FSC to wipe out tricky type of loan

Five years ago, an office worker took out a mortgage and signed up for the comprehensive fixed collateral scheme, although the bank was vague about how it worked.

The worker paid off his mortgage, but suddenly his apartment was seized by the bank.

Apparently he had guaranteed the debt of a friend, and when he couldn’t pay off, the worker’s apartment became the collateral under the scheme.

In a normal mortgage, the house or apartment being bought is the collateral for the loan.

Under a comprehensive fixed collateral loan, the borrower names certain assets as collateral for the loan.

But it remains collateral not just for that loan but for any future loan or obligation that comes his way. This includes credit card debt and guarantees of other people’s obligations.

The original idea was to avoid the hassle of setting up new collateral when a borrower needs a new loan.

According to the Financial Services Commission, of the 468 trillion won ($413 billion) in household loans outstanding at the end of last year, 72 percent, or 337 trillion won, were borrowed on some kind of collateral.

Of the total, 19 percent, or 90 trillion won, are based on comprehensive fixed collateral.

In a move to prevent borrowers from being burned, the government plans on banning even existing comprehensive fixed collateral lending in the second half of the year.

The government plans on converting the 90 trillion won in loans outstanding to non-comprehensive collateral loans.

“[The comprehensive fixed collateral] was commonly used and it was difficult for customers to understand,” said an FSC official.

“There were numerous complaints and we decided to fix the problem to protect consumers.”

Every year over 1,000 complaints about comprehensive fixed collateral were reported to the financial regulator.

The government, since November 2010 has prohibited banks to demand borrowers sign comprehensive fixed collateral loans except for some exceptions when the borrower finds it convenient to place a single asset as collateral on multiple loans.

The 90 trillion won in loans were made before November 2010.

Additionally, to protect people who used their property as collateral for a third party loan, banks will be advised to inform them of the debt payments on the loan.

At the end of 2011, loans borrowed with another person’s property as collateral amounted to 20 trillion won, which is 6 percent of the 337 trillion won.

Currently by law the person who has placed the property as collateral for a third party cannot view the debt payment process or the lender’s credit information without the approval of the lender.

“Such practices have raised the risk of unexpected financial burdens,” an FSC official said.

By Lee Ho-jeong [ojlee82@joongang.co.kr]