Financial Authorities Tighten Regulations on Mortgage Loans... Also Block Loan Evasion Tactics by Loan Sharks (Comprehensive)

FSS Blocks Evasive Loans via Loan Sharks
Comprehensive Housing Loan Theme Inspection Next Month
FSC to Also Monitor Compliance with DSR for Homes Over 900 Million Won

[Image source=Yonhap News]

[Asia Economy Reporter Kangwook Cho] From now on, mortgage loans from lenders who do not comply with the Loan-to-Value (LTV) ratio regulations will be blocked. The Financial Supervisory Service (FSS) is preventing savings banks and specialized credit finance companies (card and capital companies) from circumventing regulations by providing indirect loans through these lenders. As a result, loopholes allowing mortgage loans up to 80% of the house price are expected to disappear.

Earlier, the Financial Services Commission (FSC) also decided to intensively inspect whether the Debt Service Ratio (DSR) is properly applied on a borrower basis for mortgage loans on houses priced over 900 million KRW in speculative and overheated speculation zones, adding to the comprehensive pressure from financial authorities.

On the 26th, the FSS held a meeting with related ministers at the Government Seoul Office to review the real estate market and announced the 'Guidelines to Prevent Regulatory Circumvention through Lenders.'

Loans Taken from Savings Banks and Capital Companies but Essentially Lender Loans... Avoiding LTV Regulations

According to the FSS investigation, some savings banks and credit finance companies set the mortgage-backed loan claims of lenders as collateral (pledge) and provided loans to lenders exceeding the LTV limits applied to financial companies. This was explained as loans exploiting the fact that lenders are not subject to LTV and other loan regulations when handling mortgage loans.

In fact, unlike other financial sectors, lenders are not subject to regulations such as LTV when handling mortgage loans. This allows mortgage loans exceeding the LTV limit, which is usually recognized up to 40% in overheated speculation zones.

When savings banks and credit finance companies use such lender claims as collateral to lend money to lenders, savings banks and credit finance companies effectively handle mortgage loans free from LTV regulations. As of the end of June this year, the outstanding loan balance of such loans was estimated at 432.3 billion KRW for savings banks and 598 billion KRW for credit finance companies.

An FSS official said, "In some cases, savings banks and credit finance companies set the mortgage-backed loan claims of lenders as collateral (pledge) and provided loans to lenders." The official added, "Since lenders are not subject to LTV and other loan regulations when handling mortgage loans, it was confirmed that savings banks and credit finance companies handle high-LTV loans exceeding the LTV limits applied to financial companies by going through lenders."

LTV Applied to Lender Mortgage Loans... Administrative Guidance to Start from the 2nd of Next Month

Accordingly, from the 2nd of next month, the FSS plans to implement administrative guidance applying mortgage loan regulations such as LTV limits to indirect loans through lenders by savings banks and credit finance companies. Currently, in speculative and overheated speculation zones, mortgage loans for apartment purchases secured by properties priced over 1.5 billion KRW are not allowed. For apartments priced over 900 million KRW and up to 1.5 billion KRW, an LTV of 40% (for amounts up to 900 million KRW) and 20% (for amounts exceeding 900 million KRW) is applied. In regulated areas, for apartments priced over 900 million KRW, 50% applies to amounts up to 900 million KRW and 30% to amounts exceeding 900 million KRW.

The FSS will also conduct a thematic inspection next month on whether financial companies comply with overall mortgage loan regulations. The inspection will focus on whether credit loans are properly reflected in the current DSR calculation and whether individual business owners and corporations are using loans for housing purchases.

Especially for sectors with many financial companies subject to inspection, the FSS plans to verify the inspection results through an internal audit council jointly operated with financial companies, allowing financial companies to autonomously check regulatory compliance.

An FSS official explained, "Recently, 53 mutual finance cooperatives self-detected violations such as exceeding LTV limits, providing loans for housing purchases in speculative zones to multi-homeowners, and additional housing purchases after living stabilization fund loans, and took measures such as loan recovery."

FSC to Intensively Inspect DSR Violations

Earlier, the FSC decided to intensively inspect the enforcement status of financial sector measures taken so far to stabilize the housing market. Son Byungdu, Vice Chairman of the FSC, said at the 'Financial Risk Response Team Meeting' held on the 24th at the Bankers Hall in Myeongdong, Seoul, "Through FSS inspections, we will verify whether DSR is properly applied on a borrower basis for mortgage loans on houses priced over 900 million KRW in speculative and overheated speculation zones," and emphasized, "We will guide and supervise financial companies with issues."

DSR is the ratio of the annual principal and interest repayment amount of all household loans to annual income. Currently, when borrowing against houses priced over 900 million KRW in speculative and overheated speculation zones, the DSR must be 40% or less (for banks).

Additionally, compliance with disposal and move-in conditional mortgage loans due next month will also be inspected. Vice Chairman Son said, "From next month, the expiration date of the disposal and move-in conditional mortgage loans introduced in September 2018 will arrive," and added, "As previously announced, each financial institution will verify compliance with the agreement, and if the borrower fails to provide proof, loan recovery and registration of agreement violations will be carried out without delay."

The government, through the 'Housing Market Stabilization Plan' announced on September 13, 2018, allowed one-homeowners in regulated areas to receive mortgage loans on the condition that they dispose of their existing home within two years. For non-homeowners, mortgage loans are permitted on the condition of moving into houses priced over 900 million KRW in regulated areas within two years. Violations result in a three-year ban on housing-related loans.

This content was produced with the assistance of AI translation services.