The Commerce Commission inquiry issues warning as HSBC and two others make their exit
New Zealand home loan borrowers are at risk of getting locked into mortgage prison, as firms exit the personal lending market due to tough credit rules, a Commerce Commission inquiry has been warned.
HSBC, Goldband Finance, and Mutual Credit Finance have all decided to quit their home, car, and consumer lending businesses, due to compliance costs making them financially unsustainable.
HSBC has announced its intention to exit its wealth and personal banking business in New Zealand, winding down its involvement over several years, and just this month has agreed to sell its $1.4 billion mortgage portfolio to Pepper Money, Newsroom reported.
Christchurch-based Goldband and Mutual Credit, too, have resolved to leave, confronted with the cost and risk of lending under the new Credit Contracts and Consumer Finance Act, according to a report published on newsroom.co.nz.
This led to warnings to the Commerce Commission banking market study that Kiwi borrowers will be trapped in mortgage prison, due to their inability to switch to a more competitive lender because of the tough new rules.
Eugene Bartsaikin, director and mortgage adviser at Twine Financial Advisers, told New Zealand Adviser that there is a growing incidence of mortgage prisoners amid surging interest rates and a decline in property values, particularly among HSBC customers, who were forced into higher floating rates this week but were unable to refinance elsewhere.
Lyn McMorran, the executive director of the Financial Services Federation, shared Bartsaikin’s concern, and in a submission to the Commerce Commission, described the Credit Contracts Act regime as “overly prescriptive", accordinig to a report by newsroom.co.nz.
“It has effectively created mortgage prisoners where the granular and intrusive assessment of all household expenses, rather than just the individual’s fixed outgoings, renders their loan ‘unaffordable’ to a new provider, even though they may be meeting higher existing commitments with their current lender,” McMorran said.
It reduces their ability to shift to other lenders for a better deal – a problem worsened by the exit of providers from the market.
“It has also led to lenders quitting the consumer lending market altogether to focus on less heavily regulated business lending, which is certainly not helpful to promoting a competitive market,” McMorran said in the submission.
She stressed that competition is healthy and is good for consumers.
“Providing people with alternatives that might be more niche and more suited to their needs is something that we don’t want to squash,” McMorran said.
Goldband and Mutual Credit Finance were not the only ones to exit the riskier world of personal lending. Smaller lenders, too, have left in the past few months: Zip has opted to revert to its core BNPL business and Fisher & Paykel Credit Union has closed its doors and handed over its $2.7 million loans book to First Credit Union, with “regulatory impacts” cited as one of the reasons for the move, Newsroom reported.
Since the new CCCFA came into effect, the Commerce Commission said high-cost lenders have also withdrawn from the lending market or cut their interest to below 50%.
“These changes have been encouraging to see, particularly as some lenders traditionally charged up to 800% in interest,” said Louise Unger, the commission’s general manager for credit. “The reduction of interest rates has led to a cheaper cost of finance for borrowers and prevents potential harm and financial detriment.”
And while the exit of such lenders will be noticed, it’s the departure of more established, respected lenders such as HSBC, Goldband, and Mutual Credit that is more worrying, it was suggested.
David Tier, chair of Mutual Credit Finance, said the 60-year-old business had evolved into a business lending organisation, after starting out in consumer finance.
“But when the CCCFA [Credit Contracts and Consumer Finance Act] came out, it just got harder. Too complicated, too difficult,” Tier said. “We just couldn’t see the point of being part of that regime, that was just so complicated, and so fraught with risk.”
Martin Brennan, Goldband chief executive, said the company’s move away from personal lending has been a gradual, unspoken decision.
“The regs are too restrictive and frankly leave us too vulnerable,” Brennan said. “I mean, some of the fines and so forth are quite high, and I could lose my career if I made the wrong call.
“Frankly, people’s perceptions of lenders is that if you’re not a bank, you must be a bad, evil lender. But there are non-bank lenders like NBS, Mutual Credit, and Goldband that I think are reputable. It’s not like we’re payday lenders or anything like that.
“But it’s just got harder and harder. In terms of the compliance reporting, the risks of getting it wrong are so high that it’s just not in our interests to do it, frankly.”
The Goldband boss argued that over-regulation is a bigger problem to bank customers than anti-competitive behaviour by the big banks.
“But I’d be stunned if the Commerce Commission turned around and said, ‘well, government you’re part of the problem, not part of the solution,’” Brennan said.
Some mid-sized banks, too, such as NZX-listed Heartland, were frustrated at the compliance costs, Newsroom reported.
“Certain regulatory regimes, like the CCCFA, are so complex and uncertain that lenders are forced to adopt conservative business approaches to ensure compliance; stifling innovation and dynamism in important banking product markets,” said Phoebe Gibbons, Heartland Group’s general counsel, in the bank’s submission to the Commerce Commission inquiry.
Gibbons said “‘fixed’ regulatory compliance costs are significant for smaller banks.
“Heartland, for example, faces far greater costs (proportionally) to comply with prescriptive regimes like the CCCFA and the Reserve Bank’s prudential banking requirements than larger organisations with more resources,” she said.
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