What are responsible lending obligations?

The duty has four elements. First, make reasonable inquiries about the consumer's financial situation and what they want from the credit: income sources, living expenses, existing debts and repayment history, the purpose and term of the loan, and anything unusual such as variable income or a change coming up. Second, verify that information where it is reasonable to do so. Third, assess whether the contract would be unsuitable. Fourth, do not enter into or suggest a contract that is.

Compliance has to be demonstrable in processes, evidence and decision records, not a mechanical checklist. The licence holder keeps a decision record showing the inquiries made, documents verified, affordability calculations and the reasons for approving or declining, and it keeps ultimate responsibility for its authorised representatives and brokers.

How much verification is reasonable depends on the loan size, the product and the risk. For a salaried employee, recent payslips and bank statements confirm income and living expenses; for a self-employed borrower, tax returns, BAS or financial statements do the job; bills and lease agreements verify recurring expenses. Low-documentation products carry more risk, so if a lender relies on limited verification it should record why that was reasonable.

The assessment models repayments against realistic expense assumptions and stress-tests them for interest rate rises or a fall in income. It also weighs product features that could make the credit inappropriate, such as balloon payments, negative amortisation or high fees, and for consolidation or revolving credit it asks whether the new arrangement actually improves the borrower's position. Where the credit is unsuitable, the lender or broker declines or suggests an alternative and records why.

Responsible lending does not stop at settlement. A credit limit increase triggers a fresh unsuitability assessment. Restructures that advance new credit usually do too. A hardship variation does not, though lenders still reassess affordability before agreeing terms. Guarantors, reverse mortgages and debt consolidation typically call for enhanced verification and record-keeping. Records are kept for the period required under licence obligations, in a searchable system with an audit trail.

ASIC targets systemic failings: weak governance, incentives that reward volume over suitability, and poor verification. Its tools range from directions and infringement notices to civil penalties, enforceable undertakings and prosecution. For an individual consumer, AFCA is usually the practical avenue: it can award compensation, vary a contract or order remediation for unsuitable lending, after the lender's internal complaints process has been tried first.