The Government’s changes to the Responsible Lending Code come into force tomorrow. 1News outlines what this means for people wanting to take out a loan.
Anyone who has applied for a loan will be familiar with the financial checks that come with that territory.
These checks form part of what’s known as the Responsible Lending Code.
The code has been in place since 2015 and has been through several iterations since then. It is about to change once again, with new rules in place from July 31.
Here’s what you need to know if you’re planning on borrowing money soon.
What is the Responsible Lending Code?
The code is issued under the Credit Contracts and Consumer Finance Act 2003 (CCCFA).
It was created as a response to concerns around the behaviour of some lenders, says banking expert Claire Matthews.
“[The code] had two particular focuses – making sure that borrowers were only being lent money that they could actually afford to repay, and also that the terms and conditions of the contract were not onerous or unreasonable,” she said.
All lenders must adhere to the code.
What changes has the Govt made to the code?
The main changes concern chapter five of the code — namely the rules lenders must follow when determining what a person can afford to borrow.
“Over the last two or three versions [of the code], there had been a concern that ... it had become much more explicit about the sort of things a lender had to look at,” Matthews said.
The Government is stepping back some of those requirements.
“From the moment [previous] changes were made, there had been a lot of concern by the lenders about the sorts of things they’re having to look at,” Matthews said. “You had the complaints from borrowers about having to account for every cup of coffee that they had and all those sorts of things.”
While Labour did ease those checks on spending habits a year ago, Matthews said some felt the rules were still too restrictive.
“The new version is much more realistic because you shouldn't as a borrower have to account for every cup of coffee or the fact that you choose to have fish and chips or go to McDonald’s,” she said.
Lenders will still need to demonstrate they have checked a borrower can afford a loan but there will be more flexibility in terms of how they do that.
Matthews said the code should be looking more holistically at a borrower’s expenses.
“There are some expenses you're absolutely committed to, like repayment of other debt or insurance premiums. It’s reasonable to say that [borrowers must] explain those and show that [they] can afford those as well [as a new loan],” she said.
“But the fact that you have traditionally gone out for a restaurant meal once a week and now you're borrowing money, you shouldn't need to justify that you can continue to do that. It's quite reasonable to assume that if you're borrowing money for a home loan that you might change what you’re doing.”
What do these changes mean for borrowers?
Matthews said the process of borrowing money should become easier from July 31.
“There’s an argument that when changes were brought in about three years ago, it did reduce the amount of lending that was going on,” she said.
“So, theoretically, you may see it becoming a little bit easier to get a loan than it was previously. It may make it easier to borrow for your first home, for example.”
Matthews said borrowers will still need to show what their regular expenses are and discuss how they’re going to accommodate a new loan, but they will no longer need to explain everything they are spending their money on.
“The advice that some borrowers were getting under the previous code was six months before you go to take out a loan, stop [getting] takeaway coffee, stop going out for meals, stop any discretionary expenditure so that it looks better,” she said.
“People were having to artificially manage their lives to achieve this, so [the changes to the code] should be much more sensible, I think.”
Are there any risks to easing the code in this way?
Financial mentoring experts described the upcoming changes as a "recipe for disaster". (Source: 1News)
Some financial mentoring experts are concerned the changes to the lending code will see more people borrowing money they can’t afford to pay back.
Christians Against Poverty chief executive Sam Garaway told 1News earlier this month he was "disappointed" to see the changes.
“Every month we're receiving hundreds of calls from people and unfortunately at times we're having to turn them away because we're overbooked or we don't yet have service coverage in their area, so we know that this is the tip of the iceberg around the issue of irresponsible lending,” he said.
Matthews said the changes do potentially make it easier for less reputable lenders to take advantage of people.
“It does obviously open up the opportunity for them to go back to those bad habits,” she said.
“There has been a concern that some lenders are not as scrupulous about checking that borrowers can afford [a loan] and so that's why the code was [created] — but it went too far and caught everybody [out].”
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