3 Booklet 3 of 6 · Checking
Responsible lending: the four checks before a lender says yes
Before a lender enters a credit contract, the National Consumer Credit Protection Act makes it inquire into what the borrower needs and their financial situation, verify that situation, and assess whether the loan would be unsuitable. If the loan is unsuitable, the lender must not enter it.
The sequence
Inquire, verify, assess, decide
- 1 Inquireinto the borrower’s requirements, objectives and financial situation
- 2 Verifythe financial situation, with reasonable steps
- 3 Assesswhether the loan would be unsuitable, for a stated period
- 4 Decidean unsuitable loan must not be entered
These are the responsible lending obligations in Chapter 3 of the Act. ASIC describes their main aim as reducing the risk that people enter, or are encouraged to enter or stay in, a credit product that is unsuitable for them. They apply to lenders and to credit assistance providers such as mortgage brokers, and to home loans among other consumer credit.
Step by step
What each check involves
Inquire
The lender must make reasonable inquiries about the borrower’s requirements and objectives for the loan, and about their financial situation. ASIC reads the purpose of these inquiries as understanding why the loan is sought and which terms and features matter, and whether the borrower can meet all the repayments, fees, charges and transaction costs. Booklet 2 lists the kinds of information involved.
Verify
The lender must also take reasonable steps to verify the borrower’s financial situation. ASIC explains why this is a separate duty: information given in an application may not always be reliable, whether through a mistake, a misunderstanding, or fraud by someone involved.
Assess
The lender makes an assessment that states the period it covers and whether the loan will be unsuitable if entered in that period. Only information the lender had reason to believe was true, or would have had if it had made the required inquiries and verification, counts.
Decide
A lender must not enter a credit contract that is unsuitable for the borrower when it is entered. Moneysmart makes the same point from the borrower’s side: a borrower’s own confidence does not override an assessment that points to hardship, and the lender must then decline.
The test
When a loan counts as unsuitable
The Act sets out the test. A loan will be unsuitable if, at the time of the assessment, it is likely that:
- the borrower will be unable to meet their financial obligations under the contract, or could only meet them with substantial hardship;
- the contract will not meet the borrower’s requirements or objectives; or
- circumstances the regulations prescribe as unsuitable will apply.
The home is not the repayment plan. The Act presumes that if a borrower could only meet the obligations by selling their principal place of residence, they could only meet them with substantial hardship, unless the contrary is proved.
Timing
The checks have a use-by date
The assessment, inquiries and verification must be made within 90 days before the day the contract is entered, or another period the regulations set. For credit used to buy a residential property and secured by a mortgage over it, the regulations set 120 days. ASIC explains the point: the assessment, and what it relies on, should still reflect the borrower’s situation when the loan is actually made.
The same checks apply before a lender makes an unconditional representation that it considers a person eligible for a loan.
Your copy
Asking for the written assessment
The borrower can ask the lender for a written copy of its assessment, and the lender must not ask for payment for it. ASIC says the copy is there so a borrower can see what the lender relied on, point out incorrect details before the loan is entered, and use it in dispute resolution afterwards.
| When it is asked for | Deadline |
|---|---|
| Before the loan is entered | Before the loan is entered |
| Within 2 years after the loan is entered | Within 7 business days of receiving the request |
| Later, up to 7 years after the loan is entered | Within 21 business days of receiving the request |
Outside the box
Where the obligations stop
The obligations cover credit to individuals and strata corporations for personal, domestic or household purposes, or to buy or improve residential investment property. A loan wholly or mainly for a business purpose falls outside them, and Moneysmart warns guarantors of business loans that responsible lending obligations do not apply.
Breaking the rules is serious for a lender: entering an unsuitable contract carries a civil penalty of 5,000 penalty units, and the related offence carries up to 2 years’ imprisonment, as at October 2026.