Credit Assessment Framework

The Credit Assessment Framework

The credit assessment framework is the structured approach lenders use to evaluate borrower risk. The same underlying framework applies across residential, commercial, and asset finance lending — the differences are in thresholds, evidence requirements, and the weighting given to each dimension, not in the framework's fundamental logic.

Regulatory foundation

For authorised deposit-taking institutions (ADIs — the major banks and most building societies), APRA's prudential supervision sets capital adequacy and serviceability standards that define what a responsible lender must do. ASIC's responsible lending obligations under the NCCP Act apply to all licensed credit providers, including non-bank lenders. Together, these regulatory layers require lenders to make documented inquiries, apply consistent serviceability calculations, and verify the information borrowers provide.

How regulation translates into assessment procedures

The regulatory framework produces specific operational requirements:

• Income verification: Lenders must verify income rather than accept self-declared figures. The form of verification — payslips, tax returns, financial statements — depends on the income type.
• Serviceability calculation: Net assessed income minus living costs and existing commitments, tested at the APRA stress buffer rate, must produce a positive surplus. This is not optional — it is the mechanism that satisfies the "not unsuitable" test.
• Asset and deposit verification: The source, holding period, and genuineness of funds is checked, particularly where LVR is elevated.
• Security assessment: The property is independently valued. The lender's valuation — not the purchase price — determines the LVR used.
• Borrower profile review: Credit conduct, employment stability, entity structure, and policy sensitivity are assessed.

The Four Cs as the underlying model

The credit assessment framework is operationalised through the Four Cs: Character (credit conduct and reliability), Capacity (ability to service the debt), Capital (equity and savings), and Collateral (property security). Each C maps to specific assessment procedures and documentation requirements.

Why policy differences produce different outcomes

Lenders operating within the same regulatory framework apply different internal policy settings. The stress buffer rate is set by APRA as a minimum — lenders may go higher. Rental income shading percentages vary by lender. Self-employed income assessment methods differ. Some lenders accept one year of self-employed history in specific circumstances; others require two. These policy differences explain why the same borrower profile can pass the assessment framework at one lender and fail at another. The framework is consistent; the policy thresholds within it are not.