Lenders’ questions and answers from Lenders Seminars

We have put together answers to questions that were submitted during our series of online seminars on the Credit Contracts and Consumer Finance Act (CCCFA) but were unable to answer due to time restraints.

Lender Seminars 2022

Fees and interest

What constitutes a fee?

Credit fees broadly refer to charges payable by a debtor under a credit contract.

There are five different types of fees that lenders can charge under the CCCFA:

1. Establishment fees
2. Prepayment fees
3. Credit fees (other than establishment fees and prepayment fees)
4. Default fees
5. Third party fees.

Regardless of the type of fee, lenders cannot charge a fee that is unreasonable (section 41 of the CCCFA). Fees cannot be used to generate profits or recover more than the costs permitted under the CCCFA.

For further information about the different types of fees and some examples, please refer to our Consumer Credit Fees Guidelines.

Can you charge a fee for a hardship variation?

Yes. Section 57A(3) of the CCCFA provides that you can’t charge a fee for the application process but you can charge a fee for varying the contract if that’s the result of the hardship application.

You may not be able to just charge your normal variation fee – the costs you recover for the hardship variation have to be reasonable and transaction specific to the applicable.

When you receive overpayments, do you have to pay it back with interest?

The CCCFA does not require overpayments to be repaid with interest (section 48). However, if your terms and conditions say you will, then you will have to.

Fees guidelines – focus on business costs changing in respect of fees – however we are relatively silent on volume changes, COVID being a good example.

Section 41A of the CCCFA and our Consumer Credit Fees Guidelines (in particular [72] and [78.4]) are relevant to this question.

Volume/number of expected transactions is a key input into a lender’s methodology when setting its fee(s) (see [78.4] of the Guidelines). When the lender is aware, or ought reasonably to be aware, that this key input has materially changed from what the lender forecasted, the lender should review its fees (see section 41A of the CCCFA and [72] of the Guidelines).

Disclosure

When you give variation disclosure, do you have to give the different amount, old and new?

Old payment – $10, new payment – $8, difference – $2.

When you give variation disclosure, you must provide full particulars of the change, including its effect (section 22(1)(a) of the CCCFA). While there is no legal requirement to provide comparative information, one way to show the full effect of the change is by stating the old payment, the new payment and the difference. You can also use other ways to draw the borrower’s attention to the full effect of the variation. For further information on what to include in variation disclosure, please refer to page 16 of our Disclosure Guidelines.

With disclosure following a variation, is there a requirement to provide current information?

We cover this in our Disclosure Guidelines. There is no requirement to provide information on the current terms, only the new terms. But you are required to disclosure information in a way that discloses the “full effect of the change”, and one of the ways you can do this is by showing the current position alongside the new position.

When required to give disclosure about financial mentoring services, what is the time period for triggering it?

Regulation 5A(3)(a) and (b) provides that the information required under section 26B(2)(a) of the CCCFA must be disclosed, at the time when a payment reminder is provided, where the payment is overdue, and/or the credit limit has been extended, for more than 10 working days.

The Responsible Lending Code also recommends that lenders contact borrowers earlier if there is a high-cost loan:

[12.9] For high-cost credit agreements a lender should ordinarily contact the borrower as soon as possible after one missed payment or occasion on which a credit limit is exceeded, to, at a minimum, notify the borrower of the issues and the risk of escalating debt. If the borrower continues to miss repayments or exceed the credit limit, the lender should contact the borrower again to discuss or otherwise communicate the other matters set out below.

There’s further guidance on this issue in the Responsible Lending Code at [12.6] – [12.10].

You can download the code from the Consumer Protection websiteopen_in_new.

What are the types of disclosure issues the Commission is seeing at the moment?

We are continuing to see issues with initial and variation disclosure; not so much complete lack of disclosure, rather instances where Schedule 1 items are missing. Also with variation disclosure, we’re getting a few self-reports that the disclosure has been provided late (ie, within 5 days after the change taking effect, as opposed to within 5 days before).

Do you need to provide a separate key terms disclosure prior to initial disclosure?

There is no specific requirement for written separate key terms. There is an obligation to inform borrowers of those matters but there is no requirement around how that is to be done. However, lenders choose to inform borrowers of the key matters, they must make sure that the information provided is not confusing, misleading or deceptive.

There’s further guidance on this issue in the Responsible Lending Code at Chapter 7.

You can download the code from the Consumer Protection websiteopen_in_new.

What’s the deal with section 24(4)(b) and 9CA of the CCCFA?

Section 24 obliges lenders to provide request disclosure. More information on request disclosure is available in Part D of our Disclosure Guidelines.

Section 9CA obliges lenders to provide records about their responsible lending affordability/suitability assessments.

The exemption from providing request disclosure at section 24(4)(b), when the loan has been concluded for more than a year, does not apply to section 9CA.

The records required to be kept under section 9CA must be kept for 7 years (section 9CA(9)); the Commission, an approved dispute resolution provider, a borrower and/or a guarantor could request those records at any point during those 7 years.

If a borrower advises they can’t make a payment as scheduled but they can make a payment next week however, the lender doesn’t formally agree and chooses not to take action, does this constitute a variation of contract and disclosure requirements?

Assuming all other things remain equal, then movement of one payment date should not require variation disclosure. But if other things change, for example, the fortnightly payments follow the new repayment date, then variation disclosure will likely need to be given.

Financial mentoring disclosure (section 26B/Regulation 5A) can you satisfy this by disclosing the financial mentoring information on, eg, the customer loan statement or payment request? ie, continuously disclose it rather than just when one of the trigger defaults occurs?

Section 26B(2) of the CCCFA provides that a lender must disclose information about financial mentoring services:

• if a borrower has defaulted on a payment, or has caused their credit limit under the contract to be exceeded
• in every notice acknowledging receipt of a hardship application under section 57A(1)(a)
• if and when a lender declines an application for a high-cost consumer credit contract.

Section 26B(4) provides that the regular disclosure process in sections 32 and 35 do not apply. Instead, the disclosure must:

• be made in a prominent manner (section 26B(3)(a))
• where a borrower has defaulted on a payment, or has caused their credit limit, be disclosed at the time when a payment reminder is provided by a creditor under a consumer credit contract (Regulation 5A(3) of the CCCF Regulations)
• where the lender is acknowledging receipt of a hardship application, in the notice acknowledging the receipt (section 26B(2)(b)
• where the lender is declining a high-cost consumer credit contract application, at the time when the lender advises the application has been declined.

The requirement to disclose financial mentoring services information is triggered on one of the events in section 26B(2) occurring, and must be disclosed on or after the event occurs. We consider that a lender, who discloses the information in advance before one of the events in section 26B(2) has occurred, will not have met its obligations under section 26B(2).

Continuing disclosure – exception if maintain a website – do you need the borrower’s consent for this?

Yes – see section 21(1)(b)(ii) of the CCCFA.

Debt collection disclosure – how does this apply to internal vs external debt collection?

See the definition of "debt collector" in section 132A of the CCCFA – a creditor or any other person engaging in debt collection.

If you are a business that contacts a borrower to recover, or attempt to recover, any money that is owing by a borrower under a credit contract, then you are a debt collector for the purposes of section 132A of the CCCFA, whether or not the debt is owed to you or another business. That is:

• when you are collecting your own debt, you are a debt collector for the purposes of section 132A
• when you are collecting a debt on behalf of another creditor which is owed the debt, you are a debt collector for the purposes of section 132A.

For more guidance on section 132A see our Disclosure Before Debt Collection guidance.

Suitability and affordability

Where does “auto-decisioning” fit in online only lending and the recommendation to use “free text fields”?

The Commission encourages innovation, and we understand the need for automation. However, with responsible lending, the feedback we’ve had from lenders is there is a need for human involvement in the affordability and suitability assessments. We also consider it is unlikely IT systems will be able to pick up all the variations that are possible with free texts.

Suitability – what if you don’t offer a product that matches all of the clients/borrower’s needs? Some but not all.

While there is no legal requirement that a product meets all of the client’s needs, Regulation 4AA of the CCCF Regulations requires lenders to make reasonable inquiries on a range of aspects to determine a product’s suitability. Those inquiries must satisfy the lender that the credit provided under the agreement will likely meet the borrower’s needs (section 9C(3)(a)(i) CCCFA).

For additional guidance on the lender’s responsibility in relation to the suitability assessment, please refer to Page 18 of the Responsible Lending Code – MBIEopen_in_new.

Individual affordability assessment but having joint liabilities – what is standard guidelines? Example – husband applies for car loan, wife not wanting to go on finance but they have joint mortgage and credit cards etc. What is considered to be a reasonable split of liabilities or is there no split?

The standard approach in relation to conducting affordability assessments when borrowers have joint liabilities are covered at [5.29] to [5.33] of the Responsible Lending Code – MBIEopen_in_new.

In summary, when lending to one borrower, lenders should consider that borrower’s individual relevant expenses and any relevant expenses shared with another person.

Lenders must then consider whether it is appropriate to apportion shared liabilities in all of the circumstances.

Relevant factors to consider include:

• whether apportioning expenses based on the salary of the borrower and other parties is appropriate
• whether to simply apply the whole amount of the expense to the borrower
• whether apportionment of the expenses is likely to change over time (eg, if one of the co-borrower’s income is likely to be reducing during the loan period, then the proportion of expenses the other co-borrower(s) will need to meet should increase accordingly).

Hardship

Can a call centre fill in application for hardship over the phone?

Lender’s representatives can complete hardship applications on behalf of a borrower (with the borrower’s consent). The representative should be fully trained to have these conversations, including having the required knowledge of Chapter 12 of the Responsible Lending Code, and the requirement to take full notes of the borrower-lender conversation.

There’s further guidance on this at Chapter 12 of the Responsible Lending Code – MBIE.open_in_new

What if you don’t believe a borrower’s explanation for hardship? For example, if they said their father died four times this year.

It is perfectly acceptable for you to ask for some evidence after the second or third time this is claimed. In fact, we would expect a responsible lender to check this as it is a red flag that something may be amiss.

Can you rely on what the borrower tells you or can you ask for proof?

You can ask for proof where reasonably necessary.

How can guarantee if a 3rd party gives you a hardship application, that the borrower authorises them (eg, it’s a friend and there’s no privacy waiver)?

The statutory hardship process does not limit the circumstances in which a lender can consider variations generally; it does not limit who can make the application on behalf of the borrower.

We expect responsible lenders to be flexible in allowing applications on behalf of borrowers. Where the lender does not have confidence that the borrower consents to the application and/or has authorised the third party to make the application on their behalf, the lender should ask for evidence of the borrower’s consent or circumstances.

For example, we recently became aware of a borrower who was in prison and unable to contact the lender himself. The borrower’s girlfriend tried to communicate with the lender on the borrower’s behalf, but the lender would not communicate with her. We think a responsible lender would have made efforts to ascertain the borrower’s position, for example asking for some proof of the relationship and the borrower being in prison; if satisfied of those circumstances, we consider the lender should have communicated with the girlfriend.

Can we decline hardship on the basis of a lack of supporting documentation?

Yes, provided the missing information is necessary for you to decide the hardship application. The following timeline applies:

• If there is a lack of supporting documentation in the original application, you must request any further information which is necessary for you to decide the application within 10 working days after receiving the initial application (section 57A(1)(b) of the CCCFA).
• If the borrower fails to provide the requested information within 20 working days after you have made the request, then you can decline the hardship application if the information you sought was necessary for you to decide the application (section 57A(2)(b) of the CCCFA).

If you decline the application, you must do so in writing, explaining the reasons for your decision and advising the borrower of their rights under section 58 (section 57A(1)(c) of the CCCFA).

Record keeping

If the Commerce Commission requests records in bulk (eg 3 months) of suitability and affordability records; do you really want all supporting bank statements for each borrower?

We can confirm that the Commission is unlikely to request this much information. To date, we have tended to ask for 5 to 10 sample files, over a period of time. For each sample file, we will require all the supporting documents, including all relevant bank statements.

Pre 1 December 2021 – how long must lenders keep records for, about inquiries, or loan disclosures for?

To be able to demonstrate and evidence compliance with the lender responsibility principles and the Responsible Lending Code, it was our expectation that lenders kept records of their enquiries prior to the express obligation to do so from 1 December 2021 (section 9CA of the CCCFA). This is consistent with the Responsible Lending Code applicable during that period; refer [2.4] and [10.13] of the 2017 Responsible Lending Code – Consumer Protectionopen_in_new.

For contracts entered into or varied prior to 1 December 2001, we suggest lenders retain those records for a period of at least 7 years.

Noting that records need to be kept for seven years, what if the customer requests to delete all records?

The obligation to retain records about the lender’s section 9C inquiries, under section 9CA of the CCCFA, overrides any request by an individual to delete their records.

How far do record keeping requirements go in terms of conversations with borrowers? Do you have to run everything you’ve recorded past them for confirmation?

The Responsible Lending Code has several sections detailing how lenders can comply with their record keeping obligations. There is no requirement for lenders to run their records past their borrowers for confirmation. However, if there are red flags in a lender’s records, then we recommend lenders run those red flags past their borrowers (and record those communications).

Other

The word ‘calculations’ was referred to a number of times during the lender seminars. What is meant by this and what reference in the CCCFA/CCCF Regulations/Responsible Lending Code does this refer to?

As lenders, reasonable inquiries must be made by you into the borrower’s ability to make payments under your loans without suffering substantial hardship (section 9C(3)(a)(ii) of the CCCFA). Those inquiries, as prescribed in the CCCF Regulations, involve estimates of the borrower’s likely income and expenses, and certain calculations may be required.

The term, ‘calculations’, is also relevant to the fees charged by you. When fees are set, you must keep records as to how each credit and default fee was calculated (section 41A(1) of the CCCFA). The calculations should demonstrate that the fees charged are not unreasonable (section 41A(2)).

If a person requests a housing loan on housing terms, but for business purposes, does this still meet the appropriate test if the security is also residential? Or should it be a business/commercial loan?

The key issue here is whether the loan is a consumer credit contract. Two of the four consumer credit contract criteria may not apply here – is the debtor a natural person, and more importantly, is the loan to be used “wholly or partly for personal, domestic or household purposes”? In this case, as the loan is for business purposes the loan is unlikely to be a consumer credit contract and most of the CCCFA obligations will not apply.

You can of course choose to treat a contract as a consumer credit contract, and we know that some lenders do this. If you do, and you tell your borrower about their CCCFA rights (for example via disclosure), but then later renege on this then that may be a misrepresentation under the Fair Trading Act 1986.

How do pawnbrokers fit into this?

The Commission’s view is that some pawnbroking contracts will be consumer credit contracts and therefore come under the CCCFA – except for Part 2 of the Act which pawnbrokers are explicitly excluded from.

On 5 December 2022, the Commission filed a case stated proceeding under section 100A of the Commerce Act 1986. That section enables the Commission to ask the High Court questions to clarify the application of the law the Commission enforces. The Commission is asking the Court six questions to clarify the status of pawnbroking contracts under the CCCFA. The National Pawnbrokers Association of New Zealand is a respondent in the proceedings and intends to make submissions on four of the six questions.

Nominated address – someone else answers that email – how do you deal with that?

If a borrower has nominated an email address to communicate with the lender, the lender should take steps to verify that they are dealing with a person authorised to act on the borrower’s behalf or is their representative.

For further information on how to deal with contacting borrowers or working with their representatives (which may include family or friends), please refer to paragraphs [2.6] to [2.13] of the Responsible Lending Code – MBIE.open_in_new

How long or how many days of missed loan repayments mean you need to provide free advice?

Section 26B(2)(a) provides that lenders must provide their borrowers with information about financial mentoring services when the borrower has made a default in payment or has exceeded their credit limit. Regulation 5A of the CCCF Regulations requires that information to be provided when the payment has been overdue, or the credit limit has been exceeded, for more than 10 working days. The information may be provided earlier, at the lender’s discretion.

Further guidance on what information to provide borrowers is available at paragraphs 12.11-12.13 of the Responsible Lending Code – MBIE.open_in_new

What happens when the loan is repaid and the lender can’t stop the automatic payments (and the bank won’t either)?

We recommend the lender put the position in writing to the borrower’s bank, so that the bank is on notice of the situation and can contact the borrower. In the meantime, the lender should collect the payments and keep them aside for the borrower.

Question around accessing bank statements for assessment through a reputable third party – how do you recommend dealing with pushback from clients as elderly being asked to log into banking?

Lenders should be transparent to borrowers about why they are requesting information as part of their assessments. Where borrowers are elderly, they may be vulnerable, which means that lenders should give further assistance in helping them to understand the lender’s responsibility to gather information to assess affordability.

In relation to accessing bank statements for assessment, lenders can explain their obligations under Regulation 4AK(2)(a) of the CCCF Regulations. In particular, lenders can explain that the purpose of estimating a borrower’s likely relevant expenses is to help ensure that payments under the agreement can be made without the borrower suffering substantial hardship.

As the CCCF Regulations allow for other ways for lenders to conduct an initial estimate of likely relevant expenses, if elderly borrowers are unable to supply the relevant bank records, lenders can use other means to obtain the necessary information. For further guidance on how lenders can do an initial estimate of likely relevant expenses, please refer to Regulation 4AK(2)(a).

When does debt collection begin (does it only start when you use a debt collection agency)?

Debt collection is the act to recover, or attempt to recover, any money that is owing by a borrower under a credit contract.

Debt collection starts when you are collecting your own debt or when you are collecting a debt on behalf of another creditor which is owed the debt (section 132A of the CCCFA).

For more guidance on section 132A see our Disclosure Before Debt Collection guidance.

Define what is a ‘well informed user of credit’.

“Well-informed user of credit” is a term used and defined in the Responsible Lending Code. Under the Responsible Lending Code, a “well-informed user of credit” is an individual who lenders can reasonably expect to have a good pre-existing understanding of credit agreements or guarantees of that type, which may be due to their previous experience with credit agreements or guarantees of that type, other than:

• individual who is a vulnerable borrower or guarantor; or
• where the relevant agreement is a high-cost credit agreement.

Lenders Seminars 2021

General

Are personal guarantees in commercial credit facilities covered?

The CCCFA covers credit contracts and consumer credit contracts. The guarantee provisions of the CCCFA only apply to consumer credit contracts. So, personal guarantees in commercial credit facilities are not covered by the CCCFA.

Do leasing services come under the CCCFA?

A lease might fall under the consumer provisions of the CCCFA in one of two ways. A lease of goods might be a ‘consumer lease’ and subject to the specific rules applying to consumer leases as set out in Part 3, subpart 1 of the CCCFA. Alternatively, section 16 of the CCCFA sets out the circumstances where a lease is to be treated as a consumer credit contract. If these circumstances apply, a lessor will need to comply with the obligations of a creditor under the CCCFA (including the responsible lending obligations).

Is Buy Now Pay Later covered by the consumer credit provisions in the CCCFA?

No. The typical buy-now-pay-later (BNPL) arrangement is not a consumer credit contract because no interest or credit fees are charged, and no security interest is taken (please see section 11 of the CCCFA). Default fees, which may be payable under a BNPL arrangement, are different to credit fees (please see the definition of ‘credit fees’ under section 5 of the CCCFA).

On 4 November 2021, the Ministry of Business, Innovation and Employment released a discussion paper seeking feedback on the benefits of BNPL, the triggers of financial hardship, and on options for regulatory reform. One of the potential reform options discussed in the paper is for the CCCFA (or at least sections of it) to apply to BNPL.

Certification

What if you decide to close your business, don’t write any new loans but just run down existing loans?

You are obligated to be certified if you are a creditor under a consumer credit contract, (or a mobile trader), even if the business will not be entering into new consumer credit contracts after 1 October 2021. Failing to be certified in circumstances where you are required to be can result in a court ordering you to pay a fine of up to $600,000 for a corporate entity or up to $200,000 for an individual. We suggest you seek legal advice if your business still has existing consumer credit contracts by the time it is required to be certified.

I am winding up my business – what happens if this isn’t done by the time I need to be certified?

You are obligated to be certified if you are a creditor under a consumer credit contract, (or a mobile trader), even if the business will not be entering into new consumer credit contracts after 1 October 2021. Failing to be certified in circumstances where you are required to be can result in a court ordering you to pay a fine of up to $600,000 for a corporate entity or up to $200,000 for an individual. We suggest you seek legal advice if your business is not wound down by the time it is required to be certified.

If a sole trader is disqualified for some reason can they receive outstanding loan payments?

You will need to be certified to be registered on the Financial Service Provider Register (FSPR) and non-certification will lead to deregistration from the FSPR. If you are not registered on the FSPR, you are not permitted to enforce any right in relation to costs of borrowing or require the borrower to make a full prepayment or a part prepayment on the basis of a failure to pay costs of borrowing. The debtor will not be liable for the costs of borrowing in relation to any period that the creditor is unregistered on the FSPR.

Due diligence

Can the directors overseas rely on the senior managers locally?

From 1 December 2021, every director and senior manager of a lender will have a personal obligation to exercise due diligence to ensure that the lender complies with its duties and obligations under the CCCFA. Directors and senior managers cannot avoid their responsibility to exercise due diligence by expecting someone else will do it – including delegating the function to local senior managers.

Whether the due diligence obligations have been fulfilled will be assessed objectively. The test is whether they have exercised the care, diligence and skill that a reasonable director or senior manager of a lender, of the type and size of the lender’s business and with their responsibilities, should have exercised.

Does the due diligence obligation apply retrospectively?

The due diligence obligation doesn’t operate retrospectively, so directors/senior managers will not be held personally liable for the lender’s breaches prior to 1 December 2021.

Disclosure

Is there any guidance on variation disclosures which 'increase' the obligations on the borrower? For example, changing the frequency of the repayment date could be seen as having no change on obligations or you could argue it increases obligations.

Variation disclosure needs to be provided regardless of whether the obligations have decreased or increased. The timing of when the disclosure has to be provided depends on whether obligations have decreased or increased (please see sections 22(3)(a) and 23 (5)(a) of the CCCFA). In addition, Regulation 4F(2)(h) of the Credit Contracts and Consumer Finance Regulations 2004 sets out the prescribed information that must be provided where the parties to the contract agree to change the contract and this affects the payments required.

Is a short-term payment pause a variation even if no contract terms are actually changed?

Yes

Does financial capability advice have to be from Money Talks?

The Credit Contracts and Consumer Finance Regulations 2004, previously provided that financial capability advice had to be from Money Talks. However, Regulation 5A was amended on 1 December 2021 and now provides that information regarding the availability of free financial mentoring services, by an independent service, must be provided. This change was discussed in the Disclosure focus session.

Does Dispute Resolution Referral include an obligation to refer where expressions of dissatisfaction that are resolved by a line manager at point of receiving a complaint in cases of minor issues, such as borrowers complaining about the accent of staff?

Regulation 5A(2B) of the Credit Contracts and Consumer Finance Regulations 2004 provides that the information (ie, the disclosure required by section 26B(1)(c) of the CCCFA) need not be given if the complaint is resolved earlier to the complainant’s satisfaction.

If a borrower is in collections and a lender’s internal collections strategy allows the borrower to make an arrangement, is variation disclosure required? Sometimes this may happen on a weekly basis and if that’s the case, is variation disclosure required every time?

Yes

What do you need to disclose for continuing disclosure?

The requirements of a continuing disclosure statement are set out at section 19 of the CCCFA.

Fees and advertising

Can you provide further guidance on how to construe a portion of the premises cost as ‘closely linked’ to the activities of establishing a loan. For example, do the premises need to be used for the borrower to visit to apply/process/disburse the versus the portion of it used by the lender who performs the activities?

Our Consumer Credit Fees Guidelines provides guidance on this.

Q: What is defined as ‘regular review’? For example, does this mean annually?

A: There are no hard and fast rules on how often a review should be done as it depends on the lender’s circumstances.

Q: If you advertise as interest free, do you have to say how much are late fees or if late fees apply?

A: If lenders advertise a loan as ‘interest free’, the advertisement must clearly include the details of any mandatory credit fees and where information can be found on when the fees apply and how they are calculated.

Regulation 4AAAR(5) states that a “mandatory credit fee” excludes fees charged to a debtor for debtor-specific decisions or actions. As a late payment fee is contingent on an action or inaction of the borrower (missing their payment), it is not a mandatory fee for the purposes of regulation 4AAAS. Therefore, you would not have to say how much the late fees were and if they applied.

Q: Do the new advertising requirements apply to dealers and/or brokers advertising interest rates on their website or on their online listings?

A: Dealers and brokers are not caught by the new advertising requirements. Under these new requirements, a lender is only responsible for its own advertising and any advertising that it instigated or approved. If a dealer or broker advertises without consulting the lender, then the lender cannot be held responsible for what the dealer or broker has advertised. However, any information provided by dealers and brokers must not be misleading or deceptive which is an obligation under the Fair Trading Act 1986.

Q: Do the credit fee guidelines provide assistance about what the Commission expects for record keeping for fees?

A: We explained during the Fees and Advertising focus session that the Commission will not be providing a standard template for lenders to use. And, as the Responsible Lending Code does not set out specific requirements for record keeping, lenders are free to use their own methodology.

Q: Do you need to outline all costs associated if you’re only talking about one aspect. For example if you’re advertising interest free loans, do you then need to include terms on late fees, or just interest free because that’s what the advertising is about?

A: This is a broad question; we recommend lenders refer to Regulations 4AAAQ, 4AAAR and 4AAAS for specific guidance.

Responsible lending

Q: Is there anything explicit that requires lenders to carry out an affordability assessment on a surviving borrower for joint lending when one party passes away?

A: No, lenders do not need to undertake an affordability assessment where a joint-borrower passes away. However, this could be a trigger point for potential repayment difficulties in the future. Chapter 12 of the Responsible Lending Code, which deals with repayment difficulties, states that lenders should ensure that staff and agents who communicate with borrowers are trained to recognise key signs of potential repayment difficulties, and to manage these appropriately (see [12.4]). Signs that a borrower may be experiencing repayment difficulties include information about a significant change in a borrower’s circumstances (e.g. serious illness, recent redundancy, a relationship break-down or a death in the family) ([12.5a]).

Q: The regulations to the CCCFA state that a borrower’s regular or frequently occurring outgoings only need to be included in the expense calculation if they are ‘material’. Is there a legal definition of the word ‘material’?

A: Material is not defined in the Credit Contracts and Consumer Finance Regulations 2004 and it’s not yet known how lenders will apply this practically speaking and what they might consider to be ‘immaterial’. Given this, we have suggested to lenders they adopt a relatively conservative approach, for example by taking into account: (i) whether the outgoing is significant in dollar terms, (ii) even if low in dollar terms, whether the outgoing is significant due to frequency, (iii) whether the outgoing is significant in importance (i.e. how likely is the borrower to give up that expense). 

Q: If the borrower is retired and has a low income, can you capitalise interest payments to ensure affordability?

A: Lenders must always understand the path by which the borrower will repay the loan. Where interest is capitalised, the principal balance of the loan increases over time. We would expect that ordinarily interest could only be capitalised where the loan is being repaid otherwise than by income (e.g. from the sale of an asset).

Reverse mortgages are a product where typically a borrower doesn’t make instalment payments but instead interest capitalises. The principal and interest get repaid when the property is sold, usually where the borrower passes away or where the borrower moves into retirement care. Regulation 4AA of the Credit Contracts and Consumer Finance Regulations 2004 sets out specific requirements for assessing the suitability of reverse mortgages. The Responsible Lending Code also contains guidance about reverse mortgages.

Q: How should a lender treat expenses that are incurred within the 90 days but aren’t always incurred, for example if a borrower goes on holiday?

A: Under the affordability regulations a lender will need to categorise expenses into the listed outgoing categories – it may be that the extra expenses of the holiday wouldn't need to be included in the regular outgoings or as part of the expense calculation on the basis that it is either not regular or frequently recurring outgoing or is something that the borrower is willing to give up. If a borrower saves for their annual holiday then this may need to be something that needs to be included. Where a borrower’s spending pattern differs from ordinary because of holiday spend, then this may make verification of living expenses more difficult. In these circumstances benchmarks could assist the lender to estimate likely expenses or the lender could request statements outside of the 90 day period to get a better understanding of the borrower’s usual expenses.

Q: Where do you get a credit report from?

A: Credit reports must be obtained from a ‘credit reporter’ (within the meaning of the Credit Reporting Privacy Code 2020). Please see regulation 4AK(4) of the Credit Contracts and Consumer Finance Regulations 2004.

Q: How will you be able to determine that a lender has complied with the affordability assessment requirement when each lender might assess a client's income is differently?

A: The Credit Contracts and Consumer Finance Regulations 2004 provide a prescriptive method of estimating a borrower’s likely relevant income. While different lenders might make different adjustments to income, all lenders must ensure that a borrower’s likely income exceeds likely expenses and either that there is a reasonable surplus of income over expenses, or the income figures used and/or the expenses contain buffers or adjustments to account for estimation errors by the lender.

Q: How should a lender treat a borrower that is living with parents or boarding and advises of no power or internet expenses etc, or that­ their board payment covers those utility expenses?

A: A lender is required to assess whether the borrower will make the payments under the agreement without suffering substantial hardship (affordability). If a borrower explains that they don’t have any power or internet expenses, or that their board payment covers these, and this can be verified with reliable evidence, then the lender may be able to make their affordability assessment on this basis (provided, for example, the situation for the borrower is not likely to change during the period they’re repaying the loan).

Q: If a borrower says they are going to cease entertainment costs, is that enough or should they have to prove this over an amount of time?

A: Where a borrower says they are prepared to give up or reduce a particular entertainment cost (e.g. cease one of their online pay tv subscription services) a lender would ordinarily be able to rely on what the borrower has said. In any event, we would expect that lenders would ordinarily include some allowance for entertainment in the affordability assessment.

Q: If a borrower purchases a lot with cash then how does a lender know what they spend their money on?

A: Where a borrower purchases a lot with cash it might be difficult for a lender to verify an applicant borrower's expenses based on 90 days of bank statements. Regulation 4AM of the Credit Contracts and Consumer Finance Regulations 2004 provides that where a lender has made an initial estimate of expenses by asking a borrower about their relevant expenses, then the lender must either verify the expense with reliable evidence (e.g. bank statements) or use the higher of a benchmark expense and the borrower’s stated expenses. Where it isn’t reasonably practical to verify expenses or compare a borrower’s stated expenses with benchmarks, lenders must adjust the expense by estimating a reasonable cost for the expense.

Q: How are mortgage repayments categorised if the mortgage is joint with someone else but the lending is to an individual (e.g. a personal loan)?

A: The Responsible Lending Code contains guidance for lenders at paragraphs 5.15 to 5.19 on how to apportion expenses where the borrower shares expenses with another person.

Q: Is it considered responsible lending to advance a vehicle loan to purchase a car to someone who is on a learners licence or with no licence at all?

A: The suitability assessment required is whether the particular features of the loan being offered by the lender likely meet the borrower’s requirements and objectives. The lender is not required to judge the merits of what a borrower is spending their money on. That said, where a lender is being asked to fund the purchase of a car by someone with no licence, most lenders would no doubt have questions from a credit decisioning perspective around whether it was the borrower or someone else intending to utilise the vehicle forming security for the loan.

Q: For a motor vehicle loan where there is a balloon at the end of the term, how should the affordability be calculated?

A: Regulations 4AL (3) and (4) of the Credit Contracts and Consumer Finance Regulations 2004 set out how lenders must treat lump sum payments when calculating a borrower’s relevant expenses.