Responsible Lending
The legal framework under the National Consumer Credit Protection Act requiring lenders and brokers to assess whether a loan is not unsuitable for the borrower.
In detail
Responsible lending obligations require credit providers and credit assistance providers, including brokers, to make reasonable inquiries about a borrower objectives, financial situation, and ability to repay a loan. The lender or broker must then verify the information collected and assess whether the credit contract would be unsuitable for the borrower.
In practice this means documenting income, expenses, and objectives, retaining evidence, and forming a reasoned view about suitability. ASIC publishes information sheets and guidance on the responsible lending obligations under Chapter 3 of the National Consumer Credit Protection Act 2009. Breaches of responsible lending obligations can result in significant penalties.
Why it matters for brokers
Every file a broker lodges sits under responsible lending obligations. Documenting inquiries and verification thoroughly protects the broker, the lender, and most importantly the borrower.
Example in practice
A broker completes a fact find, collects payslips, bank statements, and a signed needs analysis. During the interview the client mentions plans to have a second child in the next year. The broker documents this conversation and factors potential changes in income into the suitability assessment.
Related terms
Serviceability
A lender assessment of whether a borrower can meet loan repayments from their income after accounting for expenses, existing debts, and a buffer.
Debt to Income Ratio (DTI)
Total debt divided by gross annual income, used by lenders as a supplementary risk measure alongside serviceability.
Year to Date (YTD) Income
The cumulative gross income an employee has earned since the start of the financial year, shown on each payslip.
Notice of Assessment (NOA)
A statement issued by the Australian Taxation Office confirming the income declared on a lodged tax return and the tax assessed.
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