You may have heard about the new lending criteria that banks are required to use, after the amendment of the Credit Contracts Consumer Finance Act (CCCFA) and the introduction of the Responsible Lending Code that came into effect on 1 December 2021. There have been numerous stories about people being turned down for home loans because they regularly eat at restaurants, or have been on maternity leave, regardless of their after tax income, or the size of their deposit.

The issue is to do with the wording of the CCCFA and the accompanying Regulations. It requires that all lenders must make “reasonable inquiries” into both whether the borrower will be able to afford the repayments in a variety of situations, but specifically refers to the borrower being able to “make the payments under the agreement without suffering substantial hardship”.

Essentially, the lenders have to take into account the fact that interest rates can change over time, and take into account the risk that this entails. But surely this is something that they have always done? In short, the answer is yes, banks have always done this. Unfortunately, regulation 4AF states the lender must now make reasonable inquiries to enable the lender to estimate the borrower’s likely income and the borrower’s relevant expenses.

The issue that has arisen is in the interpretation of “reasonable inquiries”. Banks are operating under the assumption that they must find out the actual expenses on a weekly, fortnightly, or monthly basis, and extrapolate them to be the same for 30 years (assuming that your home loan is that period).

So let’s say that you decided to purchase some shoes on a buy now pay later scheme such as Afterpay or Laybuy, and have to pay the price of those shoes over 6 weeks. During the same period, you purchase birthday or Christmas presents, which are a one-off purchase. You also decide to go to a fancy restaurant for an anniversary. If you then apply to the bank for a home loan, they will ask to see your expenditure over the last 3 months. Because these purchases will all show up on your bank statements, the banks are assuming that these will be regular payments, and will take that into account when determining your expenses.

This was seen by a couple who both earn around $200,000 per year (before tax), and like to eat out at restaurants regularly. By most people’s standards, they can afford to do so quite comfortably, while maintaining payments on a loan. Unfortunately, they were declined by the bank because the bank considered that it showed a pattern of spending that introduced too much risk.

Is it an overreaction?

Most news articles have reacted with some degree of outrage. For the borrowers, it is incredibly frustrating to learn that had you applied for the same loan 3 months previously, it would have been approved, only to be declined now.

Part of the fault can be laid at the feet of the government/parliament. The wording is vague, and leads to banks attempting to ensure that they are complying with regulations. Because the regulations are vague, the banks are going with a “better safe than sorry” attitude.

There has been finger pointing both by banks, and the government. The banks say it is unclear where they have satisfied a “reasonable inquiry”, whereas the government maintains that the banks are overreacting. Unfortunately, unless a Court rules on the legislation as to how it should be interpreted, or the Government amends it, it is likely to remain in the hands of the bank to interpret as they see fit.

What can you as a potential borrower do?

Unfortunately there isn’t much guidance on what will or won’t help with applications, with the regulations coming into effect so recently. If you are looking at purchasing a home with a  mortgage, we suggest that you talk with your mortgage broker or banker to see what will help with your application.

This article is not intended to be legal advice. If you have any questions about the conveyancing process or are in the process of selling or purchasing a home, Regent Law is able to assist you and give you advice that is specific to your situation. Get in touch with us by sending us an email at [email protected] or calling us on (09) 430 0509.

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