Media Releases

Law change creates new climate for borrowing

3 June 2015

Consumers in the market for a loan can expect to see significant changes to lending practices after an overhaul of consumer credit law, which takes effect from Saturday.

Changes to the Credit Contracts and Consumer Finance Act 2003 come into force on June 6. The Commerce Commission will be responsible for enforcing the amended law and will have a wider range of tools which it can use to better protect New Zealanders.

One of the key changes is the introduction of lender responsibility principles. These new rules require lenders to make reasonable enquiries before entering into a loan or taking a guarantee to be satisfied that the credit provided will meet the borrower’s needs. The lender must also be satisfied that the borrower or guarantor will be able to make the payments under the loan, or comply with the guarantee, without suffering substantial hardship.

Commissioner Anna Rawlings said; “Lender responsibility will change the way loans are made. The new rules will give New Zealand consumers more protection and better information when borrowing money and require all lenders to act responsibly. This is particularly important for vulnerable borrowers.”

“Lenders must ensure loan documents are clear, concise, and intelligible so that borrowers can understand them and make informed decisions. Borrowers will also need to be prepared for more thorough questions and provide evidence to ensure the loan is suited to them.”

The changes also mean that lenders must publicly display their interest rates and fees as well as their standard form contract terms. This allows consumers to shop around, whether online or in-store when choosing the best loan for them.

These new stricter rules apply to all lenders who provide consumer credit, take security over consumer goods, or enter into buy- back transactions. They include banks, car dealers, pawnbrokers and payday lenders.

Repossession laws are also updated under the changes with an increased focus on consumer protection. Lenders are no longer able to take security over essential goods such as beds and fridges. Repossession Agents must also now be licensed or can be fined up to $200,000 for individuals or $600,000 for companies. The Commerce Commission acquires a new enforcement role in relation to unlawful repossession practices.

“The arrival of the Responsible Lending Principles has set a benchmark for a more transparent and robust lending process which all lenders must follow. This allows us to better protect consumers – especially those that need it most,” Ms Rawlings says.

Most of the changes apply only to contracts entered into on or after 6 June 2015, but there are some exceptions. Read more information on the changes.

Background

The example below clearly shows how current laws place the responsibility on the borrower.

A man bought a used car from a South Auckland car dealer he needed for a new job. The man already had significant debt he was struggling to repay. The car was $14,000 but after nearly $5,000 in fees and 28% interest were added over a four year term the car was going to cost him over double the price – just under $30,000. He questioned this but the lender reminded him of his less than ideal credit score, implying he would struggle to get credit elsewhere.

With his existing debt problems, the weekly $140 payments were unsustainable. He soon defaulted, incurring further fees and interest, and was unable to catch up. Eventually the car was repossessed and sold for less than $5,000. He still had a loan of over $20,000 to pay off, no car and the prospect of losing his job.

In this situation the lender didn’t breach the current law. But the new Lender Responsibility Principles will require a lender in a similar position to make reasonable enquiries about the borrower’s ability to make repayments without suffering substantial hardship.