[Q&A] "There Are Issues with Real Estate PF Practices... Encouraging Industry Self-Improvement"

"Authorities Will Not Intervene in Industry Commission Levels"
Improvement Targets Unreasonable Calculation Methods and Procedures
Industry Participation TF Launched... Improvement Plan to Be Prepared in Q3

High-rise buildings in Yeouido's financial district. Photo by Younghan Heo younghan@

The Financial Supervisory Service (FSS) conducted an inspection of seven companies in the financial investment, insurance, and small finance sectors with a high proportion of real estate project financing (PF) handling during March and April, uncovering five major areas for improvement related to PF fee practices.

On the 24th, the FSS held a briefing titled "Results of Real Estate PF Fee Inspection and Plans for Operating a Task Force (TF) on System Improvement," announcing the inspection results and future plans for regulatory improvements.

The authorities initiated on-site inspections following complaints from the construction industry regarding excessive fees related to real estate PF.

The inspection revealed issues including △unstructured PF service fee charging practices △contract terms unfavorable to borrowers in PF agreements △lack of consistent interest rate calculation standards when determining interest rate caps △inadequate record management related to financial services △insufficient information provision to borrowers regarding PF fees.

Based on these findings, the financial authorities will form a system improvement TF involving the financial sector, construction industry, and market experts to develop improvement measures in the third quarter. This aims to enable the financial industry to voluntarily implement reforms to eliminate unreasonable fee practices.

Below is a Q&A with Hwang Seon-oh, Deputy Director of the Financial Investment Division at the FSS.

- You mentioned that the inspection targeted seven companies with a high proportion of real estate PF handling. Since the sectors are divided, what criteria did you use for selection?

▲ We selected companies considering various cases such as whether they have a large number of real estate PF loans, high transaction amounts, or whether affiliated companies participate together as major lenders.

- Do you plan to conduct additional inspections?

▲ This inspection was conducted to understand the current situation. Since we believe we have grasped the overall financial status to some extent, we do not see the need for further inspections. Going forward, we will focus on system improvements.

- Could you share examples of the highest fee amounts charged?

▲ We do not disclose individual highest fees. Since each company has different fee charging methods, it is difficult to provide specific figures.

- Were securities companies unaware that fees should not exceed the legal maximum interest rate? If there were cases of exceeding the maximum interest, would this constitute a violation of the Loan Business Act or lead to sanctions from the FSS?

▲ Companies are aware of the legal maximum interest rate. However, due to weak internal controls and inadequate checking systems related to early repayment, some cases may occur. We are reviewing whether these constitute regulatory violations. It is difficult to comment further at this time as the review is ongoing.

- How excessive were real estate PF fees compared to corporate loans?

▲ It is difficult to directly compare with corporate loans. The services provided differ, and fees include both interest-type and service-type charges. Therefore, direct comparison with corporate loan interest is challenging.

- Since PF is a private contract, does the FSS have grounds to intervene?

▲ The authorities do not plan to intervene based on whether fees are excessive or not. However, we plan to improve unreasonable aspects in calculation methods or procedures that are generally considered inappropriate.

- Did you find cases where major lenders charged fees separately without consultation with the lending consortium?

▲ Generally, fees are determined through the lending consortium. However, the inspection found cases where a major lender charged fees individually within the consortium.

- Financial companies claim that charging fees individually is a customary practice. When improving the system, will measures be established to require fees to be agreed upon only through the lending consortium?

▲ The issues identified will be discussed with the construction industry and financial sector associations to determine what is appropriate and reasonable. We have not set a direction yet; these matters will be deliberated through the TF.

- The materials state that fees and various items will now be treated as legal interest to ensure they do not exceed the statutory interest rate. Did financial companies agree to this?

▲ Most financial companies are aware that fees are included in interest. There may be subtle differences in detailed criteria based on Financial Services Commission precedents, which could cause some confusion in the industry. However, broadly speaking, most understand that fees are included as interest.

- What actions are planned regarding notable issues?

▲ First, due to the high likelihood of legal violations from acts of private gain, we have filed criminal complaints with the prosecution. Second, we are reviewing whether certain deposits can be considered as binding deposits, but no conclusion has been reached yet.

- Will the FSS be able to request corrective actions from financial companies in the future?

▲ Corrective requests require clear legal violations, but these are currently viewed as customary practices. Please understand that our approach is based on the perspective that these are undesirable practices. Requesting corrections may be somewhat burdensome at this stage.

- Is this aligned with the financial authorities' current efforts for an orderly soft landing of real estate PF? Could you explain the context regarding complaints mainly from the construction industry?

▲ Complaints and dissatisfaction about excessive fees were raised mainly by developers and contractors, prompting us to verify the actual situation. This is not closely related to real estate PF restructuring.