"Claims of 'Reverse Discrimination Against Low Credit Borrowers'... Bill Proposed to Grant Interest Rate Reduction Requests in the Loan Industry"

Assemblyman Kim Young-joo Proposes Partial Amendment to the Loan Business Act
Guarantees Interest Rate Reduction Requests in Loan Contracts with Loan Companies
Fines Imposed on Companies for Failure to Notify Interest Rate Reduction Rights
Urgent Need to Improve Credit Evaluation Methods for Small Loan Companies

Business card-sized flyers from a loan company are scattered on the streets of Insadong, Jongno-gu, Seoul. Photo by Mun Ho-nam munonam@

A bill is being promoted to allow financial consumers using loan companies to also utilize the right to request an interest rate reduction. This is due to criticism that users are being discriminated against because only loan companies cannot reduce interest rates, even though they pay interest close to the legal maximum rate.

According to the industry on the 26th, Kim Young-joo, a member of the Democratic Party of Korea, recently proposed a partial amendment to the "Act on Registration of Loan Business and Protection of Financial Consumers." The main point is to guarantee the use of the right to request an interest rate reduction even when entering into a loan contract with a loan company. It also requires loan companies to inform borrowers of the right to request an interest rate reduction at the time of the loan contract. A clause imposing a fine of up to 20 million won for violations was also included.

Rep. Kim explained, "There have been many criticisms of reverse discrimination because the right to request an interest rate reduction could mainly be used only at first-tier financial institutions such as banks with low interest rates. This bill aims to establish a legal basis so that users of loan companies can receive interest rate reduction benefits whenever there is a factor that can positively affect their credit improvement."

The right to request an interest rate reduction is the right to ask financial companies to lower interest rates when the borrower's economic or financial status improves. Typical reasons for exercising this right include employment or job change, promotion, income increase, credit score improvement, asset increase, and debt reduction. It applies to both personal and corporate loans but excludes products with predetermined interest rates such as policy fund loans or savings/deposit-secured loans.

Currently, the right to request an interest rate reduction can be used when entering into loan contracts with banks, insurance companies, savings banks, mutual finance institutions, and specialized credit finance companies. However, it is exceptionally not available when entering into loan contracts with loan companies.

Right to Request Interest Rate Reduction for Loan Companies, CSS Improvement is Key

The financial authorities state that legal grounds are necessary to introduce the right to request an interest rate reduction in the loan industry. Since this right is legally established, it is difficult to enforce it on individual companies without legislation. Although the right was previously unavailable in the mutual finance sector, it became possible after the revision of the Credit Union Act in December last year.

The Financial Supervisory Service also attempted to promote the right to request an interest rate reduction for loan companies in 2017 as part of the "3rd National Experience 20 Major Financial Practice Reforms," but it failed. The plan was to implement it gradually starting with large loan companies, but it was scrapped due to the lack of legal grounds at that time.

Along with establishing the institutional foundation for the right to request an interest rate reduction, there are calls for measures to enhance its effectiveness. To implement this right, borrowers must be able to prove their improved credit status, but only a few large companies have a credit scoring system (CSS). Many small companies assess creditworthiness based on their own standards rather than using NICE Credit Information or Korea Credit Information Services, making fair measurement of credit improvement difficult, which also needs to be addressed.

An industry insider said, "It is a reality that small loan companies used by low-credit and low-income individuals find it difficult to judge CSS," adding, "Since the situation is different from other financial sectors, it will take some time before the right to request an interest rate reduction is actually exercised even after its introduction."