Introduction of principles of responsible lending
The Commerce Select Committee reported back on the Credit Contracts and Financial Services Law Reform Bill on 17 March. The bill is a large one that makes a number of important changes to the Credit Contracts and Consumer Finance Act 2003 (CCCFA). The bill also repeals the Credit (Repossession) Act 1997 and incorporates its provisions into an expanded CCCFA.
One very important part of the bill is that it introduces the concept of responsible lending to New Zealand credit legislation for the first time. This is done by the addition of a new Part 1A of the CCCFA.
The new Lender Responsibility Principles will be very important to the application of the CCCFA. They impose onerous duties on lenders which will inevitably require some significant changes in processes and practices.
They are expressed in quite general terms which do not provide much guidance to lenders of what is expected from them. Helpfully, however, the Select Committee has proposed amending the bill so that the new Lender Responsibility Principles do not come into effect until the same time as the Minister issues a proposed Responsible Lending Code.
A new outline provision suggested by the Select Committee explains the relevance of the Lender Responsibility Principles and when they apply.1 This provision records that the CCCFA provides for:
- the court to make compensation and other orders, or to grant an injunction, in respect of a breach of the Lender Responsibility Principles;
- creditors to make decisions on hardship applications in compliance with the principles;
- creditors to comply with the principles in relation to a repossession of consumer goods;
- the court to order persons not to act as creditors if they have failed, more than once, to comply with the principles; and
- the court to have regard to compliance with the principles when deciding whether to reopen an agreement under Part 5 of the CCCFA (which allows the reopening of oppressive credit contracts).
The Lender Responsibility Principles will be set out in a new s9B of the CCCFA.
The first important principle is a duty of care. Section 9B(2)(a) provides for a lender to exercise the care, diligence and skill of a responsible lender. The precise nature of this duty of care is not outlined.
Is this a duty owed to borrowers to take care to avoid loss to them? The section simply notes that the duty of care will apply to lenders’ conduct in advertising the provision of credit, in pre-contractual dealings leading up to an agreement to provide credit, and to all subsequent dealings with a borrower in relation to an agreement.
The standard of care expected of a responsible lender is also not elaborated. Hopefully further guidance as to what is expected will be provided for in the proposed Responsible Lending Code. In the absence of such guidance the obligations expected of lenders in relation to the duty of care are uncertain.
The second important principle requires lenders to satisfy themselves as to the ability of the borrower to repay. Section 9B(3)(a) provides that a lender must make reasonable enquiries before entering into an agreement with a borrower so as to be satisfied that it is likely that the credit or finance provided in the agreement will meet the borrower’s requirements and objectives, and the borrower will make the payments under the agreement without suffering substantial hardship.
This provision amounts to a shift of responsibility for borrowing from the borrower to the lender.
To date it has been up to the borrower to decide, having regard to his or her own knowledge of his or her own financial circumstances, that he or she can make repayments under the agreement without suffering hardship.
The new s9B(3)(a) is controversial. Some lenders have argued that while borrowers should be protected from oppressive practices, an appropriate policy setting should encourage individuals to take personal responsibility for budget setting and compliance with personal financial obligations.
A further risk is that the provision results in a limiting of the availability of credit or in the cost of credit being increased. The amendment will likely discourage prudent lenders from providing credit to any customer who doesn’t clearly fall within the standard lending criteria.
Providing credit to such customers will be risky as there is a chance that the lender may subsequently face the allegation that it has breached the lender responsibility principle in s9B(3)(a). Alternatively, the cost of credit for all consumers may rise as lenders build in a further margin to reflect the greater risk involved in lending to customers who only just fall within standard lending criteria.
A third principle requires the lender to assist a borrower to reach an informed decision whether to enter into a credit agreement. As part of this principle, s9B(3)(b) includes a requirement for the lender to ensure that the terms of a credit agreement are expressed in plain language and in a clear, concise and intelligible manner. It can be difficult on the one hand to be clear, precise and accurate while on the other hand also being concise.
A fourth principle requires a lender to treat a borrower and their property (or property in the possession of the borrower) reasonably and in an ethical manner. This obligation is set out in s9B(3)(e) and specifically applies when breaches of the agreement occur, where a debtor suffers unforeseen hardship or during the process of repossession of goods.
The obligations of reasonableness and of ethical conduct are quite general. Again it will be useful for the standards expected to be clarified in the Responsible Lending Code.
A fifth principle requires a lender to avoid oppressive conduct. Section 9B(3)(f) requires a lender to ensure that the agreement is not oppressive, that the lender does not exercise a right or power in an oppressive manner and that the lender does not induce the borrower to enter into the agreement by oppressive means.
Similar lender responsibilities to those discussed above are owed to guarantors in relation to guarantees in ss9B(2) and 9B(3A). Further there are obligations owed to borrowers in relation to credit related insurance contracts in s9B(3B).
Section 9E provides for the Minister of Consumer Affairs to prepare and issue a Responsible Lending Code. The purpose of the code is to elaborate on the Lender Responsibility Principles under the Act.
The Select Committee has added a provision to the effect that the code is not binding.2 However, evidence of a lender’s compliance with the provisions of the Responsible Lending Code will be treated as evidence of compliance with the Lender Responsibility Principles.3
Section 9D provides some guidance as to the content that may be included in the code. For example, the code may set out the nature and extent of enquiries that a lender should make before entering into an agreement. It will be particularly interesting to see the extent of questions that are considered appropriate for a lender to ask so as to satisfy itself that a borrower will be able to meet its obligations under a proposed agreement without suffering “substantial hardship”.
Section 9D also notes that the code may set out processes, practices or procedures that a lender should follow to ensure that the lender treats borrowers and their property reasonably and in an ethical manner. There is certainly scope for differences of view as to what processes, practices or procedures would be appropriate in this context.
Section 9D also notes the code may include processes, practices or procedures that a lender should follow to ensure that fees (including credit fees and default fees) are not unreasonable. One of the other reforms made by the bill is to significantly amend the provisions in the CCCFA dealing with when credit fees and default fees are unreasonable.4 The bill inserts a new s44B of the CCCFA which will provide that evidence of a creditor’s compliance with the provisions of the Responsible Lending Code is to be treated as evidence that a credit fee or default fee is not unreasonable.
The Select Committee recommended amending the bill to stagger the commencement of the bill’s provisions. The intention is to allow time for development of the Responsible Lending Code and for the necessary changes to be implemented in the credit industry.
The bill does provide that all of its provisions must come into force within 12 months,5 and the Commerce Minister must ensure that the Responsible Lending Code comes into force within the same time period.6
The proposed staggering of the bill’s introduction is a helpful change. The bill, as originally introduced, only provided for the Responsible Lending Code to be published within two years after the Lender Responsibility Principles came into effect.7
That was undesirable. As is apparent from the discussion above, the Lender Responsibility Principles are general and uncertain in scope. It makes sense for them to only come into effect at the same as the Responsible Lending Code.
The code will hopefully provide lenders with helpful guidance on what is expected of them. The introduction of the Lender Responsibility Principles are likely to cause lenders considerable work in changing procedures and practices and that work should be informed by the terms of the code.
John Land is a senior competition law specialist and commercial litigation barrister at Bankside Chambers in Auckland. He was formerly a partner of Kensington Swan for 20 years. He can be contacted on (09) 379 1513 or at email@example.com.
- New s9AA CCCFA.
- New s9C(1A) CCCFA.
- New s9C(2) CCCFA.
- Sections 41, 43 and 44 of the CCCFA are replaced and new ss44A and 44B are inserted.
- Clause 2(3) Credit Contracts and Financial Services Law Reform Bill 2013.
- Clause 1A of proposed new Schedule 1AA to CCCFA.
- Section 9E(1) of Credit Contracts and Financial Services Law Reform Bill 2013 as originally introduced.
Last updated on the 17th March 2016