Modelling by the Reserve Bank estimates current consumer lending law could have a $12.9 billion impact on the financial system, with the potential for an even more severe impact.
Under the Credit Contracts and Consumer Finance Act lenders must provide borrowers with information about their loan. Between 2015 and 2019 any lender who even made a small mistake in the information provided to customers, like getting their phone number wrong, could, on one interpretation, be required to repay all the interest and fees paid until the error was corrected. That consequence would be totally out of proportion with the technical legal breach, especially if there was no harm to the consumer.
A summary of Reserve Bank modelling in a ministerial briefing outlines three scenarios which estimate the potential impact of incorrect loan information disclosure on the ability of banks to meet their capital requirements. The third scenario estimates a financial system impact of $12.9 billion, and the Reserve Bank goes on to say they considered other scenarios where the potential impact would be “much more severe”.
New Zealand Banking Association chief executive Roger Beaumont says: “We support proposed changes to fix this anomaly in the consumer lending law. The Reserve Bank’s analysis helps to quantify the potential risk to New Zealand’s financial system if the law is not corrected. It reveals a risk of almost $13 billion in cases of incorrect disclosure where consumers may have suffered no harm. That’s money that cannot be used to lend to consumers, businesses, and farmers.
“At a time of economic recovery and global uncertainty, the last thing New Zealand needs is the risk of this scenario playing out. It shows why the law is bad and needs to be fixed.
“It’s important to remember that the proposed law change does not stop consumers or regulators taking action against lenders for information disclosure breaches. Nor does it stop any cases currently before the courts. Rather, it would simply ensure that any remedy would be just and equitable. It would be up to the courts, as it should be.”
ENDS