Lender responsibilities

When providing consumer credit lenders must comply with the lender responsibility principles in the Credit Contracts and Consumer Finance Act 2003.

These include that a lender must, before entering into an agreement with a borrower, or making a material change to an existing agreement, make reasonable inquiries to be satisfied that it is likely that the credit or finance provided under the agreement will meet the borrower’s requirements and objectives (i.e. that the loan is suitable for the borrower).

Lenders must also make reasonable inquires before a relevant insurance contract is entered into to be satisfied that it is likely that the insurance provided will meet the borrower’s requirements and objectives.

Suitability regulations

Lenders must also comply with relevant regulations in the Credit Contracts and Consumer Finance Regulations 2004 (Regulations).

The Regulations require lenders to, before agreeing to lend money to a borrower (or agreeing to lend more money under an existing loan), make specific inquiries about the borrower’s needs and objectives, to help ensure the credit product is suitable.

The Responsible Lending Code provides guidance for adhering to the regulations

  • A revised version of the Responsible Lending Code (Code) came into effect on 31 July 2024. The Code is not binding but if lenders can show they have complied with the Code, this can be taken as evidence of a lender’s compliance with its responsible lending obligations. Lenders should become familiar with the Code and seek specialist legal advice to understand its application to their business.
  • The Code is prepared by the Ministry of Business Innovation and Employment.

Read the Responsible Lending Code [PDF]

What are the requirements set out in the Regulations?

Some of the key obligations under the new regulations have been summarised below. This should not be taken as a complete summary of all obligations outlined under the regulations.

Assessing the borrower’s requirements and objectives (suitability)

The Regulations set out the types of inquiries lenders must make to collect and assess information to be satisfied that it is likely the proposed credit product will be suitable to meet the borrower’s requirements and objectives . These include (among other things) asking how much money the borrower wants, what they’ll use it for, and how long they’ll want to take to pay it off. There are also specific inquiries to be made depending on the particular terms or type of loan being sought. Using those inquiries, the lender must then assess whether the loan is likely to meet the borrower’s needs.

It is important to note that the inquiries set out in the regulations do not cover every scenario and are not exclusive. Lenders will need to consider whether it is appropriate to make further or different inquiries depending on the individual situation, or where the borrower may be vulnerable. The need to exercise judgment here, is one reason why we recommend lenders obtain specialist legal advice.

Guidance for compliance can be found in chapter 4 of the Code.

Additional requirements for certain waivers, warranties and insurance

For certain add-on products, the lender must make specified, additional inquiries under the regulations to make sure that the add-on product is also suitable:

  • where a borrower is considering financing a repayment waiver under the loan agreement
  • where a borrower is considering financing an extended warranty under the loan agreement
  • where credit-related insurance is arranged by the lender, which includes where the credit-related insurance is financed under the loan agreement.

Guidance for compliance can be found in chapter 9 of the Code.

Record-keeping

Lenders must make and keep records that show how they have met their responsible lending obligations. These records will need to show the inquiries made, and how the lender has satisfied themselves that a loan is likely to be suitable and affordable for a borrower.

If asked, lenders must make copies of these records available to the Commission, or to any borrower, free of charge and within specified timeframes.

Guidance for compliance can be found in chapter 2 of the Code.

Consequences of non-compliance

Breaches of the Lender Responsibility Principles are subject to civil pecuniary penalties up to $600,000 for a company and $200,000 for an individual, plus statutory damages equal to the cost of borrowing (interest and fees charged to the borrower). Failure to comply with the regulations will result in a breach of the relevant lender responsibility principle, resulting in potential liability for these penalties.

Read the Suitability Regulations (4AA and 4AB)