NZ Bankers' Association argues there'd be 'real risk of adverse customer impact' if the RBNZ introduces a debt-to-income ratio cap for home loan borrowers

Bank lobby group the New Zealand Bankers' Association (NZBA) has reiterated its opposition to the Reserve Bank (RBNZ) introducing a debt-to-income (DTI) cap for home loan borrowers.

It has done so in a submission to the RBNZ's consultation paper on debt serviceability restrictions. Released in November, the consultation paper floated the possibility of introducing a DTI cap for borrowers of six or seven and a test interest rate floor for bank lenders of 7% or 8%.

When calling for submissions by February 28 in November, the RBNZ said it wasn't proposing to implement debt serviceability restrictions at this time, but wanted to prepare for implementing them in case financial stability risks warranted it.

NZBA argues the combination of loan-to-value ratio (LVR) restrictions on low equity lending, December's Credit Contracts and Consumer Finance Act (CCCFA) changes, rising interest rates and tax changes appear to be slowing housing lending growth. The submission was written before Friday's government announcement of changes to responsible lending rules designed to address concerns raised by the CCCFA by banks and others.

"There is a real risk of adverse customer impact if the RBNZ introduces a DTI tool, noting the risks in this area as highlighted by recent coverage of CCCFA changes. Given the recently reported customer frustration following the CCCFA changes, our members are very mindful to ensure any future changes are done in a way that achieves the intended prudential risk management outcomes, while minimising customer impact to the greatest extent possible," NZBA says.

"We also note that these recent changes may have resolved the problem that DTIs would be designed to address, and if that is the case, the resulting customer impact and compliance burden are unlikely to be outweighed by any positive result."

"We suggest that the RBNZ waits to assess the impact of LVRs and the CCCFA changes before further developing the framework for DTIs. Once the RBNZ has developed and finalised a DTI framework, banks must have at least 12 months to implement this tool given the complexity of building flow management into lending decisioning and origination tools, and the volume of other regulatory initiatives banks are delivering at present. The implementation timeframe should also take into consideration that key bank IT resources will also likely need to deliver any priority CCCFA changes that might result from the current MBIE review of the recent CCCFA changes," NZBA argues.

Long running opposition

Even though some banks, notably BNZ and ASB have implemented their own DTIs on housing lending, NZBA has long been opposed to the RBNZ adding this macro-prudential tool to its toolkit. In a previous DTI consultation round in 2017, NZBA argued the RBNZ hadn't established that the benefits of a DTI tool outweighed its costs. Additionally NZBA argued DTIs could create a number of unintended consequences for both the housing market and the economy.

"The evidence linking high-DTI loans and default is weak," NZBA said in 2017. "Job loss has the most significant impact on the likelihood of [loan] default. The reason is that loss of income causes the debt servicing to income ratio to rise above 100%."

In terms of test interest rates, New Zealand banks currently set their own to assess a borrower’s capacity to continue to service the debt if mortgage rates were to rise from prevailing rates. These typically rise as interest rates go up, and fall as interest rates go down. NZBA says it does support the RBNZ developing a test interest rate floor tool, which it can introduce at relatively short notice if it considers action is needed. This would give the regulator time to assess, develop and implement a DTI flow restriction if that is required, NZBA says.

"This assumes it will be a single test interest rate across all customer groups, as it will be very complicated to administer different test rate floors for different groups. The test interest rate floor tool should be the first mechanism the RBNZ deploys if it considers a debt serviceability restriction is necessary, as banks already use test interest rates, and this will minimise customer impact and reduce the pressure to implement DTIs. If it becomes apparent further action is needed, then the RBNZ could require the implementation of DTIs," NZBA says.

Meanwhile, the lobby group bemoans that debt serviceability restrictions will only be imposed on banks, thus creating an uneven playing field and a risk of regulatory arbitrage, as non-bank mortgage lenders such as finance companies, building societies and credit unions wouldn't be subject to the restrictions. 

"This arbitrage does not provide good outcomes for customers as non-bank lenders generally charge higher interest rates. Additionally, this could undermine the objective of the debt serviceability restrictions framework in that it potentially increases financial stability risk in the non-bank lending sector."

LVR restrictions aren't imposed on non-bank lenders either.

'Challenging for customers too'

NZBA also argues that the "complexities associated with a DTI restrictions framework" would be challenging for borrowers as well as banks, in terms of understanding both how the DTI ratio is reached, and the impact on their home loan applications.

In 2013 when the RBNZ's macro-prudential toolkit was put together, via a Memorandum of Understanding between then-RBNZ Governor Graeme Wheeler and then-Finance Minister Bill English, a DTI tool was left out. Four tools were included, including LVR restrictions. 

The RBNZ appeared to crank up its enthusiasm for a DTI tool in late 2015 and early 2016 as house prices in Auckland, and then elsewhere in the country, surged. However, firstly the National-led government and then the Labour-led government were unenthusiastic about the RBNZ getting a DTI tool citing its potential detrimental impact on first home buyers. Against the backdrop of a red-hot housing market, Finance Minister Grant Robertson finally acquiesced at the start of August last year.

In November's consultation paper the RBNZ talked down the potential impact of it implementing a DTI tool on first home buyers.

"At a DTI cap of seven, around 1% of first-home buyers or other owner-occupiers are prevented from purchasing a similar property following the introduction of the restriction – they would either purchase the property at a lower price, and hence be financially better off, or be allocated into the speed limit. Investors are the most impacted in terms of restricting purchases of equivalent properties," the RBNZ said in November.

"At a DTI cap of six, around 5% of first-home buyers or other owner-occupiers are prevented from purchasing similar properties. By contrast, there is a material impact on restricting investor purchases."

In the consultation paper the RBNZ said banks will need to prepare their systems for the potential introduction of a regulated DTI limit no later than the end of 2022. It estimated a DTI restriction could be implemented by the fourth quarter of 2022, and a test rate floor could be implemented in the second quarter of 2022.