- Responsible lending laws require lenders to verify a borrower’s ability to repay a loan without falling into financial hardship.
- Lenders must ask reasonable questions about a borrower’s finances, verify the information, and assess their needs and objectives.
- A loan is typically unsuitable if the borrower could not meet repayments or would need to put themselves under significant financial stress to do so.
Responsible lending has evolved significantly since the Banking Royal Commission but remains a major part in how lenders decide if you can afford a mortgage, car loan, or credit card. Lenders are expected to make reasonable inquiries into a borrower’s financial position and avoid approving loans that would leave someone unable to meet repayments without hardship.
What is responsible lending?
Basically, responsible lending means that lenders must not provide loans, whether they be home loans, car loans, personal loans, or other debt facilities, to someone if that product is unsuitable for their financial position. It puts the onus on the bank or lender, rather than the borrower.
Responsible lending laws are part of the National Consumer Credit Protection Act 2009 (National Credit Act). They demand lenders, credit providers, and even brokers:
- Ask reasonable questions about a person’s finances
- Verify their financial situation
- Consider their needs and financial goals
- Assess that a credit contract (a loan, for instance) is ‘not unsuitable’
These obligations are restricted to loans offered for personal or domestic purposes, like buying or renovating residential property or purchasing goods.
A loan product might be deemed unsuitable for an applicant if they couldn’t meet the repayments or they’d need to place themselves under significant financial stress to do so. A product might also be unsuitable if it didn’t align with an applicant’s needs and goals.
If a lender deems a product unsuitable, you can request a copy of its assessment.
Savings.com.au’s two cents
It’s easy to see responsible lending as just another banking hurdle. After all, a wishful homeowner without the borrowing power needed for their dream home or whose mortgage application is knocked back - even if their rent is higher than their expected repayments, will understandably feel frustrated. But the laws are there to protect, not stifle. They’re designed to stop people from locking themselves into repayments that crush their finances.
How is responsible lending applied?
The way lenders apply responsible lending can vary depending on the type of loan, the lender, and the borrower’s financial situation. Here are some things that might be considered as part of a mortgage, car loan, personal loan, or credit card application:
Income
Lenders look closely at your income to ensure you can comfortably meet repayments. Income can include your salary, bonuses, rental income, government payments, or that from a business or investments you own. They’ll usually want to see payslips, bank statements, or tax returns to verify your earnings.
Living expenses
Some borrowers may be surprised by how deep lenders go when assessing everyday spending. Banks can review your declared expenses - things like groceries, utilities, transport, childcare, subscriptions, and entertainment - and compare them to actual transaction data. They may also cross-check against the Household Expenditure Measure (HEM), a benchmark used across the industry.
Existing debts
Credit cards, personal loans, HECS/HELP debts, buy-now-pay-later accounts, car loans, and even overdraft limits all affect your borrowing capacity. Even unused credit card limits count, because lenders must assume you could draw down on them at any time.
Credit history
Your credit report shows how you’ve managed debt in the past. Missed repayments, defaults, payday loans, or multiple recent credit enquiries can all raise red flags and reduce how much you’re able to borrow.
Interest rate buffers
For home loans in particular, lenders must assess whether you could still afford your repayments if rates rise. APRA currently expects banks to apply a buffer of 3% above the loan’s rate.
Loan purpose
How you intend to use the loan matters. For example, investment loans often attract higher rates and stricter scrutiny, while unsecured personal loans may require more documentation than a low-limit credit card.
Who determines and enforces responsible lending?
Responsible lending rules are largely the responsibility of two regulators. The Australian Securities and Investments Commission (ASIC) and the Australian Prudential Regulatory Authority (APRA) both oversee how loans are assessed, and they do so in very different ways.
The National Credit Act is the domain of ASIC and applies to all credit providers.
Other regulations, like the serviceability buffer and other macroprudential settings, are overseen by APRA.
It’s worth noting that when it comes to credit providers, only banks are typically subject to APRA regulations. Non-bank lenders may have greater control over their own risk assessments, but they still have to adhere to the National Credit Act.
How does responsible lending apply to you?
While you’re not bound by the ASIC regulations, it's worth thinking about responsible lending from your perspective. Additionally, banks and lenders can (and do on occasion) get things wrong. If you’ve been offered a home loan or other loan product, consider how taking on the debt will affect your life. Consider the following prior to signing on the dotted line:
- How much you COULD borrow isn’t always the amount you SHOULD borrow
Just because a lender is willing to lend you up to a specific amount of money, doesn’t mean you should borrow that amount. Consider how taking on a large debt will impact your lifestyle and ability to meet essential costs. - Take responsibility for the amount you borrow, don’t only rely on your lender’s obligations
Make sure you understand exactly what it is you’re committing to when taking out a loan. Take the time to build a thorough and accurate view of your borrowing commitment, including your monthly repayments, income, and current and future spending levels. - Understand that the suitability of your home loan can impact your long term financial position
Unsuitable loans often lead to repayment struggles or, in a worst case scenario, default.
The existence of responsible lending means some loan applications are rejected.
While being rejected for a loan is disappointing and can leave a mark on your credit report, they should serve as a reminder to focus on building your savings and pay off existing debts before making another application.
They can also indicate that a loan simply isn’t suitable for you - it may be too expensive or risky. In this sense, the lender may have actually saved you from financial distress.