Ineffective Mandatory Loan Purpose Verification... Borrowing as 'Saenggye Fund' to Buy a House Passes Without Issue

'Verification of Personal Loan Purpose' Rendered Ineffective
Used as a Workaround for Gap Investment

[Asia Economy Reporter Kwangho Lee] Despite financial authorities strengthening the ‘credit loan usage verification procedure’ to prevent people from taking out credit loans to buy houses, it has proven to be ineffective. The intention was to eliminate the practice of using credit loan amounts for home purchases by investigating the source of funds for home purchases, but it has been criticized as merely a formal process and has become a loophole.

According to the ‘Status of New Household Loans Other Than Mortgage Loans by Domestic Banks from 2019 to 2020’ submitted by the Financial Supervisory Service to Seong Il-jong, a member of the National Assembly’s Political Affairs Committee from the People Power Party, credit loans from 18 domestic banks excluding the Korea Eximbank amounted to 117.8 trillion won last year. This is an increase of 30.8 trillion won (35.4%) compared to the previous year (87 trillion won).

By loan purpose, living expenses accounted for the largest amount at 56.1 trillion won. Other purposes such as car purchases and travel funds followed with 41.4 trillion won, repayment of existing loans at 13.3 trillion won, and housing-related purposes including home purchase, lease deposit return, and housing rental costs at 7 trillion won.

A bank official stated, "If the loan purpose is written as housing-related when applying for a credit loan, there is a high chance of rejection, so it is common to write other purposes such as living expenses. In principle, using credit loans for home purchases is not allowed, but many still engage in ‘Yeongkkeul’ (borrowing to the limit) or gap investments using credit loans."

He added, "Recently, non-face-to-face credit loans have expanded due to COVID-19, and in some banks, housing-related purposes are completely excluded from loan purposes, making the credit loan usage verification procedure practically ineffective."

Financial authorities also cite ‘Yeongkkeul’ and ‘debt investment’ as reasons for the rapid increase in credit loans but maintain that it is impossible to directly regulate by verifying all loan purposes.

Currently, financial authorities recall loans exceeding 100 million won based on their usage. If a person who has taken out a credit loan exceeding 100 million won buys a house in speculative or overheated speculative districts within the loan maturity period, the credit loan is recalled. Additionally, borrowers with an annual income of 85 million won and a mortgage loan of 300 million won (assuming a 3% annual interest rate with equal principal and interest payments over 30 years) cannot receive credit loans exceeding 150 million won. However, small credit loans are not questioned about their usage.

A financial authority official said, "Although it is impossible to verify the usage of credit loans, we review the purpose and usage of funds around three months before and after the registration of housing ownership transfer, considering it as an attempt to bypass mortgage loans. Since the purposes of taking out credit loans are diverse, it is not easy to regulate them unconditionally."

Assemblyman Seong advised, "Currently, it is acceptable not to clearly state the usage when taking out credit loans, but going forward, it is necessary to improve the system so that the purpose is clearly stated to thoroughly block loans for speculative purposes."

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