[Exclusive] 'Home Ownership' Crushed by Bad Loans... Saemaeul Geumgo's Uncollected Amount Reaches 23 Billion Won

Chuncheon Private Rental Apartment Deposit Scandal
Three Saemaeul Geumgo Branches in Daegu Involved
Loan Funds Deposited to Developer's Account Instead of HUG
'Splitting' Loans to Avoid Single Borrower Limits
Unsecured Loan Cases and More... 23 Billion Won Unrecovered
Repeated Cases Including Democratic Party Lawmaker Yang Moonseok

Editor's NoteTwo years ago, when the issue of non-performing loans surfaced, consumers who were anxious rushed to Saemaeul Geumgo. Although innovative measures have been proposed, improper and illicit loans are still frequent. As a financial institution that has been part of Korea's modernization history, there is a need to win consumers' trust anew and fulfill the fundamental role of mutual finance. Asia Economy is running a series that highlights the recurring loan problems at Saemaeul Geumgo and considers what strategies Saemaeul Geumgo should adopt to undergo a 'complete transformation.'

The problem of non-performing loans at Saemaeul Geumgo, which triggered the 2023 bank run (massive deposit withdrawals), remains unresolved. This has not only crushed the dreams of ordinary people to own homes but also caused hundreds of billions of won in damages to the credit unions where illegal loans by developers were executed. The issue of loans used for purposes other than intended, which gained attention through the case involving Yang Moon-seok, a member of the Democratic Party of Korea, continues to occur.

According to the financial sector on the 5th, after the bankruptcy of the contractor for the 'Sion Forest Morning View' private rental apartment in Chuncheon, Gangwon Province, last October, the Housing and Urban Guarantee Corporation (HUG) took follow-up measures during which an incident occurred where Saemaeul Geumgo branches A, B, and C in Daegu and the developer deliberately failed to deposit 31 billion won in deposits. Prospective residents hired lawyers and filed a civil lawsuit for damages against HUG, the developer, and Saemaeul Geumgo in January. A lawsuit to confirm non-existence of debt was also filed against Saemaeul Geumgo.

First, the developer and HUG exacerbated the problem. When the developer halted construction citing financial difficulties, prospective residents inquired with HUG about refund procedures for the 38.5 billion won in contract and interim payments. However, the developer did not pay this to HUG and instead used it for construction costs. Prospective residents explained that HUG failed to properly verify the non-payment of the deposit after issuing the rental deposit guarantee certificate.

However, the situation worsened due to branches A and B. These two branches changed the account for interim payment deposits from HUG to the developer without the consent of the contract holders and reportedly transferred part of the deposits to the developer’s account. Specifically, trusting a letter from the developer stating "we will take responsibility," the two branches transferred the deposits to the developer’s account. For some units, interim payments 1 through 3 were deposited into the HUG-designated account, while the 4th and 5th interim payments were deposited into the developer’s account. If the credit unions had deposited the loan funds into the HUG account instead of the developer’s account, prospective residents could have recovered at least some of the funds. Branches A and B handled most of the interim payment loans for prospective residents, while branch C handled loans for commercial unit buyers in the apartment complex. The Saemaeul Geumgo Central Association explained that branch C only executed three interim payment loans for commercial units and that there is no concern about damage from the debtor’s perspective.

Disciplinary disclosures clearly show signs of non-performing loans. The Saemaeul Geumgo Central Association imposed sanctions on branches A, B, and C following inspections in August last year. According to the disclosures, excessive loans beyond the limit were made to the developer. The method was 'splitting.' Although the debtors’ names differed, the loans were essentially for the developer. Specifically, the developer’s representatives, inside directors, and auditors, who could be considered related parties, disguised themselves as general prospective residents and received dispersed loans. This appears to have been an attempt to cover construction costs. Excessive loans outside the designated area were also made to the developer. While out-of-area loans are not illegal, they have limits. Since the developer had already exceeded the out-of-area loan limit, they registered the project address as within the area to obtain additional loans. This resulted in loans exceeding the out-of-area loan limit. Additionally, lease deposit loans were made on unregistered buildings, meaning interim payment loans were executed on non-existent properties. Loans without HUG guarantee certificates were also made.

Branches A and C bore significant losses due to the developer. The developer conducted loans not only for the Chuncheon apartment but also for other regional projects through branches A and C, resulting in damages of 23 billion won. According to Saemaeul Geumgo’s timely disclosures, illegal loans were executed at the two branches through the developer’s fabrication of false contract documents. The total loan principal amounts to 25.61364 billion won, with an unrecovered amount of 23.26765 billion won.

The Saemaeul Geumgo Central Association stated that whether employees of the branches colluded with the developer to execute these improper loans must be determined through investigation. Meanwhile, the Central Association said, "Regardless of collusion, sanctions were imposed due to failure to fulfill verification duties in processing work, arbitrary account changes that caused damage to debtors, and inadequate measures to secure claims. Internal disciplinary action is necessary regardless of criminal liability." The Central Association filed a complaint with the Daegu District Prosecutors' Office in September last year regarding the Chuncheon deposit case involving the developer. The investigation is ongoing, and no decision on prosecution has been made.

Starting this year, the Central Association has introduced and is operating a sliding system to prevent exceeding out-of-area loan limits. The proportion of out-of-area loans among new loans handled annually must not exceed one-third. If out-of-area loans are excessively high in a particular quarter, no out-of-area loans can be made in other quarters.

Meanwhile, not only real estate-related loan issues but also illicit loans executed for purposes different from the actual loan intent continue to occur. A typical example is using business loans to purchase housing. In the case involving Representative Yang that surfaced last year, he was indicted on charges of borrowing a business loan under his daughter’s name to buy an apartment. On the 28th of last month, Representative Yang was sentenced in the first trial to 1 year and 6 months in prison with a 3-year probation. According to the prosecution, he deceived the Daegu Suseong Saemaeul Geumgo and forged transaction statements and other supporting documents. The court ruled that applying for a business loan for the purpose of repaying a mortgage loan constitutes false representation of the loan purpose.

Similar cases have recurred at other credit unions in the Daegu area. At that time, Suseong Saemaeul Geumgo was sanctioned for inadequate screening and post-management of corporate operating funds loans. Branch D in Daegu was also sanctioned in December last year for misusing loans by refinancing a debtor’s housing purchase loan as corporate operating funds. The Central Association stated that it is distributing checklists and inspection sheets to all branches to manage corporate operating funds loans before and after issuance.