Borrowers might need to change their spending patterns to qualify for a loan

Afterpay, Netflix, and private schools could turn out to be some of the no-no's under the Australian Securities and Investments Commission's new lending rules.

ASIC has recently published updated guidance on the responsible lending obligations that are contained in the National Consumer Credit Protection Act 2009 (the National Credit Act).

"We have listened carefully to all stakeholders and addressed areas where we consider updated guidance would help. We hope this guidance will assist the industry to more confidently make responsible lending decisions and to facilitate good lending outcomes for consumers," ASIC Commissioner Sean Hughes said.

The 96-page document contains updated lending guidelines with the aim of preventing borrowers from taking "unsuitable debts". Under these changes, lenders are urged to carefully assess the spending of potential borrowers in determining their eligibility for the loan products they are applying for.

ASIC provided several examples and hypothetical situations that banks can use as their guide in assessing certain scenarios. In one example, Sarah, who is applying for a 20-year home-loan, has children studying in a private school.

Under this scenario, the lender would have to discuss with Sarah why a 20-year term would not be appropriate with her current financial situation.

"They discuss the change that increasing the term of the loan will make to the repayment amounts, and also to the overall amount of interest that will be paid on the loan. Following this discussion, Sarah decides that although she would pay more interest over the term of a longer loan, the 20-year term originally specified was not a priority and could be changed," ASIC said.

In another example, a borrower named Leah applied for a small loan amount for her car registration costs. When the lender checked Leah's statements, they noted that she had limited spending on non-essential items.

"After discussing with Leah concerns over her ability to finance the small amount credit contract, Leah told the lender that she could cancel her monthly streaming services, which would cover the monthly repayment amount on the proposed loan," ASIC said.

Buy-now-pay-later (BNPL) services were also highlighted in ASIC's examples. Lenders are compelled to classify borrowers who use such services as "high risk".

In one of the case studies, a borrower named Chanthavy is applying for a $20,000 secured car loan. While her credit score and credit history are both good, she holds three credit cards and has recently started using BNPL arrangements.

"The lender considers that Chanthavy's history of revolving credit debt and her increasing net debt position indicate there is a higher risk that she is operating at the margins of her available income, and more information should be obtained to enable the lender to determine whether she can afford the repayments on the car loan," ASIC said.

ASIC also asked banks to not rely too much on the basic spending benchmark known as the  Household Expenditure Measure (HEM).

ASIC said HEM figures do not include spending on a range of items that are commonly part of a consumer's overall outgoings.

"When you compare the consumer's estimates to HEM it is important that you only use the estimates of spending on the kind of items that are included in the benchmark figure, and not a wider estimate of their total expenditure," it said.