Enforcement Decree of the Lending Business Act Revised
Anti-social illegal lending contracts to be completely invalidated
Stricter requirements and harsher penalties for illegal private lenders
Starting from July 22, anti-social and illegal lending contracts that significantly exceed the statutory maximum interest rate, or are established through violence or threats, will be rendered completely unenforceable, meaning lenders cannot collect either interest or principal.
The Financial Services Commission announced on July 15 that a revised enforcement decree of the “Act on Registration of Lending Businesses and Protection of Financial Users (Lending Business Act),” containing these provisions, was approved at a Cabinet meeting.
According to the amendment, any illegal lending contract involving sexual exploitation, human trafficking, violence, or threats that is concluded in a way that is significantly disadvantageous to the borrower, or that carries an ultra-high interest rate exceeding 60% per annum, will be invalidated in its entirety, including both principal and interest.
Previously, for lending contracts that exceeded the statutory maximum interest rate of 20%, only the portion of interest above the legal rate could be invalidated. However, the new legal basis now prohibits the recovery of principal as well in so-called “anti-social” illegal lending contracts.
Even if a contract does not qualify as an anti-social lending contract, unregistered illegal private lenders will not be able to collect any interest. For registered lenders, if they fail to provide a lending contract, falsify contract details, or impersonate a financial institution to sign a contract, the contract can now be canceled at any time.
The requirements for registration as a lending business or lending brokerage business will also be raised. Individuals must now hold at least 100 million won in capital (up from the current 10 million won) and corporations must hold at least 300 million won (up from the current 50 million won) to register as a lender. Online lending brokers must have 100 million won in capital, while offline lending brokers must have 30 million won.
To highlight the illegality of unregistered lenders under the Lending Business Act, the term will be changed from “unregistered lender” to “illegal private lender.” The penalty for operating an unregistered lending business will be increased from up to 5 years in prison or a fine of 50 million won to up to 10 years in prison or a fine of 500 million won. Punishments for violating the maximum interest rate will also be strengthened, with penalties increased to up to 5 years in prison or a fine of 200 million won (previously up to 3 years in prison or a fine of 30 million won).
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