[10·26 Debt Measures] 'The Ultimate Loan Regulation' DSR Accelerated and Tighter Controls on Secondary Financial Institutions

Financial Services Commission Announces Strengthened Household Debt Management Measures
Early Implementation of Borrower-Level DSR Phases 2 and 3
Significant Tightening of DSR Regulations for Secondary Financial Institutions Amid Concerns Over 'Balloon Effect'

[Asia Economy Reporter Kim Jin-ho] The outline of additional regulations to curb household debt, the biggest risk factor in the Korean economy exceeding 1,800 trillion won, has emerged. The timeline for the phased application of the borrower-level Debt Service Ratio (DSR) regulation, known as the so-called 'final boss of loan regulations,' will be accelerated, and DSR regulations on the secondary financial sector will be strengthened. The financial authorities are strongly determined to establish a lending practice based on 'repayment ability.'

The Financial Services Commission announced the 'Strengthened Household Debt Management Plan' with these key points on the 26th.

First, the 2nd and 3rd phases of borrower-level DSR will be implemented earlier. The originally scheduled implementation dates for the 2nd and 3rd phases of borrower-level DSR, set for July next year and July 2023 respectively, have been moved up to January and July next year.

DSR is the ratio of the total principal and interest repayment amount of all household loans held by an individual to their annual income. Strengthening borrower-level DSR regulations means focusing on the borrower's repayment ability to suppress the principal and interest repayment amount from exceeding a certain level of income. It aims to establish a practice of borrowing only as much as one can repay.

Currently, DSR regulations are preemptively applied to mortgage loans for purchasing houses over 600 million won in regulated areas and credit loans exceeding 100 million won. At present, a 40% DSR is applied in the banking sector.

The DSR standard for the secondary financial sector will also be strengthened. The borrower-level DSR, currently applied at 60%, will be lowered to 50%. The average DSR of financial companies has also been significantly strengthened, focusing on mutual finance, capital, and savings banks, which have recently shown a rising trend.

Additionally, starting next year, the loan maturity used in DSR calculations will be made more realistic. Currently, the maximum maturity or similar is uniformly applied when calculating DSR, but this will be reduced to the 'average maturity' per loan. Accordingly, the maturity for credit loans will be reduced from the existing 7 years to 5 years, and for non-mortgage loans from 10 years to 8 years.

In particular, for the secondary financial sector, where loans tend to concentrate due to looser regulations compared to banks, causing a balloon effect, additional tailored management measures have been introduced. First, from July next year, the loan-to-deposit ratio for managing non-member loans in the mutual finance sector will be adjusted. Also, from next year, card loans will be included in the borrower-level DSR calculation, and guidelines related to multiple card loan borrowers will be established. For multiple card loan borrowers, restrictions such as limiting the handling of five or more card loans or recommending differentiated usage limits based on multiple debts will be implemented.

Furthermore, measures such as expanding installment repayments to improve the qualitative soundness of household debt will be implemented together.

First, from next year, the target for installment repayments on mortgage loans will be raised to 60%. As of the end of 2020, the installment repayment rate for mortgage loans was 54.2%. Preferential treatment for credit guarantee fund contributions will be expanded in connection with the installment repayment performance of mortgage loans.

Incentives and inducements for installment repayments on jeonse loans will also be expanded. Efforts to encourage installment repayments on credit loans will continue as well.

The household loan management system of financial companies will also be strengthened. This is to prevent the recurrence of phenomena such as first-come-first-served loans or domino effects of loan suspensions.

To this end, from next month, the management of annual household loan handling plans by financial companies will be systematized. When establishing and submitting household debt management plans by company, it will be mandatory to report to the CEO, Risk Management Committee, and the Board of Directors to allocate quarterly supply plans to prevent loan suspensions.

The principles of suitability and appropriateness under the Financial Consumer Protection Act will also be strictly applied. The association will inspect related documents and overall screening procedures when handling household loans and organize necessary improvements. Penalties such as fines will be imposed for violations.

Various loan agreement compliance checks currently in place will be strengthened semiannually. Violations such as prohibiting house purchases for one year when handling mortgage loans with move-in or disposal conditions or credit loans over 100 million won will be actively identified and addressed. As of the end of June, among approximately 650,000 agreements concluded, 3,797 violation cases were recorded.