How the CCCFA changes will impact borrowers
Now that changes to the Credit Contracts and Consumer Finance Act 2003 (CCCFA) have come into effect, there'll be a closer eye on loan affordability and suitability.
Changes to the CCCFA, which came into effect on 1 December, are designed to protect potentially vulnerable borrowers, and help them to make informed choices and keep track of their debts.
Under the changes, lenders need to take additional steps to ensure any new loan, including not just mortgages, meets a borrower's objectives and requirements, and that a borrower can reasonably afford the loan repayments.
While the changes will not apply retrospectively to existing loans, 'material changes' to a loan – such as extending the interest-only term or increasing the credit limit – may mean those additional steps are necessary.
The changes have a few implications for borrowers, but the onus is really on lenders to ensure compliance. And the challenge for some lenders will be their blanket approach to compliance processes, which will add sometimes-unnecessary steps to the approval process.
Closer inquiries under CCCFA
As lenders will need to make 'reasonable inquiries' about the affordability and suitability of credit products, borrowers should be prepared for lenders to dig a little deeper into their financial situation than they might have done previously.
While lenders have always been able to make these inquiries, under the new regulations, they will now be legally required to do so.
Lenders will need to ask about a borrower's requirements, and ensure the features of the credit product meet the borrower's needs and objectives, which could be to take out a loan, purchase an asset or repay a loan within a specified time.
Borrowers can also expect lenders to take a closer look at their financial position, including if the borrower's income exceeds their expenses.
Previously, a lender could take the personal financial information that a borrower presented, such as calculation of assets, income or debt, at face value. Under the CCCFA changes, the lender may need to verify the borrower's assets, income or debt with reliable evidence such as bank statements, contracts or invoices. Lenders must also consider whether expenses presented reasonably match the borrower's circumstances.
Based on the inquiries, a lender will determine whether the borrower can meet the loan repayments without experiencing substantial hardship.
Changes to the CCCFA indicate that these inquiries will also be required in advance of making a 'material change' to a loan – such as extending the interest-only term or increasing the credit limit.
Borrowers should also bear in mind that lenders will need to keep records of their suitability and affordability assessments, including the outcome.
Tailored approach to meeting CCCFA changes
While all lenders are subject to the CCCFA obligations, not all lenders will meet these obligations in the same fashion.
Resimac will continue to offer loans that meet borrowers' objectives and requirements, and has opted for a customer-centric approach. For all applications, we will begin by assessing a borrower's debt servicing coverage before determining the level of additional information required.
For applicants with greater discretionary income – and for whom affordability is therefore less likely to be an issue – Resimac will continue to use benchmarking to assess expenses. This tailored approach, which assesses the need for further inquiry on a case-by-case basis, ensures eligible applicants are not subjected to unnecessary and onerous inquiries.
When we do need to undertake additional inquiries to meet the compliance requirements, our existing processes ensure the process is speedy. To ensure you are equipped with the knowledge, understanding and confidence to achieve your financial goals, speak with an adviser or lending specialist.
This material has been prepared for information purposes only. This should not be taken as constituting professional advice. You should consider seeking independent legal, financial, taxation or other advice to determine how this information relates to your own circumstances.