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Responsible lending in Australia: a complete guide

What is responsible lending?

Responsible lending obligations

The Australian government has rules in place to make sure lenders provide credit responsibly. The National Consumer Credit Protection Act requires consumer credit providers to hold an Australian Credit Licence¹ and comply with a set of obligations, including general conduct obligations related to holding a license and specific obligations for their interactions with consumers.

Some general conduct obligations of credit licensees are²:

• Engaging in credit activities efficiently, honestly, and fairly is important for all credit licensees.
• Complying with the conditions of the license is a crucial responsibility.
• Complying with any other obligations that are prescribed by the credit laws and regulations.

Some specific obligations on interactions with consumers are³:

• Lenders should make reasonable inquiries about customer’s credit requirements and financial situation.
• Lenders should take steps to verify the borrower’s financial situation.
• Lenders should assess whether the credit contract is suitable for the customer.

How responsible lending is done

Lenders have to consider things like how much financial risk a loan may pose to you before they approve a loan. Here’s how it works:

• Understanding Your Situation: Before approving a loan, lenders need to get a clear picture of your finances. This means asking you to confirm about your income, bills, job, and any upcoming changes that may affect your ability to pay.
• Verifying the Information:  Lenders can’t just take your word for it. They’ll ask for documents like bank statements or tax assessment papers to confirm your financial situation.
• Debt History: This includes assessing existing loans, credit card balances, and any other outstanding debts. It helps the lender understand how much you already owe to other lenders.

Here are a few factors the lenders will consider before approving a loan application:

• Affordability: Lenders look at your income and expenses to see if the loan payments will fit comfortably in your budget without causing hardship.
• Risk: Is the loan amount too high for your current financial situation? Responsible lenders want to avoid putting you in a risky situation where you struggle to repay.
• Needs Fulfilment: They consider the loan type (e.g., car loan, mortgage) and amount to see if it aligns with your goals (buying a car, house renovation).Lenders need to check if the loan is a good fit for you. This means considering if you can comfortably afford the payments and if the loan itself meets your needs and goals.

Sometimes extra checks are needed

In certain situations, lenders may be required to conduct some extra checks over and above the responsible lending procedures. Some of these scenarios are:

• Complex Loan Products: If the loan has unusual features like high interest rates and complicated repayment terms, the lender may need to ensure you fully understand the implications before approving it.
• Large Loan Amounts: For loans significantly higher than your typical borrowing history, the lender might require more documentation or conduct a more thorough review to assess your ability to repay.
• Fluctuating Income: If your income has recently decreased or become unstable, the lender may need additional verification (like recent payslips) to ensure that your current financial situation can support the loan.
• Limited Credit History: If you have little or no credit history, you may face extra scrutiny. The lender may require alternative forms of proof of financial responsibility, like rent payment receipts or bank statements demonstrating consistent savings.
• Red Flags in Application: Inconsistent information, unexplained gaps in employment, or a high debt-to-income ratio might raise red flags for the lender and trigger a more detailed review of your financial situation.
• Concerns About Affordability: Even if your application meets the basic criteria, the lender may conduct extra checks if they have any concerns about your ability to afford the monthly repayments.
• Credit Cards: Since January 2019, credit card companies in Australia have to check if you can afford to repay the entire credit limit (not just the minimum payments) within 3 years. This is to make sure you don’t borrow more than you can handle.⁴

Sometimes loans may be considered unsuitable

Responsible lending also makes sure lenders don’t approve loans that would be unsuitable for you. Here are some reasons why a loan may be deemed unsuitable for you⁵:

• Unaffordable Payments: If the loan payment would significantly strain your budget and leave you struggling to cover essential expenses like groceries or house rent, the lender may reject it to protect you from financial hardship.
• Excessive Risk: If the loan amount is too high for your current income and debt level, it might be deemed too risky. Responsible lenders don’t want to put you in a situation where you risk defaulting on the loan.
• Doesn’t Meet Your Needs: Let’s say you apply for a personal loan to consolidate debt, but the loan terms (interest rate, repayment period) aren’t much better than your existing debts. In this case, the lender may reject your application as it wouldn’t improve your financial situation or meet your goals.

What happens if lenders fail their responsible lending obligations?

If you believe your lender failed their responsible lending obligations, you should consider taking legal advice to understand your options. The outcome largely depends on the facts of your case, but in most cases, you should be able to go back to the position before you took out the loan.

Steps to take if there’s irresponsible lending

• Collect information: Collect every document related to your loan (application form, contract, statements, written copy of assessment). Look for the signs that the lender didn’t check your finances properly or rushed you into the loan.
• Recall the approval: Reflect on how you got the loan. Did they ask about your income, living expenses, or other debts? Did they ask for copies of your payslips, bank statements, or credit reports? Did the loan fit your needs and could you truly afford it? Did you give them any false or misleading information? Did you give them any forged documents?
• Get help: Talk to a financial counsellor or lawyer specialising in loans. They can review your evidence and see if you have a case for irresponsible lending. They can also legally advise you on your rights and next steps.
• File a complaint: If your advisor says you have a case, start by complaining to the lender. Explain why you think they acted irresponsibly. If they don’t help, you can file a complaint with the Australian Financial Complaints Authority, a free service that can help resolve loan disputes. You can also lodge a complaint with the Financial Ombudsman Service on 1800 367 287 between 9 am and 5 pm on any weekday.

What will be the possible outcomes?

If you suspect irresponsible lending and take action, the outcomes can vary depending on the specifics of your situation and the strength of your case. Here’s a breakdown of some possible scenarios:

Scenario 1: Reaching an Agreement with the Lender

The lender might agree to make your loan more manageable (lower rates, freezing interests, longer repayment) or forgive some debt.

Scenario 2: Receiving Compensation

If the irresponsible lending caused any financial harm, you may recover fees or charges you shouldn’t have paid.

Scenario 3: Loan Cancellation

In some cases, the loan agreement will be terminated.

Scenario 4: No Change to the Loan After review, the authorities may decide in favour of the lender and rule that they acted responsibly. In this case, the loan terms will stay the same.

Credit24: Responsible lending, fully regulated by ASIC

Credit24 is fully regulated by ASIC and complies with all the provisions of the Credit legislation . We check your application carefully to make sure you can afford the loan. This helps you avoid loans that are too expensive or unnecessarily complicated. Here are some benefits of using Credit24:

• We have checks in place to make sure the loan is not unsuitable for the borrower.
• You can get quick responses.
• We make sure you get a customised repayment plan adjusted to your profile, with fixed repayments upfront.
• You can borrow up to $10,000 based on your financial situation.

Learn more about Credit24

Disclaimer:
IPF Digital Australia Pty Ltd, trading as Credit24, ABN 59 130 894 405. Australian Credit Licence 422839. The information in this article is of general nature and does not take into consideration your objectives, financial situation or needs. Lending criteria, fees and charges apply. For more information about our products, eligibility criteria and terms and conditions, please visit www.credit24.com.au.

Sources:

• ASIC, Credit Licensees
• ASIC, Credit: General conduct obligations
• ASIC, Responsible lending
• ASIC, Loans and credit cards
• ASIC, Regulatory Guide 209 Credit licensing: Responsible lending conduct