Transition to Credit Scoring System... Fewer Rejections for Mortgage Loan Applicants

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[Asia Economy Reporter Park Sun-mi] The credit rating system, which has been divided into 1 to 10 grades, will be completely converted to a credit scoring system ranging from 1 to 1000 points starting next year. In line with this, the Korea Housing Finance Corporation has also begun full-scale revision work. With the credit rating system, which caused the "threshold effect" side effect, changing to a scoring system, those who were unfairly denied mortgage loans are expected to be rescued.

According to the financial sector on the 13th, the Korea Housing Finance Corporation announced plans to revise the operational standards for the acquisition of mortgage loans by financial institutions in accordance with the full introduction of the credit scoring system next year and has begun collecting opinions.

For the basic qualified loans, when conducting credit evaluations, debtor requirements currently apply NICE Credit Information or Korea Credit Bureau (KCB) credit ratings from 1 to 9 grades as of the loan application date. The Korea Housing Finance Corporation plans to apply scores ranging from 1000 to 445 points instead of grades. The operational standards for the Bogeumjari Loan, a long-term fixed-rate, installment mortgage loan, which previously only accepted cases with CB grades from 1 to 9, will also be changed to allow handling only if the credit evaluation is conducted and the credit score falls within separately defined criteria under the scoring system.

A representative from the Korea Housing Finance Corporation said, "First, we will revise the operational standards to apply scores corresponding to each credit grade, then adjust the score ranges considering the reflection status in the banking sector." They added, "As a result, about 3% of those rejected for mortgage loans, including Bogeumjari Loans, are expected to be relieved. Under the current system, dozens of loans that failed to pass the threshold due to being rated as grade 10 will become possible."

The change from a grade-based to a score-based personal credit evaluation system aims to resolve the side effect where loan approval is determined by grade divisions despite minimal differences in credit scores. This allows for more detailed screening by financial institutions based on credit scores, enabling flexible loan approvals, term extensions, and interest rate determination criteria.

Personal credit evaluation companies are currently updating their credit evaluation models to ensure smooth adoption of the credit scoring system across all financial sectors starting next year. NICE Credit Information is preparing to exclude grade provision to financial institutions and provide only credit scores from next year, updating its credit evaluation model from RK0400 to RK0600.

The new model features a reduced negative reflection rate of delinquency information and other factors. To minimize confusion in the financial sector, the new model will be applied first to financial institutions that are ready. Korea Credit Bureau is also known to be discontinuing grade provision from next year and upgrading its credit evaluation model, K-Score, from version 1.0 to 2.0.

The banking industry is in the final stages of preparation, with the five major banks, which have relatively high credit risk evaluation capabilities, piloting the credit scoring system, while non-adopting banks are also organizing internal systems and establishing score application standards. The card industry is also working on revising terms and conditions and reorganizing internal credit evaluation systems in response to the credit scoring system transition starting next year.

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