Clarifying the CCCFA for consumers

Effort to remain compliant with the Credit Contracts and Consumer Finance Act (CCCFA) has caused significant disruption to the finance sector. The Act was designed to protect vulnerable consumers while ensuring lenders only provide credit to those who can afford to make repayments.

The CCCFA ensures borrowers like you can make informed choices , understand what you’re agreeing to, and keep track of your debts. The Act does this by requiring lenders to always act responsibly and protect borrowers when they take out a personal loan or mortgage, use a credit card, borrow money on an agreed overdraft, or purchase products and services on credit.

The CCCFA protects borrowers in the instance where money is loaned for personal, domestic, or household purposes. This includes consumer credit contracts, consumer leases, and buy-back transactions. The Act also covers all other consumer credit transactions by protecting borrowers from predatory lending practices while ensuring they understand their rights including all of the costs of borrowing prior to signing a loan contract.

In December 2021, the CCCFA changed to increase the requirements for responsible lending. These regulatory changes made it more difficult for people to secure finance as lenders became more cautious about extending credit. Lenders were required to gather more information about their borrowers and scrutinise every detail to prevent borrowers from falling into arrears on loan payments.

The amendments made to the CCCFA were condemned for hindering advisers and lending institutions with excessive red tape while blocking finance to qualified borrowers. Subsequently, the tightening of banks’ lending criteria has led to a rise in non-bank lenders offering consumers an alternative borrowing option.

The CCCFA’s latest amendments

Following the December 2021 changes, the impact on lenders and borrowers was such that, the CCCFA was reviewed within two months and by July 2022 a set of preliminary changes were introduced. At the time of writing this, the government has unveiled more proposed changes to the Act, which will be open to debate in September this year with hopes of implementing further proposed changes by March 2023.

The latest tweak to the CCCFA includes the removal of ‘savings’ and ‘investments’ from the defined list of expenses that must be assessed, highlighting that these items are optional and different in nature from a borrower’s outgoings or other necessary expenses. This means savings and investments won’t be considered as part of the assessment for loan affordability. Lenders will no longer need to check multiple sources of information to verify customer expenses.

The next round of changes aims to narrow the expenses of would-be borrowers that must be considered by lending institutions. This means excluding discretionary expenses more explicitly with the aim of alleviating the disproportionate enquiries made by lenders while reducing the overestimation of borrower expenses.

Proposed changes are expected to ease conservative assumptions lenders are required to make about expenses associated with revolving credit contracts, particularly credit cards. The changes are also aimed at restructuring debt in various ways, allowing for debt refinancing or consolidation to make the debt more manageable. This ought to ensure lenders and borrowers can go through a faster process and improve consumers’ access to safe credit.

Proposed changes will also clarify that a lender can exclude an expense from the affordability estimate when it’s clear the expense will stop. For example, if a borrower is buying a home to live in, then the lender can omit any existing expenses for rent.?

Understanding expectations and protections

As consumers, it’s critical to remember that the CCCFA is there to protect you. Most changes made to the Act are to prevent consumers from being accidentally put into repayment difficulties by their lenders. With further assessments and amendments in the pipeline, the CCCFA will continue evolving to ensure borrowers are protected from bad lenders and loans that exceed their financial capabilities.

Under the Act, lenders must make standard terms and costs of borrowing publicly available via their website or on clearly displayed notices at their premises. This helps borrowers compare the cost of borrowing and contract terms to ensure they find the best loan for their needs. Lenders must also give borrowers important information in writing before they sign an agreement, such as the annual interest rate, all fees, cancellation terms, and details of their dispute resolution scheme.

Lenders who do not make proper disclosure cannot enforce their contracts until disclosure is made. Disclosure of information must be clear, concise, and likely to be noticed by a reasonable person without being misleading or deceptive about important information.

Under the CCCFA, a lender must comply with disclosure obligations and determine the affordability/suitability of the loan. Failure to do so can result in a refund of the interest, fees, and/or damages to the borrower.

The challenges and consequences

As it grows increasingly difficult for consumers to secure financing, regulators are placing greater emphasis on servicing suitability, ensuring lenders can prove their capacity to service customers’ needs. Lenders are now taking a literal view of regulations to be more dogmatic with evidential support. This has led to some lenders, particularly mortgage providers, trying to get around regulatory changes by reclassifying residential property (in Trust) as commercial, when in fact it is being purchased for personal, domestic use.

Commercial lending allows the lender to charge higher fees without explanation, thereby improving internal returns and circumventing some of the Act’s affordability requirements and other protections. This kind of discrepancy commonly goes unnoticed until a customer tries to refinance their loan. This not only hurts the consumer but contravenes consumer-protection laws.

Since regulators may not always have the capacity to enforce the ever-evolving CCCFA, it’s important for borrowers to understand their rights, so they’ll notice any changes that may occur and know how to ask for clarification or support.

Consumer rights and lender responsibilities

The increased stringency of lending options has highlighted the importance of understanding and managing your credit score and the information that drives it. Borrowers should have access to this information so they can see how their spending, savings, outstanding loans and repayment history make up their credit score.

Lenders analyse consumers’ credit scores and personal credit reports to get a comprehensive understanding of the customer’s payment history. To improve your credit score, it’s important to make prompt repayments, avoid taking on extra debt and manage your finances responsibly. This includes paying down any high-interest debts, avoiding unnecessary loans, and reducing things like credit cards, credit limits, and Buy Now Pay Later accounts.

Consumers may struggle to keep abreast of ongoing amendments and proposals to the Act. However, it’s clear that the effects of these changes seem modest in scale and leave most of the regulatory structures unchanged. It’s critical that consumers and lenders are aware of their rights and duties under the CCCFA.

Most lenders will still be required to conduct a very detailed, lengthy, and invasive analysis of borrowers’ financial situations, which leaves them little flexibility or discretion since they remain subject to formidable enforcement consequences. The proposed amendments to the Act are likely to be seen by many as a missed opportunity for more meaningful updates and structural overhauls.

Safeguarding responsible lending

As a consumer, if you’re struggling to keep up with your payments, ask about applying for hardship to potentially change the terms of your agreement. If you think your lender has acted unfairly, it’s best to try and resolve the issue directly with them first.

If you can't resolve an issue with your lender, then you should complain to your lender's dispute resolution scheme. Under the Financial Service Providers (Registration and Dispute Resolution) Act, all lenders must be members of a dispute resolution scheme. To find out which scheme your lender belongs to, search the Financial Service Providers Register .

For more persistent issues, you can report lenders to the Commerce Commission, which is responsible for enforcing the CCCFA. Such reports help to identify lenders suspected of regularly breaking the rules. The Commerce Commission can investigate lenders and take steps to ensure they stick to the rules by either giving advice on how to legally comply; issuing warnings; or even taking the lender to court.

The CCCFA is designed to protect consumers. While the rules and requirements continue to change, it’s vital to know your rights, understand your lender’s duties and requirements, and ensure you remain informed of any regulatory changes that may occur during your loan contract.

We can’t always expect regulators alone to enforce the Act, particularly as it continues to evolve and change. It’s up to consumers to stay informed and go directly to their financial advisor for any questions or queries they can’t address alone.