[1mm Financial Talk] As DSR Regulation 'Evasive Loans' Increase... Savings Banks Strengthen Internal Controls

Restrictions on 50-Year Mortgage Loans and Strengthened Bank Loan Regulations Increase Demand for Savings Bank Loans
Savings Banks Association Warns "Strengthen Screening"

As signs emerge that ‘clever loans’ circumventing the Debt Service Ratio (DSR) regulations are rampant in the secondary financial sector such as savings banks, the savings bank industry has launched internal crackdowns.

According to the financial sector on the 24th, the Korea Federation of Savings Banks communicated precautions related to household loans and personal business loans to each savings bank earlier this month. The federation instructed, “To prevent circumvention of mortgage loan (Judaemae) regulations, strengthen verification of whether loans from other financial institutions have been executed before disbursing household loans, and exercise caution in the screening process to prevent the occurrence of ‘work loans’ when handling personal business loans.”

This notice came amid recent tightening of DSR regulations in the banking sector. Currently, the DSR regulation limits the annual principal and interest repayment ratio for loans over 100 million KRW to not exceed 40% of income (50% for the secondary financial sector). The financial authorities, pointing out that 50-year mortgage loans in the banking sector are the ‘main culprit’ behind this year’s household loan increase, shortened the DSR calculation period to a maximum of 40 years to reduce loan limits. The sale of the general-type special Home Mortgage Loan (Bogeumjari Loan), which was exempt from DSR regulations, was also suspended from the end of last month.

Due to the ‘balloon effect’ caused by higher hurdles for bank loans and policy mortgages, demand for loans in the secondary financial sector has increased. Borrowers who have already exhausted their loan limits or want higher limits are turning to savings banks, where loans are relatively easier to obtain. Along with this, concerns about ‘clever loans’ involving personal business loans used for home purchases have also grown. This refers to so-called ‘work loans,’ where individual borrowers falsify documents through loan agents to appear as business owners and use the loans for other purposes. In response, the Korea Federation of Savings Banks has ordered each savings bank to strengthen loan screening to prevent evasion of banking sector DSR regulations by obtaining unsecured loans from savings banks or abusing personal business loans.

A savings bank official explained, “As regulations have tightened, customers who find it easier to get loans in the secondary financial sector than in banks are emerging,” adding, “Since regulations were strengthened earlier this year due to the issue of work loans, this is also a reiteration of that emphasis.”

[Image source=Yonhap News]

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