Banking lobby group reiterates opposition to RBNZ macroprudential debt-to-income ratio tool
Banking lobby group the New Zealand Bankers Association (NZBA) has reiterated its opposition to the Reserve Bank’s (RBNZ) introduction of a debt-to-income ratio (DTI) cap for borrowers home loans.
It did so in a submission to the RBNZ’s consultation paper on debt service restrictions. Released in November, the consultation document raised the possibility to introduce a DTI ceiling for borrowers of six or seven years and a test interest rate floor for bank lenders of 7% or 8%.
When calling for submissions by Feb. 28 in November, the RBNZ said it was not proposing to implement debt service restrictions at this time, but wanted to prepare for implement them if financial stability risks justify it.
The NZBA argues that the combination of loan-to-value ratio (LVR) restrictions on low equity loans, changes to the Consumer Credit Contracts and Credit Act (CCCFA) in December, higher Interest rate and tax changes appear to be slowing the growth of home loans. The submission was written before Friday’s government announcement changes to responsible lending rules to address concerns raised by the CCCFA by banks and others.
“There is a real risk of negative impact on customers if the RBNZ introduces a DTI tool, noting the risks in this area, as recent coverage of CCCFA changes highlights. Given customer frustration recently reported to Following the CCCFA changes, our members are very careful to ensure that any future changes are made in a way that achieves the intended prudential risk management outcomes, while minimizing the impact on clients to the fullest extent possible. possible,” says NZBA.
“We also note that these recent changes may have solved the problem that DTIs were supposed to solve, and if so, the resulting customer impact and compliance burden is unlikely to be outweighed by a positive result.”
“We suggest that RBNZ wait to assess the impact of LVRs and CCCFA changes before further developing the framework for DTIs. Once RBNZ has developed and finalized a DTI framework, banks should have at least 12 months to implement this tool given the complexity of integrating flow management into loan origination and decisioning tools, and the volume of other regulatory initiatives that banks are currently implementing. MBIE’s current review of recent CCCFA changes,” the NZBA asserts.
A long-standing opposition
Although some banks, notably BNZ and ASB, have have set up their own DTIs on home loans, the NZBA has long opposed the RBNZ adding this macro-prudential tool to its toolkit. In a previous DTI consultation round in 2017, NZBA argued the RBNZ had not established that the benefits of a DTI tool outweighed its costs. Additionally, the NZBA argued that DTIs could have a number of unintended consequences for both the housing market and the economy.
“The evidence linking high DTI loans to default is weak,” the NZBA said in 2017. “Job loss has the largest impact on the likelihood of [loan] fault. The reason for this is that the loss of income causes the debt service-to-income ratio to rise above 100%.
In terms of test interest rates, New Zealand banks are currently setting their own to assess a borrower’s ability to continue to service debt should mortgage rates rise from prevailing rates. These generally rise when interest rates rise and fall when interest rates fall. The NZBA says it is supporting the RBNZ in the development of an interest rate floor test tool, which it can introduce at relatively short notice if it considers action is necessary. This would give the regulator time to assess, develop and implement a DTI flow restriction if necessary, the NZBA said.
“This assumes that it will be a single test interest rate for all customer groups, as it will be very complicated to administer different test interest rate floors for different groups. The tool A test interest rate floor should be the first mechanism deployed by the RBNZ if it considers a Debt service restriction is necessary, as banks are already using test interest rates, which will minimize the impact on customers and will reduce the pressure to implement DTIs. If it becomes clear that further action is needed, then the RBNZ may require the implementation of DTIs,” the NZBA states.
Meanwhile, the lobby group laments that debt service restrictions are being imposed only on banks, creating a level playing field and the risk of regulatory arbitrage, as non-bank mortgage lenders such as finance companies, building societies and credit unions would not be subject to the restrictions.
“This trade-off does not work well for customers because non-bank lenders typically charge higher interest rates. Moreover, it could undermine the purpose of the debt service restriction framework in that it potentially increases financial stability risk in the non-bank lending industry.”
LVR restrictions are also not imposed on non-bank lenders.
“A challenge for customers too”
The NZBA also argues that the “complexities associated with a DTI restrictions framework” would be difficult for borrowers as well as banks, in terms of understanding both how the DTI ratio is achieved and the impact on their home loan applications.
In 2013, when the RBNZ Macro-Prudential Toolkit was set up, via a Memorandum of Understanding between then RBNZ Governor Graeme Wheeler and the then Finance Minister, Bill English, a DTI tool was left out. Four tools have been included, including LVR restrictions.
The RBNZ seemed to increase its enthusiasm for a DTI tool in end of 2015 and early 2016 as house prices in Auckland, and then elsewhere in the country, surged. However, first the National Government and then the Labor Government were not keen on the RBNZ getting a DTI tool, citing its potential negative impact on first-time home buyers. Against the backdrop of a hot housing market, Finance Minister Grant Robertson finally acquiesced at the beginning of August last year.
In the November consultation document the RBNZ has spoken the potential impact of implementing a DTI tool on first-time homebuyers.
“At a DTI cap of seven, around 1% of first-time home buyers or other owner occupiers are prevented from buying a similar property after the restriction is introduced – they would buy the property at a lower price, and therefore would be financially better off or affected by the speed limit. Investors are the most affected in terms of restrictions on purchases of equivalent properties,” the RBNZ said in November.
“With a DTI cap of six, about 5% of first-time home buyers or other owner occupiers are prevented from purchasing similar properties. In contrast, there is a material impact in restricting investor purchases. “
In the consultation paper, the RBNZ said that 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 that a DTI restriction could be implemented by Q4 2022, and a test rate floor may be implemented in Q2 2022.