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This Pro Talks interview is produced with the support of Spark and BNZ
Unresolved issues with Credit Contracts Act could be addressed by better targeting loan restrictions to problem lenders, says BNZ chief executive
Small businesses are still exposed to worrying credit constraints, despite the work of the government and the financial sector to finalize the new law on credit agreements and consumer credit.
Dan Huggins, who heads the 160-year-old BNZ, backs targeting high-interest lenders, rather than sweeping checks on all borrowers. He spoke live with Newsroom Pro editor Jonathan Milne and answered questions from Pro subscribers.
It comes after banks were forced to ask intrusive questions, such as how much borrowers had spent at KFC in the previous three months. The new rules were intended to protect vulnerable households from predatory loan companies, but their wide net had caught up with home loans and some business loans, especially small businesses whose directors borrowed against their homes.
In a report to the Trade Minister, MBIE officials recommended further investigation into the targeting of lenders.
“I think that’s true,” Huggins says. “Organizations that adhere closely and specifically to the rules, they will specifically adhere to this. Those that didn’t care before, may not care now.”
According to MBIE guidelines, certain aspects of the law cover all credit transactions, including commercial transactions, protecting borrowers from oppressive behavior by lenders. These are loan agreements that are “oppressive, harsh, unfairly burdensome, impermissible or contrary to reasonable standards of commercial practice”.
The new law required, and still requires, much more intrusive investigations and discussions with customers. “A lot of customers, when we ask them for this kind of information, are a bit surprised by it,” says Huggins. “Wait a second, I’ve been doing business with you for 20 years. What do you mean, you need this information? That’s crazy.”
But there are lenders who do not follow the rules. “So you can end up in a perverse situation where, in effect, you’ve reduced the number of people who get credit from those people who adhere to the rules, and more people go to those other players.”
He notes that other countries, including Australia, have taken a more targeted approach to reviewing loan applications, and New Zealand could follow suit. “Most importantly, it doesn’t distract from the intent of the law, which is entirely fair.
At business lending firm Prospa, chief executive Adrienne Begbie favors Huggins’ arguments to better target CCCFA restrictions. “I don’t disagree with that,” she says. “He was really aimed at payday lenders, truck lenders and predatory lenders – but he took a very broad approach.”
His firm surveyed 520 New Zealand SMEs about their access to finance this year, revealing they were struggling. It shows that of businesses that applied for funding in the past six months, 11% were turned down and 32% received a loan that was lower than they applied for – although not as difficult as in the past. the height of the pandemic.
“The fact that the consumer is spending $100 per month on caviar does not tell whether a given loan will put the consumer in circumstances of substantial hardship. Likewise, knowing that the consumer is spending $500 per week on groceries Basic doesn’t.”
– Justice Nye Perram, Federal Court of Australia
Those most likely to have difficulty borrowing are in construction, retail or wholesale trade, and warehousing.
Begbie says small businesses have always struggled to borrow because most lenders ask them to use their house as collateral – many young people starting a business don’t own a house. But this year, it’s even more difficult.
“You have to blame it on the lenders,” she says. “A regulator can oversee it, but everyone has a responsibility to their customers, their boards, their investors, to lend properly and not to lend to people who can’t afford it.”
Like the banks, Prospa has been interested in developing the government’s new Lender Responsibility Principles, which are not binding but provide good rules of thumb. “We don’t take a mortgage on someone’s house, we consider lending based on the strength of the business,” she says. “But we all have responsible expectations when it comes to lending.”
In Australia, the Federal Court has pushed back against attempts by the regulator, the Australian Securities and Investments Commission, to extend responsible mortgage lending rules to business lending. As in New Zealand, banks feared an overlap between mortgages and business loans, as many small business borrowers use residential property as collateral.
The commission had accused Westpac Australia of breaking responsible lending laws 261,987 times between 2011 and 2015 because it failed to properly assess whether the loans were appropriate, as required by the Credit Act.
“We consider the intention of the CCCFA to be the right one. You want to make sure that customers can pay their loans – it’s in everyone’s interest. It’s in the customer’s interest and it’s certainly in my interest to ensure that the client can afford to repay their loan.”
– Dan Huggins, BNZ
The case became known as the ‘shiraz and wagyu case’ after Judge Nye Perram ruled that consumers’ past habits were irrelevant to their future habits and that taking out a loan would alter spending decisions . “I can eat wagyu beef every day washed down with the best shiraz, but if I really want my new home, I can settle for much more modest dishes,” he said.
“The fact that the consumer is spending $100 per month on caviar does not tell whether a given loan will put the consumer in circumstances of substantial hardship. Likewise, knowing that the consumer is spending $500 per week on groceries Basic doesn’t.”
This same issue has been debated in New Zealand – albeit in reference to KFC rather than wagyu beef. Eventually, Trade Secretary David Clark agreed to make changes to the new law so that banks and other consumer lenders were not automatically required to review every expense line on bank statements. and credit card details of potential borrowers.
At BNZ, Huggins is very clear that he and the bank are 100% behind the goals of the new Credit Agreement Act, but there are still a few wrinkles to iron out. “We consider the intention of the CCCFA to be the right one. You want to make sure that customers can pay their loans – it’s in everyone’s interest. It’s in the customer’s interest and it’s certainly in my interest to ensure that the client can afford to pay their loan repayment.
“I think New Zealand banks have traditionally been very good at this. We haven’t seen huge backlogs, when you compare New Zealand banks and BNZ to others around the world.”
But the regulations still limit, quite substantially, banks’ discretionary power over lending decisions. “And so this knowledge that we have accumulated over 160 years of what is a good thing to do is limited by new legislation. And that means the availability of credit is lower.”
It only remains for him to convince the Minister of Commerce of the merits of better targeting credit constraints on loan sharks.
Clark acknowledges his officials’ advice that the government should consider targeting the scope of regulation on the affordability of subprime loans based on product type, lender class or borrower characteristics. . They say this would be in line with the original intent of the policy and address a key underlying driver of unintended impacts, which is that the regulations apply to almost all consumer loans with limited exceptions.
But Clark does not follow this advice. “I am concerned that any further changes to target the scope of affordability regulations will significantly reduce consumer protection and the benefits of doing so will be marginal,” he said in a Cabinet document. “While there may be certain lenders, product types or borrowers where the risk of irresponsible lending is higher, that does not preclude those outside the targeted scope from irresponsible lending as well.”
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