HLG027 What is responsible lending and why does it matter? (505 words)

With tighter lending criteria being applied to borrowers, this article explains what responsible lending is and what is required when applying for or refinancing a mortgage, and why.

Whether it’s due to over-enthusiastic lenders or desperate borrowers, failure to adhere to robust lending standards can land some borrowers in serious financial distress. In many cases the difficulties experienced by these borrowers could have been avoided if the lenders had complied with their responsible lending obligations.

In brief, this means inquiring into a borrower’s financial situation and requirements, verifying the information supplied, and making an assessment as to whether or not the credit contract is suitable for the borrower. Ideally, the lender should also consider the ability of the borrower to maintain loan payments if there is an increase in interest rates. This is a common pathway into mortgage stress – the situation where loan repayments take up too large a fraction of household income.