Banks must now disclose more on rates and pricing

Banks are now required to disclose more information about how they price loans to individuals under guidelines announced Tuesday.

The move comes as regulators work to improve transparency in the sector so customers can determine whether they’ve been treated fairly in the application process and whether they’ve been charged the right rate.

The Financial Service Commission (FSC), the Financial Supervisory Service (FSS), the Korea Federation of Banks and the Korea Institute of Finance released a joint statement on the new requirements Tuesday.

Banks must now inform customers of the income and collateral amounts used in making credit decisions.

The banks will also have to disclose additional rate information. They will not only have to provide the offer rate, but also the difference between that rate and major benchmarks, such as the prime rate and the bank’s standard lending rates.

Terms now have to include provisions that allow for an adjustment in the rate if material changes occur in a borrower’s financial health. This could include an improved credit score, an increase in income or a promotion.

Under the current system, banks are not required to have set standards with regards to the rights of borrowers to request a lowering of the rate. Banks also have not been required to explain their reasoning when they decline these requests.

The financial authorities said they decided to improve the transparency of the loan application process after the FSS found several banks improperly setting rates on loans. Last year, three banks were found to have used incomes lower than the actual and disregarded declared collateral in some applications, adjustments and omissions that resulted in higher rates for the customers.

“With the disclosure of basic customer information used and basic interest rate information, a borrower can have a better understanding of how the bank evaluated their application,” said an FSC official.

Other reforms are being implemented to help borrowers.

The Federation of Banks said it will use more reference rates when setting the Cost of Funds Index (Cofix), adopted in 2010 and used as the benchmark for calculating adjustable-rate loans.

The Cofix has been based on the average of eight rates, including the rates paid by savings and deposit accounts, mutual installment savings plans, housing savings deposits and certificate of deposits (CD) and commercial paper (CP) and repurchase agreements (RP) coupons.

Banks set the interest on loans as a spread to Cofix. The spread is based on their own costs and the creditworthiness of the borrower.

But beginning in July, other rates will be included, such as the interest on government and central bank debt, and a lower benchmark is expected as a result.

The additions are forecast to decrease the Cofix 0.27 percentage points compared to the current rate.

The Cofix on new loans is now 2.04 percent and 1.99 percent on existing loans.

The Bank of Korea started raising interest rates two months ago, increasing the cost of loans and putting pressure on borrowers.

The FSC also said it will be lowering the commission charged to customers repaying loans early.

BY LEE HO-JEONG [lee.hojeong@joongang.co.kr]