Responsible Lending laws in Australia

We explain what responsible lending is, what the responsible lending obligations are and what they mean for you if you’re thinking of applying for a loan.

What is responsible lending and how does it apply to you?

Responsible lending is a legal requirement for lenders which mandates that significant effort is made by the lender to ensure a loan is actually a good option for you, the consumer or borrower.

The National Consumer Credit Protection Act 2009 sets out how lenders must act when they are assessing loan applications.

Essentially, it means a lender must only offer a loan if it is suitable for the borrower, or as it says on the Australian Securities and Investments Commission (ASIC) website: “The key concept is that credit licensees must not enter into a credit contract with a consumer, suggest a credit contract to a consumer or assist a consumer to apply for a credit contract if the credit contract is unsuitable for the consumer.”

Importantly, the rules put the responsibility on the lender to ensure the credit product is suitable for you, and how they will meet the responsible lending obligations.

The responsible lending obligations involve:

• Making reasonable inquiries about a consumer’s financial situation (usually through a credit history or score check), and their requirements and objectives.

• Taking reasonable steps to verify a consumer’s financial situation.

• Making a preliminary assessment (if you are providing credit assistance) or final assessment (if you are the credit provider) about whether the credit contract is ‘not unsuitable’ for the consumer.

• If a consumer requests it, being able to provide the consumer with a written copy of the preliminary assessment or final assessment (as relevant).

These responsible lending obligations were introduced to Australia in 2009, following the global financial crisis (GFC).

Your rights as a borrower

According to Maurice Blackburn lawyers, if you’ve received a loan that you’re struggling to repay or you have defaulted, you may have a claim for compensation against the lender if it failed to recognise that your loan was unsuitable for you at the time it was entered into.

What is responsible borrowing?

It’s often said just because you can borrow a certain amount, should you? Just because a lender is willing to lend you up to a specific amount of money, doesn’t mean you should borrow all of that amount. How much can you afford to borrow and manage repayments? These kinds of questions relate to borrowing responsibly.

Generally, when considering a loan, it’s important to keep in mind things such as the interest rate, fees and charges, the comparison rate, the loan term and any flexibility the loan product may have around additional repayments, as well as any additional features the loan product may have (such as offset accounts and redraw facilities), and the eligibility criteria.

A lot of the responsibility for the quality of a loan is dependent on the information provided by the borrower.

In September 2017 investment bank UBS found Australian banks had issued about $500 billion of mortgage debt based on inaccurate or unreliable information about the borrower’s ability to make repayments.

The UBS survey, based on detailed interviews with people who had successfully applied for loans, found almost a quarter had lied to get a loan – typically by overstating their income and/or the value of their assets, and underestimating other loans and living costs.

This can leave borrowers vulnerable if interest rates rise, or their income falls. It can also lead to financial hardship and damage your credit score, which can impact your chances of getting approved for credit or a loan in the future. If you’d like to check your credit score, you can do so for free with Canstar or via the Canstar app.

Related: 7 steps to help you improve your credit score

The importance of responsible lending

There are a number of reasons why responsible lending is important for both borrowers and lenders, including:

• Protects consumers – one of the most important reasons for responsible lending is it protects consumers by ensuring they receive loans that are affordable and suitable for their needs. Irresponsible lending practices can lead to high levels of debt and financial hardship.

• Reduces the risk of default – when lenders engage in responsible lending practices, they ensure borrowers receive loans they can reasonably repay. This reduces the risk of default, which can harm both parties.

• Promotes ethical behaviour – responsible lending practices promote ethical behaviour in the financial industry. By adhering to ethical principles, lenders can build a positive reputation and earn the trust of their customers.

What to consider before taking out a loan

Think through whether you really need a loan, if you can afford it, and whether it will be worth it in the long run.

Canstar’s Budget Planner Calculator may help you to plan for your expenses. Make sure you read any relevant documents such as the Product Disclosure Statement (PDS), Target Market Determination (TMD) and Key Facts Sheet (KFS) when deciding if a loan is suitable to your needs and your financial situation.

If you’re experiencing financial difficulty or receive Centrelink payments, you may have other borrowing options, such as the Home Equity Access Scheme or No Interest Loan Scheme (NILS) if you meet eligibility requirements.

If you’re considering a short-term personal loan or payday loan, keep in mind there are many risks and potentially very high costs to consider.

Free financial advice is available from a financial counsellor via the National Debt Helpline (NDH), which you can contact on 1800 007 007. The NDH helps consumers find individual counsellors and organisations in their area. It can also provide information and resources on what your rights are if you are experiencing financial hardship.

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