Final tranche of consumer credit reforms now online | Dentons

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In short

From December 1, 2021:

  • The rest of the changes under Credit Agreement Law Amendments Act, 2019 (CCLAA) will come into force and amend the Credit Contracting and Consumer Finance Act 2003 (CCCFA).
  • The related CCLAA regulations duo, Lender Inquiries into Suitability and Affordability Regulations 2020 and Credit Agreement and Consumer Credit Regulations 2020, will also come into effect. and change regulations on credit contracts and consumer credit. 2004 (Rules).
  • The updated Responsible Lending Code (other than Chapter 12 on hardship), which includes guidance on enhanced lender accountability principles as amended by CCLAA, comes into effect.

Recent developments

Prior to the current COVID-19 Delta outbreak, the latest set of amendments to the CCLAA and its related regulations were due to come into effect on October 1, 2021. Due to continued national restrictions, in early September, a further two-month delay has occurred. confirmed, which pushed back the final implementation date (except for the new certification regime), to December 1, 2021.

Since September, the following legal developments in consumer credit have been introduced:

October 1, 2021 – Certification required
  • The new certification regime under the CCLAA is applicable to all consumer credit providers and mobile merchants, except by exemption (mainly entities licensed or authorized by the FMA or the Reserve Bank).
  • Lenders and mobile traders must be certified by the Trade Commission and registered with the Registry of Financial Services Providers (FSPR) if they provide lending services.
  • If a lender or mobile merchant is already FSPR registered on September 30, 2021, they have until their next FSPR confirmation date to become certified.
October 13, 2021 – Updated Addendum to the Responsible Lending Code
  • The updated addendum to Responsible Lending Code: COVID-19 (addendum) has been reissued in response to the COVID-19 Delta outbreak.
  • The addendum offers additional guidance on how to navigate the obligations under the responsibilities of the lender when it comes to dealing with borrowers affected by COVID-19. Several strategies are described, including deferring loan repayments and replacing existing loan agreements.
  • The addendum expires on February 1, 2022, the date of entry into force of the revised Chapter 12 of the Responsible Lending Code, regarding hardship.

Where we landed – key areas of reform

The provisions of the CCLAA coming into force on December 1 cover broadly the following areas:

Increased Lender Responsibilities – Relevance and Affordability
  • The new amended regulations prescribe specific adequacy and affordability surveys that must be carried out by lenders before agreeing to lend or before making “material changes” to the loan agreement, such as an increase in loan agreement. the credit limit.
  • Direct surveys should be carried out on a borrower’s needs and goals to ensure that the credit offered meets their goal. Specific surveys to fully assess a borrower’s income and expenses should be carried out to give a lender confidence that repayments are unlikely to cause significant hardship to the borrower.
  • Lenders must keep records of the above investigations and their results for seven years. Records should demonstrate how the lender has complied with its responsible lending obligations. Upon request, copies of the records should be provided to the borrower or to the Trade Commission.
Disclosure
  • Lenders are now required to make additional disclosures before the start of a debt collection process.
  • Lenders should disclose to the borrower information about their dispute resolution process and the free financial mentoring services available to them.
  • The amended regulations prescribe minimum change disclosure requirements that apply to unilateral and mutually agreed upon changes.
  • If a lender has published in the last 6 months a language different from the language used in the proposed loan agreement, they must provide the borrower with the information relating to the loan agreement in the same language as that used in the advertisement. .
Duty of care for directors and senior executives
  • Directors and senior executives of consumer credit providers must exercise due diligence to ensure that the creditor meets its CCCFA obligations.
  • Under this obligation, directors and senior executives must objectively demonstrate that they have solid systems and procedures in place to meet their compliance obligations. It also extends to ensuring that gap identification processes exist and are operational.
  • Directors and senior executives will be personally liable for breach of their duty of due diligence, with the courts being able to order financial penalties of up to $ 200,000. It is important to note that it is forbidden to insure or indemnify against these penalties.
Advertising and fees
  • The Regulations contain new minimum standards for advertising if an interest rate, interest charges, amount of payment or if no interest is mentioned. In each case, certain prescribed details relating to the total cost or charges relating to the loan product must be prominently displayed in the advertisement.
  • Certain advertising practices are prohibited. An advertisement should not state that no investigation will be carried out into a borrower’s situation or that a borrower’s situation will not be taken into account in approving a loan.
  • If an advertisement refers to the speed of loan approval in minutes or hours, it should also include a prominent reference that it is subject to responsible lending investigations and criteria.
  • Lenders should review their credit and default charges if they know (or reasonably should know) of a change in circumstances that could materially affect the reasonableness of the charge.
  • Lenders must keep records for seven years showing how their credit and default charges were calculated and what they are considered reasonable. These registrations can be requested through a dispute settlement system or the Trade Commission.

Our opinion

The CCLAA reforms go beyond their original primary objective of ensuring better protection of vulnerable consumers from unscrupulous or predatory lenders. In practice, these are far-reaching reforms that have already had, and will continue to have, profound implications for all lenders in the consumer credit market.

For potential lenders looking to enter this market, it is difficult to see how the new improved suitability and affordability assessment requirements, record keeping obligations, mandatory certification, and personal due diligence duties. for directors and senior executives would not be considered significant barriers to entry into a cost-benefit analysis. It is doubtful that adequate and appropriate compliance under the CCCFA can realistically be achieved without significant investments and resources to ensure that strong operational compliance systems and processes are in place.

Only time will reveal to what extent the CCLAA reforms will impact borrowers, but we will be following the questions below with interest:

  • The increased administrative burden due to the increased requirements for suitability and affordability assessment, and the time and cost implications for granting loans. Delays will frustrate both lenders and borrowers and will not promote efficient transaction execution. The increased administrative costs borne by lenders may ultimately have to be passed on to consumers.
  • The extent of evidence collected by lenders to demonstrate how they met the increased affordability and convenience requirements. Evidence and records retained should show that a sound assessment of affordability and adequacy has been conducted, and that the appropriate internal processes have been put in place to ensure this. If investigated, a lot will depend on a lender proving that they have put their systems in place well, with a good result without defense against a bad process.
  • With the increased penalties for LCCFA violations, lenders may naturally take a more cautious approach in their adequacy and affordability assessments. Credit could become increasingly difficult to access for consumers, and particularly for consumers where more complex or non-vanilla circumstances apply.
  • The Regulations provide that a suitability and affordability assessment may not be required if it is objectively considered “obvious in the circumstances” that the borrower can make repayments without experiencing financial hardship. This is meant to be a high test. The limited scope of this exception can prevent lenders from supporting good results for clients. For example, a long-time client of a lender may find it unnecessarily cumbersome to be subjected to full income and expenses when requesting an increase (however large) to an existing credit limit.

While the heart of consumer credit reforms focus on consumer protection, the real test will be whether the additional legislative protections and obligations for lenders are proportionate and properly addressed. It remains to be seen whether a viable balance can exist between these and serving consumer credit demand, allowing healthy competition among credit providers (including the entry of new providers) and ensuring that credit remains. reasonably accessible for the benefit of all consumers and the economy more broadly.


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