A buyer's lender approves a home loan without asking about the buyer's expenses. Under the lender responsibility principles in s 9C of the Credit Contracts and Consumer Finance Act 2003, what must a lender make reasonable inquiries about before lending?
Correct Answer
C) That the loan meets the borrower's needs and is affordable without substantial hardship.
Section 9C(3)(a) of the CCCFA requires a lender, before entering into an agreement, to make reasonable inquiries so it is satisfied that it is likely the credit will meet the borrower's requirements and objectives, and that the borrower can make the payments without suffering substantial hardship. A lender that ignores expenses risks breaching that duty.
Why This Is the Correct Answer
Section 9C(3)(a) covers both suitability and affordability without substantial hardship.
Why the Other Options Are Wrong
Option A: Only that the property value supports the loan under the Reserve Bank's LVR limits.
Section 9C(3)(a) requires inquiries about suitability and affordability, not just security value.
Option B: Only that the borrower's credit record shows no defaults in the last five years.
A clean credit record does not satisfy the duty to inquire into requirements, objectives and hardship.
Option D: Nothing, because responsible lending duties apply only to loans under $50,000.
The lender responsibility principles apply to consumer credit generally, including home loans.
Background Knowledge for Finance
Source: https://www.legislation.govt.nz/act/public/2003/0052/latest/whole.html
Exam Tip for Finance
CCCFA responsible lending: suitable for the borrower and affordable without substantial hardship.
Common Mistakes to Avoid on Finance Questions
- β’Thinking responsible lending is only about the value of the security.
More Finance Questions
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When assessing a mortgage application, which factor is typically given the highest priority by New Zealand lenders?
James has been contributing to KiwiSaver for 4 years and wants to withdraw funds for his first home. His KiwiSaver balance is $45,000, but $15,000 consists of government contributions and employer matching. What is the maximum he can withdraw for his house deposit?
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- β What is the maximum amount a first home buyer can withdraw from their KiwiSaver account for a house deposit?
- β What does LVR stand for in New Zealand mortgage lending?
- β What is the key difference between a table mortgage and an interest-only mortgage in terms of monthly payments?
- β A bank checks how much of a borrower's gross income would go on debt repayments. The borrower earns $80,000 a year, already pays $800 a month on other debts, and the new mortgage would cost $2,200 a month. What share of gross income would the repayments take?
- β Sarah earns $80,000 annually and wants to borrow $400,000. What is her debt-to-income ratio?
- β A property is valued at $600,000 and the buyer has a $100,000 deposit. What LVR would this loan represent?
- β Which of the following is NOT typically considered by banks when assessing lending criteria?
- β How long must a KiwiSaver member have been contributing before they can withdraw funds for their first home?
- β Which type of mortgage allows borrowers to make additional payments that can be re-borrowed later?
- β A couple with a combined income of $120,000 wants to buy their first home for $650,000. They have a 15% deposit. What is their LVR?
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