'Illegal Private Loan Crackdown' Amendment to the Loan Business Act Passed by the National Assembly... To Be Enforced in the Second Half of Next Year

Legal Basis Established to Limit Effectiveness of Illegal Loan Contracts and Forfeit Illicit Financial Crime Profits
Illegal Loan Contracts Nullify Principal and Interest Entirely
Enhanced Supervision of Online Loan Brokerage Sites

The amendment to the Loan Business Act, aimed at fundamentally eradicating illegal private financing by strengthening penalties for illegal private loans and nullifying principal and interest on antisocial loan contracts, passed the National Assembly plenary session on the 27th. The amended law will take effect in the second half of next year.

Financial authorities plan to create and distribute guidelines for the management and supervision of the Loan Business Act to local governments nationwide if the revised Loan Business Act currently under discussion in the National Assembly is passed. Through this, financial authorities expect to ensure thorough loan management, preventing arbitrary operations based on varying levels of understanding or interests among local governments.

Accordingly, legal grounds have been established to limit the validity of illegal loan contracts and to confiscate the proceeds of illegal private financing crimes. Antisocial illegal loan contracts, such as those concluded under conditions highly disadvantageous to borrowers due to sexual exploitation collection, human trafficking, bodily injury, assault, or threats, as well as ultra-high-interest loan contracts, will have both principal and interest nullified.

Furthermore, even if a contract does not fall under antisocial loan contracts, illegal private financiers are prohibited from collecting interest at the time of loan contracts (violation punishable by up to 5 years imprisonment or a fine of up to 200 million KRW), and the interest portion of monetary loan agreements is declared null and void.

To prevent citizens from unknowingly contracting with illegal private financiers and suffering damages, measures such as changing the designation of unregistered loan providers and blocking illegal loan phone numbers will also be promoted. The term for operators conducting illegal loan businesses without registration under the Loan Business Act will be changed from the current ‘unregistered loan providers’ to ‘illegal private financiers.’ Additionally, the scope of phone number suspension requests that the Police Agency, Financial Supervisory Service, and Korea Inclusive Finance Agency can make to the Ministry of Science and ICT has been expanded from ‘illegal loan advertisement phone numbers’ to ‘phone numbers used for illegal loans in general.’

Supervision of online loan brokerage sites, which have recently served as major channels for illegal private financing crimes, will also be strengthened. First, the registration authority for loan brokerage sites will be elevated from local governments to the Financial Services Commission, and they will be required to meet capital requirements of at least 100 million KRW as stipulated by presidential decree, fulfill personnel and material requirements equivalent to loan comparison platforms under the Financial Consumer Protection Act, and establish information protection systems to prevent personal data leaks.

Loan providers and loan brokers are prohibited from using personal information obtained for purposes other than loan provision or brokerage, and anyone who knowingly provides, stores, transmits, or distributes personal information for illegal private financing or other criminal purposes will be punished (violation punishable by up to 5 years imprisonment or a fine of up to 200 million KRW).

Moreover, to prevent damages to loan users caused by the proliferation of small-scale loan businesses and illegal operations, registration requirements and withdrawal conditions for local government loan providers have been strengthened. The capital requirements for local government loan providers and offline exclusive loan brokers have been significantly raised*, and an obligation to maintain capital has been imposed. To prevent evasion of Financial Services Commission registration obligations through split registrations, concurrent holding of positions as representatives or chief officers of multiple loan companies is prohibited.

The disqualification criteria for executives of local government loan providers have been raised to the level of those for Financial Services Commission-registered loan providers, and the re-registration ban period after voluntary closure has been extended from 1 year to 3 years to make it more difficult for unqualified persons to re-enter the loan business.

Penalties and sanctions for illegal loan activities have also been significantly increased. Unregistered illegal loan activities by illegal private financiers will be punished at the level of fraud under the Criminal Act (up to 10 years imprisonment), and violations such as exceeding the maximum interest rate and impersonation advertisements of government or financial institutions will be punished at the highest level under financial-related laws (up to 5 years imprisonment or a fine of up to 200 million KRW). Additionally, grounds have been established for institutional warnings, cautionary measures, and sanctions against executives when loan providers violate the Debt Collection Act.

Kim Byung-hwan, Chairman of the Financial Services Commission, stated, "We placed utmost emphasis on reflecting the reality where the damage to low-income and vulnerable groups is expanding due to antisocial loan contracts accompanied by illegal debt collection, so that the amendment to the Loan Business Act can greatly enhance prevention and relief of illegal private financing crime damages." He added, "We will cooperate with related agencies to ensure effective and prompt law enforcement so that the public can feel the improvements from this legal amendment as soon as possible."

The amended Loan Business Act, which passed the National Assembly plenary session this time, will take effect in the second half of next year, six months after promulgation, considering the time required for subordinate legislation such as enforcement decrees. The government plans to guide compliance through the Financial Supervisory Service and the Korea Financial Investment Association to ensure smooth implementation of the amendment and will promptly proceed with related enforcement decree revisions. Through the currently operating ‘Government-wide Task Force (TF) for Eradicating Illegal Private Financing,’ necessary institutional improvements and supplements to prevent public damages from illegal private financing will be continuously reviewed and promoted.