FSS issues new rules on banks that sell loans

Local banks will face new restrictions on the sale of outstanding loans to protect borrowers from illicit overaggressive debt collectors, according to Korea’s financial watchdog Monday.

The Financial Supervisory Service announced Monday a new set of guidelines for local banks when they sell loans to third parties such as other financial companies or loan sharks.

“Some financial companies arbitrarily dispose of loans and borrowers end up with new creditors such as other financial institutions or loan sharks,” explained the FSS in a press release. “In the process, they end up exposed to illegal debt collections.”

Under the new guidelines, which apply to loans with principal amounts less than 50 million won ($44,250), banks cannot sell loans that are beyond the statute of limitations or that are the subject of lawsuits.

If a loan reaches its statute of limitation five years after creditors fail to send payment notices to the borrower, they are not obliged to make payment on the loans.

If they are discovered selling such loans, the banks will be forced to repurchase them.

When selling loans to third parties, banks are required to do due diligence on the purchaser.

They have to examine the debt collecting behavior of the institution and whether it has abided by the Fair Debt Collection Practices Act, which regulates debt collection. It prohibits use of violence or damage of property.

The FSS says this new regulation will minimize the number of cases in which borrowers fall prey to illegal debt collecting activities.

This means financial companies will not be able to sell loans to private loan sharks with records of overaggressive collecting.

The FSS launched a task force to study such guideline last October after local financial companies repeatedly came under fire for selling non-performing loans after their statute of limitations had expired to private lenders, some to private loan sharks.

The loan sharks exploited the fact that borrowers were oblivious of their legal rights and didn’t know they were required to pay off the loans.

“We expect that by strengthening the responsibility of financial institutions in selling non-performing loans, we will be able to protect consumers at risk from excessive debt collecting activities and increase the level of quality of financial service,” the FSS said.

BY CHOI HYUNG-JO [choi.hyungjo@joongang.co.kr]