Changes to home loans: Do banks take the rules too seriously?


Explanation: It’s been difficult to go a full day in December without hearing about someone being rejected an unsecured house loan such as Oak Park Financial due to a minor offense.

One customer was told they’d over-spent on their pet. One client was denied preapproval in the amount of 57 percent due to having taken time off for maternity. A couple was denied preapproval only days before the auction which saw the home being sold at an amount lower than what they could afford to purchase.

One of the major problems for borrowers is stricter loan-to-value limits that restrict banks from lending to borrowers with small deposits. One of the biggest concerns for most people is the changes in the CreditContracts ConsumerFinance Act (CCCFA) which came into force on December 1st, 2012.

What’s happening?

The CCCFA issued new rules that apply to lending institutions of all kinds, not only banks.

The new rules limit what lenders can ask for. Personal liability requirements for directors and executives are also included, with fines of up to 200,000USD if their company does not follow the guidelines.

The rules compel lenders to estimate the borrower’s earnings (assuming they intend to use this estimate to repay their debt) and then estimate expenses based on several tests. These include the introduction of new requirements to verify the information they provide.

The lender has to ensure that there is a sufficient surplus in the budget of the borrower, as well as adequate buffers. But, SophieEast, a partner at BellGully, said it was unclear what qualifies as “reasonable” and that there was no data on the exact amount of surplus or buffer that is required.

The law stipulates that costs include the cost of accommodation as well as insurance body corporate costs and school costs, as well as child support that is due under the ChildSupportAct, debt payments and utility bills, along with food and other food items as well as clothing and medical expenses for children’s transportation, and other expenses that are often incurred such as investments or savings or, entertainment, Tithing or gym memberships costs

Brokers caution that putting more money into your KiwiSaver account could cause problems unless you notify the bank that you intend to reduce the amount you contribute after purchasing the home of your dreams.

Didn’t they make sure they could pay off their debts?

True, but not in this way.

Banks had previously examined the ability to repay “to a somewhat different degree and not to this new level,” according to John Kensington, a financial services consultant at KPMG. According to the new law, “if you’re going to lend money to someone, be sure they can repay it.”

The new regulations laid out “very precisely” the minimum standards banks must meet.

“You can no longer apply a formula that says if you earn $50,000, you’ll pay 80% of that money, or whatever you’re spending it on, for living expenses, or if you earn $200,000, you’ll pay 40%.” This will not work. You must obtain the individual’s information, scrape it, and determine the nature of their activities.”

People often limit their spending once they’ve paid, he noted. However, banks lacked a clear strategy for dealing with the situation.

“As the elderly population ages, their priorities shift, and they may retreat into their shells for a while, but if someone comes to the bank and hands over the details of all their transactions, the bank is in trouble, and the bank may assume that the individual will change their spending habits, but if they don’t, and they end up out of the woods, the institution may find itself out of the woods.”

He claimed that the CommerceCommission had failed to provide sufficient instructions for interpreting the facts. The CommerceCommission has been appointed to address the issue.

Banks were facing a tough scenario, Kensington said. No one wants to be the first person to be accused of irresponsible.

“Because the ComCom isn’t ready to give advice or declare that you’re capable of making a decision, they’re unlikely to apply judgment. They’ll gather all the data they can and make more tough decisions than they normally would.”

New Zealand Bankers Chief Executive of the New Zealand Bankers Association Roger Beaumont stated that banks do not have the same power as they used to have.

According to the official, every lender must establish and implement changes to its lending policies and procedures, as well as employee training, to ensure compliance with the new rules.

“Banks operate in a highly competitive commercial and economic climate, and they are responsible for managing their own risks and complying with the law.

“Banks lend; they’re also responsible lenders who take the law’s responsibilities very seriously.”

Are they overdoing it?

There have been tales of people being turned down because their bank didn’t like how many times they ordered takeout.

A specialist in the field of banking ClaireMatthews of MasseyUniversity explained that it was “Big Brother-like” at first look, and it’s certainly not a wise idea to create an unconstitutional law regarding the number of nights out the borrower is allowed to take part in. She said the most important factor was whether they had enough cash to cover the expenses.

“It’s normal for a lenIt’s common for a lender to question about takeaways when determining how much money was spent on ‘meal and grocery goods,’ such as food and groceries. However, these definitions focus on the amount people spend and thus how much extra they will need to pay for loans – they do not (or at the very least shouldn’t be) about the things that people spend on their spending.”

The legal definition of a countable expense was created to ensure that every detail was recorded.

“The cost of groceries is lower in the event of fewer meals, thus looking at the amount spent on food items without taking into consideration regular meals at restaurants or takeaways does not give a realistic picture of how much a borrower spends on food. This should not be regarded relevant if a borrower eats out practically every night and still has enough money to pay their debts.”

According to her, the new restrictions may have made banks more cautious, and they may have a tougher time giving money to individuals than before.However, she believes that in some cases, this is because declaring that a loan would be declined due to takeout is too straightforward.

“That’s understandable if they’re merely following the new guidelines. The rising cost of housing has made it more difficult as well as concerns over the rising interest rates, which require an increase in the buffer permitted.”

What effect will it have?

Following the implementation of the reforms, Centrix forecasts a 23 percent rise in loans. In comparison to normal, the number of house loans handled decreased by 7000 dollars.

Home loans are thought of similarly to any other risky credit. What are the best options?

Probably, says Kensington. “For different risks, you might have different interest rates.”

Home loans are generally low-risk loans as homeowners attempt to stop their houses from getting destroyed. The statistics show that banks only take 0.1 percent of the mortgage loan.

Can you withdraw cash without being under scrutiny?

There are a few suggestions on how individuals could stay out of the bank’s eye by cashing out their money for trips to the pub, takeaway restaurants, and other activities that could be viewed as a rejection.

That isn’t the ideal solution, according to Matthews.

“I do not see how anyway to aid. If they withdraw money from the bank, the bank will demand verification of their expenditure. If they’re spending everything with cash, that’s likely to create many problems for many people.”

Banks, according to broker Glen McLeod, would be wary of approving frequent cash withdrawals.

“The essential argument, I suppose, is that cashing out money on a Friday night to enjoy the weekend would be regarded an occasion to spend money on amusement. My suggestion is to keep track of every installment for 3months prior to the time when you apply for your mortgage. Keep your records neat and simple.

“We are waiting for an innovative processing tool that is being evaluated by banks and by us. It will read bank statements, examine them and divide the expenses into different categories. There’s no way to avoid.”

What does this mean? Does it mean that the government had a goal to achieve?

Following the publication of the new rules, there was discussion about how to protect vulnerable people from lenders that charged three-digit interest rates. Was the goal truly to make it more difficult for people who haven’t yet purchased a home to secure a loan?

CommerceMinister DavidClark said he had demanded the Council of FinancialRegulators examine whether the CCCFA did not do as it was planned.

“Due to the current economic climate, banks appear to be handling their lending more conservatively at the time.”

“It’s also possible that being cautious in the early weeks of applying the new CCCFA guidelines was a mistake.

“It’s worth noting that other market-affecting events occurred concurrently with the CCCFA revisions, including rises in OCR and OCR, LVR changes, and an increase in housing prices as well as local rates.COFR will conduct research to determine how much lender behavior, as indicated in the CCCFA, influences changes in bank lending practices.”

Kensington has stated that there could be likely unintended negative effects, which could include problems for small-scale enterprises.

“Because their owners invested capital, so many small and medium-sized firms have survived the pandemic thus far. A portion of the owners have capital coming to an end, but they’re not ready to sell the business just yet. What are they able to do to get a credit from the lender today?”

The CCFA does not apply to company loans, however the majority of small firms are financed through home mortgages.

“At the moment, there’s a risk that the New Zealand economy will require cash to re-open and, maybe, further economic instability this year, when money will need to be borrowed, banks will find it difficult to make it happen; there’s no one-size-fits-all solution.”

He also said that “you shouldn’t let people borrow money they can’t afford.” Some people were unable to obtain the funds they required.

It could also have downstream consequences according to the author. “People who are turned down by banks might turn to a financing firm to receive the loan but need to pay additional. The finance firm will look at the loan and inform me that it’s an enormous mortgage that permits me to make 30-day credit. The finance firm may not be able to make these loans, but further on… at the midpoint are those who have been denied the loan, and need the money.

“What you’ve got here are great intentions, but it has to be adjusted to suit the goal better.”


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