What Is CCFA?

As 2022 begins, we hear more and more about CCCFA. So, what exactly is CCCFA? CCCFA is the Credit Contracts and Consumer Finance Act. In short, this act ensures consumers can make informed choices when they are borrowing money. It is designed to make certain that borrowers know what they agree to and gives them the ability to keep track of their debts by requiring lenders to act responsibly at all times. This act protects consumers’ transactions like using a credit card, taking out a loan, either personal or a mortgage, borrowing money on an overdraft, or buying products and services on credit such as hire purchase. It also makes lenders accountable, ensuring they undertake checks that the consumer can repay the funds without severe hardship.

CCCFA was implemented at the start of December 2021 and was essentially intended to protect consumers from loan sharks. CCCFA stipulates that lenders require stricter scrutiny of a borrower’s financial position to ensure they do not get into financial trouble.

CCCFA also requires lenders to identify all and any charges that can be applied if the consumer cannot meet their required repayments and therefore safeguards the consumer.

So, What's Changed?

In the past lenders would decide whether a person could finance a loan by applying any debt serviceability restrictions the lender may have in place, checking the debt-to-income ratio in this particular case, and ultimately taking into account the income of the person concerned. The CCCFA requirements stipulate that a consumer must have the ability to cope with an increase in living costs. At present banks and mortgage brokers are working on an increase of about 3% on the current interest cost. Although these costs are not needed immediately, a borrower must be able to show they can afford these increases before a loan is approved.

This act stipulates how much income a bank can make from specific transactions. So, before deciding on approving a loan, the bank would also consider the profit from each transaction and make an economic decision on the risk and benefit of the loan. Loans like bridging loans were previously profitable for the banks. However, with the changes, the time, effort and risk to implement bridging loans may not necessarily make these financially viable any more.

Who Is Affected By CCCFA?

Anyone who is borrowing money is affected by the CCCFA. First home buyers and newly-separated or single people seem to be affected to a higher degree. Those restructuring their mortgages may also face many more hurdles than when they first attained a loan.

Now What?

Just two months after the introduction of the Credit Contracts and Consumer Finance Act (CCCFA) David Parker (Minister of Revenue and Associate Minister of Finance) has launched a review. This review, supported by Treasury, the Reserve Bank, Commerce Commission and the Financial Markets Authority was recommended after credit companies reported a noticeable drop in lending approvals. This has also coincided with a slowdown in the real estate market and an increase in interest rates. An unintended consequence could be slowing down the economy and a collapse of the housing industry if the CCCFA is not adjusted to ensure money still flows. The review is expected over the next few months and may not necessarily require a law change but could be adjusted by a regulatory change if required.

Sharon Cullwick, Executive Officer, NZ Property Investors’ Federation