The Government is set to enforce a series of sweeping changes from next year to better protect consumers from "high-cost loans and unaffordable debt".
“Building on the work to crack down on loan sharks last year, we’re now making the rules clearer for all lenders to help protect borrowers from unaffordable loans,” Minister of Commerce and Consumer Affairs David Clark said today in a statement.
He said while lenders are obligated to check that a borrower will be able to pay back a loan, some lenders are “much less careful and diligent than others”.
Clark said around 20 per cent of repayment issues experienced by Kiwi borrowers are believed to be due to the cost of the loan, and the harm caused by unaffordable debt is “serious and long-lasting”.
“We need to support all lenders to do a more thorough job of understanding their customers’ circumstances before approving a loan,” he said.
“We are making changes to ensure that the rules are clear, consistently applied and easy to enforce if they are broken.”
Under the "suite of changes", lenders will need to make consistent inquiries into the borrower’s needs and objectives to ensure the credit product is suitable before approving of a loan. They will also have to verify their income and expenses to be satisfied that the repayments are unlikely to put the borrower into significant hardship.
"During this period of financial uncertainty, it will be more important than ever that people don’t take on debt that will ultimately put them in even more difficulty long term."
He advised people facing financial hardship to consider what other options or support is available by contacting free budgeting helpline MoneyTalks.
Clark said the requirements will be complemented by the Responsible Lending Code, which helps provide guidance for lenders on their obligations.
The Government will be consulting on the code at a later date to ensure it is updated in time for the new requirements coming into effect from next year, he said.
The new lending requirements will come into force on October 1, 2021, under the Credit Contracts and Consumer Finance (Lender Inquiries into Suitability and Affordability) Amendment Regulations 2020.
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