobile traders and high-cost consumer credit contracts will come into force. These are the key changes that were introduced to protect against “loan sharks” and predatory or unscrupulous lenders. They close the loophole previously relied on by “truck shop” lenders. In summary, there will be a 0.8% daily interest cap to prevent the amount a lender can charge borrowers right from the start of a loan, and a cap on the total cost of high-cost loans, limiting the total amount owed (including all default fees and interest) to twice the amount originally borrowed. This means that high-cost debts cannot keep growing indefinitely, and is intended to help reduce high-cost loans being given to those who can’t afford them. In general, the new limits will not apply to agreements entered into before 1 June 2020 (but existing agreements will still be taken into account in certain circumstances).
- Director/manager liability: New duties on directors and senior managers to ensure lender compliance will apply. Directors and senior managers will be personally liable for any breach of duty that occurs from this date, including in respect of existing agreements.
The remaining amendments will come into force on 1 April 2021 or any earlier date(s) set out by the Governor-General by Order in Council. Under a draft Commencement Order released by the Governor-General for consultation, it is proposed that the following changes will apply from the following dates:
On 1 September 2020 applications will open for certification of directors and senior managers as fit and proper persons, and other changes regarding the Court’s powers and injunctions will apply.
On 1 April 2021 most of the increased responsible-lending obligations will apply, in particular:
- Record-keeping: Creditors will be required to keep records about the following and make these available to borrowers, their dispute resolution provider or the Commission on request:
- Responsible lending: inquiries made by them to comply with the lender responsibilities, including new affordability and suitability assessments; and
- Fees: how their fees have been calculated and to demonstrate that each fee was not unreasonable at the time it was set or reviewed.
- Fee review: Creditors will also be required to review their fees if the reasonableness of the fee is likely to be affected for any reason (e.g. if there is any change in the creditor’s business or costs) and to reduce fees if the review identifies the fee as now unreasonable.
- Disclosure: Creditors will be required to make additional disclosures about debt collection, dispute resolution schemes and financial mentoring services in certain circumstances.
- Certification: Creditors and mobile traders will be required to hold certifications and meet fit and proper person requirements (from date of next annual confirmation for existing creditors).
- Advertising: Additional new advertising standards will apply.
On 1 June 2020 the rest of the CCCFA amendments will apply.
Some of these changes will apply to existing agreements (e.g. the disclosure requirements) or existing agreements that are amended after the changes come in to force. They should be considered with any refinancing or existing loan restructure.
These amendments call for new and amended regulations under the CCCFA. In preparation for these changes, MBIE has released draft regulations and accompanying commentary and is currently seeking feedback on these documents.
The draft regulations set out requirements for the affordability and suitability assessment, responsible advertising standards, disclosure, securitisations and covered bond arrangements and other matters. MBIE has asked for written submissions on the draft documents by 5 February 2020.
These new requirements will make it harder to provide timely loans and will require much more record-keeping from lenders. To prepare for these impending changes, lenders should start keeping appropriate records now regarding their responsible lending practices, fees, loans offered and general business. Some of that information may need to be submitted to the Commerce Commission as part of a new annual return obligation introduced under the Amendment Act so it will be important for lenders to keep good records. Lenders should consider obtaining advice regarding whether their current documents and practices will meet the new legal requirements. Lenders will face much more scrutiny under the new laws, particularly if they deal with vulnerable borrowers, or provide high-cost loans.
Lenders will also need to take more care when any complaint or hardship application is received or when a borrower is in arrears or is declined any high-cost credit, and refer the borrower to dispute resolution scheme and financial mentoring services in those situations. It will be important not to rush through the loan application process and to be aware of the new responsible lending requirements before they come in to force.
The draft Regulations, Commencement Order and Consultation documents are open for public feedback until 5 February 2020 (see here for further details). If you have any comments about the new requirements before they come in to force, now is the chance to have your say. Once all submissions have been analysed, the proposed new regulations and any amending regulations will be finalised and made, likely in April 2020, with all changes in force by April 2021.
Want to know more?
If you have any questions about the proposed new changes, or the existing consumer credit law, please contact our specialist banking and finance team.