Loose Regulation Neglected... Authorities Shocked by LH, Investigate Non-Mortgage Loans Across All Financial Sectors

LH Employee Land Speculation Allegations Prompt Pre-Investigation of Non-Residential Mortgage Loans in Financial Sector
Expansion of Agencies Verifying Illegal Loans Upon Detection of Suspicious Speculation Cases
Some Criticize for Missing Timely Strengthening of Loose Regulations

Korea Land and Housing Corporation (LH) (Photo by Yonhap News)

Inspection of Non-Housing Mortgage Loans Spreading Across the Financial Sector

[Asia Economy Reporter Lee Kwang-ho] Financial authorities are launching an inspection of non-housing mortgage loans across the entire financial sector following suspicions of land speculation involving employees of the Korea Land and Housing Corporation (LH). This full-scale investigation comes amid criticism that land-backed loans, compared to housing mortgage loans, have been relatively overlooked in terms of regulation and supervision. Some have criticized the authorities for only focusing on housing mortgage and credit loan regulations, neglecting the looser non-housing mortgage loans, which could lead to a balloon effect, and only taking action belatedly after public opinion worsened.

According to financial authorities on the 16th, the Financial Services Commission and the Financial Supervisory Service are currently assessing the status of non-housing mortgage loans across all financial sectors, including mutual finance, banks, savings banks, and specialized credit finance companies.

The Financial Supervisory Service is collecting data in writing from each financial institution to examine loan volumes by region and type, and based on this, will select targets for on-site inspections. However, since some of the investigation overlaps with the Special Investigation Headquarters’ work, the timing and scope of the on-site inspections will be coordinated with the Special Investigation Headquarters before commencement.

If further suspected cases of land speculation are identified through additional government investigations, the financial authorities may expand the institutions subject to verification for illegal loans.

Criticism Raised Over 'Poor Management and Supervision Worsening the Situation'

Despite these moves by the financial authorities, criticism has been raised that poor management and supervision by the responsible ministries exacerbated the situation.

In fact, the loan-to-value ratio (LTV) for non-housing mortgage loans in the mutual finance sector ranges from 40% to 70%, which is more lenient than commercial banks (60% for land). Moreover, this is not regulated by law but based on administrative guidance. While commercial banks manage an average debt service ratio (DSR) within 40%, mutual finance institutions only need to maintain an average DSR of 150% until the end of this year, making loans relatively easier to obtain. Non-housing mortgage loans secured by land, commercial buildings, officetels, agricultural machinery, and fishing vessels can directly affect the livelihoods of farmers and fishermen, whose incomes are relatively unstable, making regulation difficult. However, calls for regulatory improvements have continued.

Especially, the government’s ultra-strong regulations on housing mortgage and credit loans were expected to cause a balloon effect. Min Hyung-bae, a member of the Democratic Party of Korea, revealed during last year’s National Assembly audit that from September 2019 to July of the following year, new non-housing mortgage loans with a DSR exceeding 100% amounted to 3.1624 trillion won (about 9,600 cases) at banks. This means that even in commercial banks, where loans are relatively strictly screened, loans were executed despite the borrower’s principal and interest repayment amount exceeding their income.

Clear Balloon Effect in Mutual Finance... Thorough Countermeasures Needed

The balloon effect feared in mutual finance has clearly appeared. According to the office of Yoon Chang-hyun, a member of the People Power Party, the balance of non-housing mortgage loans in mutual finance at the end of last year was 257.5 trillion won, increasing by 30.7 trillion won in one year. The growth rate of 13.5% was the highest since 2017, when data became available. This far exceeded the overall household debt growth rate of 7.9% last year. Despite the loose regulations applied to land-backed loans through mutual finance, financial authorities had not even grasped the actual situation. While financial regulations focused on housing mortgage and credit loans, a gap emerged in the ‘war against speculation.’

Voices calling for thorough countermeasures for mutual finance have emerged, taking the LH scandal as an opportunity. Mutual finance was established to support fund circulation for farmer and fisherman cooperative members, and it is excluded not only from loan regulations but also from various consumer-related laws, leading to frequent cases of exploiting these ‘loopholes.’

A commercial bank official said, "In the case of mutual finance, screening is less stringent than banks, and it is relatively easy to avoid financial authorities’ supervision, resulting in financial accidents every year," adding, "Thorough institutional improvements for mutual finance, which is a no-man’s land, are urgently needed."

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