2 Booklet 2 of 6 · Asking
What a lender asks for, and why it asks
Before it lends, a lender must make reasonable inquiries about what the borrower needs the loan for and about their financial situation, and take reasonable steps to verify that situation. ASIC’s guidance to lenders, Regulatory Guide 209, describes the kinds of information and documents that usually means; this booklet sets them out as a parts list.
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Two kinds of question
The questions fall into two groups because the law asks two things of the lender. One is about the loan itself: what it is for, and what terms and features matter to the borrower. The other is about the borrower’s ability to meet all the repayments, fees, charges and transaction costs.
ASIC is plain that its lists are not a mandatory or complete checklist. They are guidance on the kinds of information that may be available, and what counts as reasonable “depends on the circumstances”. So two lenders can ask for different papers, and both can be acting within the rules.
Contents of the box
Four bags of parts
- The amount of credit needed, and how long it is needed for.
- The purpose of the loan.
- Any features or flexibility wanted, how much each matters, and whether any extra cost or risk that comes with them is acceptable.
- Whether extra costs, such as premiums for insurance related to the credit, are to be added to the amount borrowed.
ASIC says this information needs to be specific enough for the lender to understand what is important to the borrower; it cites a Federal Court case in which general descriptions such as “personal” or “living expenses” were not enough.
- For employees paid through PAYG: recent payslips, confirmation of employment from the employer, recent tax returns, and bank statements showing pay coming in.
- For people receiving government benefits: Centrelink statements and bank account statements.
- For self-employed people: recent tax returns, Business Activity Statements, a statement from their accountant about income, financial statements for related businesses, business account statements and bank statements.
For casual or seasonal work, ASIC notes that a lender is likely to need documents covering a longer period, to see the usual pattern of income rather than an untypical stretch of higher hours.
- A credit report, which a lender obtains from a credit reporting body. It can show credit applied for, defaults, repayment history, and court judgments or insolvency records for set periods.
- Statements or information from other credit providers about debts outstanding and repayments.
Moneysmart explains that there is a right to a free copy of your own credit report every three months, and that lenders use the credit score built from it in deciding whether to lend. It also says that a hardship arrangement can appear on a credit report but does not affect the credit score.
- Fixed or recurring costs, such as rent or council rates, phone and internet plans, child support, insurance, school fees and child care: shown by contracts, invoices, accounts or bank statements.
- Variable costs, such as utilities and regular entertainment or recreation: shown the same way, with ASIC noting that some people keep no separate records of these.
Inspection
What lenders look at, in Moneysmart’s words
Moneysmart’s page on saving for a deposit sorts what lenders check into a few themes. One is track record: a habit of regular saving, and how past debts and bills show up on the credit report. Another is present capacity: income, debts and everyday spending set against the repayments, and how steady the work or income is. The last is whether a family guarantor stands behind the loan, who would have to pay if the borrower could not.
Everyone signs for the truth. ASIC notes that every party to a credit transaction, borrowers and brokers as well as lenders, has an obligation not to make a false or misleading representation about matters material to the loan.
The lender still has to verify. ASIC quotes the interim report of the Financial Services Royal Commission: “Verification calls for more than taking the consumer at his or her word.”
If a part is missing
When an application is turned down
Moneysmart gives two broad causes. Either something on the credit report counts against the application, such as a default, unpaid debts, payments made late or missed, or a cluster of recent applications; or the numbers do not stretch far enough, because income is low for the amount sought, spending is high, or other debts take up the room. When the credit report is the reason, the lender has to tell the applicant.
Applications leave a trace too: Moneysmart notes that each one is recorded on the credit report, and that a burst of them in a short time can pull the score down.