Consumer finance and COVID-19 – new regulations and guidance
The Government has provided guidance on the regulation of consumer finance following the disruption caused by COVID-19.
Parliament passed the Credit Contracts and Consumer Finance (Exemptions for COVID-19) Amendment Regulations 2020 (Amendment Regulations) on 31 March 2020. The Commerce Commission (Commission) has also released guidance for lenders operating during the COVID-19 pandemic (Guidance Document).
The Amendment Regulations provide for exceptions to the CCCFA in specific circumstances where a registered bank is the lender. The Guidance Document provides broader guidance to lenders generally.
The Commission has acknowledged that the application of the requirements of the CCCFA will be informed by the circumstances in which lenders, acting reasonably, are operating while COVID‑19 affects the New Zealand economy, and notes that its approach to the enforcement of the CCCFA during this period will be strongly informed by these circumstances. The Commission also notes that the content of the Guidance Document may be changed or withdrawn as necessary.
In our view, any relief to lenders as they strive to assist customers in the unprecedented COVID-19 environment is welcome, and we consider that the Amendment Regulations should be extended to non-bank lenders.
The Amendment Regulations create exemptions from the application of certain provisions of the Credit Contracts and Consumer Finance Act 2003 (CCCFA) if:
- a registered bank is the lender;
- the borrower is experiencing, or reasonably expects to experience, financial difficulties due to the economic or health effects of COVID-19; and
- the contract is an existing contract that is varied or replaced for the purpose of reducing those difficulties.
The exemptions relate to various provisions of the CCCFA, (see here for the full list) including provisions relating to:
- if an existing contract is being varied or replaced, the assessment of whether a borrower will make payments under an agreement without suffering substantial hardship;
- time limits for making disclosure and giving or sending terms; and
- the obligations of creditors in relation to hardship applications.
The Amendment Regulations create some flexibility for registered banks to deal with borrowers reasonably in the context of the disruption caused by COVID-19.
The Guidance Document is intended to be read alongside the Amendment Regulations, and provides guidance to non-bank lenders, as well as registered banks to the extent that it discusses provisions of the CCCFA not subject to the Amendment Regulations. The Guidance Document provides additional guidance relating to the Lender Responsibility Principles under the CCCFA, responding to borrowers under financial stress, disclosure and fees.
Responsible Lending Principles
The Commission reiterates that lenders must comply with the Lender Responsibility Principles as set out in the CCCFA and Responsible Lending Code (Code). However, it acknowledges that lenders may not in the current circumstances be able to strictly comply with all guidance contained in the Code. The Commission states that what is required to discharge the lender responsibilities will be informed by the circumstances in which lenders, acting reasonably, are operating while COVID-19 affects the economy. This includes consideration of what is practicable in the circumstances.
A full outline of the Commission’s guidance on responsible lending can be found from paragraph 8 of the Guidance Document. Some points to note are set out below.
Affordability and suitability inquiries
Borrowers may have difficulties obtaining the supporting information and documents that would ordinarily corroborate an application and underpin a lending decision while businesses and services are disrupted. The Guidance Document states that lenders will be acting responsibly where they make reasonable decisions based on the best available information in the circumstances. This includes permitting borrowers to provide information verbally and follow up to verify information with copies of documents as soon as this is practicable.
The Guidance Document also provides that in the current circumstances when borrowers seek credit or the variation of existing credit, it may be more appropriate to consider the borrower’s history and reasonable expectations of their future circumstances than under normal circumstances.
Duty to assist borrowers to make informed decisions
The Guidance Document provides that communications with borrowers may need to be verbal if that is the only practicable means in the circumstances, but they should be followed up with disclosure in writing as soon as is reasonably practicable.
The Guidance Document states that in circumstances where it is impracticable to comply with the whole of the guidance in section 11 of the Code (relating to subsequent dealings) lenders should at the very least communicate to borrowers the following key messages (to the extent applicable to the variation):
- if payments are to be deferred:
- that no payments will be made during the period of the deferral;
- the period of time for which payments will be deferred;
- whether the borrower will be charged interest on the loan during the period of the deferral (and therefore whether the loan amount will increase during the period of the deferral and while no payments are being made); and
- what the borrower’s payments and loan term will be after the deferral period.
- if the borrower’s payments will be reduced for a period of time:
- the amount of the reduced payments;
- the period over which they will be reduced; and
- what the borrower’s payments and loan term will be after the period that reduced payments are made.
- if the loan term will be extended:
- how long the loan has been extended for; and
- when the loan is to be completely paid off.
- whether the loan deferral and/or reduced payments and/or extended term mean that the borrower may have to pay more over the term of the loan, including more interest.
Responding to borrowers under financial stress
The Guidance Document provides that any lender may work with any borrower at any time to provide relief from financial stress. In the current circumstances it may be appropriate for lenders to accept variation applications by telephone if circumstances make it difficult for applications to be made in writing. Lenders should process applications for variations as quickly as possible and communicate their decisions to borrowers as quickly as possible.
The Guidance Document also notes that the Commission considers the hardship procedure in the CCCFA to be a minimum standard.
Disclosure and Fees
The Guidance Document also provides guidance relating to disclosure and fees under the CCCFA. See paragraphs 41 and 45 of the Guidance Document, respectively, for more detail.
For further information, please contact one of our specialists.