Responsible lending and affordability assessment
Domain 2 - Responsible lending and affordability assessment
This domain tests the lender's responsibility principles under the CCCFA and the Responsible Lending Code: make reasonable inquiries, assess affordability, assist the borrower to make an informed decision, and treat them reasonably.
Core rules
- Inquiry must cover income, expenses, debts, dependants, existing credit and the likely impact of the loan.
- Affordability uses a credible assessment rate, not just the advertised rate; lenders apply buffers and stress tests.
- Expenses should be verified where possible; self-declared figures need challenge and documentation.
- The assessment must consider variability: overtime, commission, rental vacancies, interest-rate rises and life changes.
- Records must show the information relied on and the reasoning, not only a score.
Worked example
A couple has verified net monthly income of $9,000. Committed expenses are $4,200 including existing debt, and the proposed loan repayment at the lender's assessment rate is $3,800. Surplus is $1,000. If policy requires a 10% surplus buffer after stress testing, the loan may still fit, but only if the $1,000 is genuinely uncommitted and income is stable. If $600 of income is overtime, the assessor should test a lower income figure and document the reduced surplus.
Traps
- Using the actual low introductory rate instead of the assessment rate.
- Ignoring credit card limits the borrower could draw down.
- Accepting stated expenses without bank-statement verification.
- Treating rental income at 100% without vacancy and cost adjustments.
- Failing to record why an exception was approved.