[Exclusive] Unfair Appraisal Practices Persist at Banks... Controversy Over Lectures by Major Commercial Bank

Headquarters Appraisal Staff Gave Lectures to External Appraisal Firms
Received Lecture Fees After Sessions
Potential Violation of Internal Regulations and Code of Ethics
Appraisal Industry Voices Suspicions of Power Abuse
Unpaid Deskt

Unfair practices by banks toward appraisal firms have once again come under scrutiny. There are ongoing criticisms that banks continue to request repeated appraisals from multiple firms and even demand free desktop appraisals to obtain their desired collateral valuations. Recently, controversy has intensified after it was revealed that a bank employee in charge of appraisals gave lectures to external firms and received lecture fees. Industry observers point out that the deeply rooted power imbalance between banks and appraisal firms likely made it difficult for firms to refuse such requests. There is also criticism that the current system, which centralizes appraisal authority at bank headquarters to eliminate past practices of branches receiving rebates from appraisal firms, is insufficient to address these issues.

According to the financial industry on September 4, the head of Team A in the corporate loan review department at a major commercial bank gave approximately five lectures to appraisal firms from 2023 to last year. The lecture fee was 1 million won per session, and the lectures covered collateral valuation methods and the review process. However, this appears to violate the bank’s internal regulations and code of ethics. Article 6 of the internal regulations (prohibition of concurrent employment in other industries) states that employees must not engage in other work for profit or hold concurrent positions without the bank’s approval. Such actions are subject to disciplinary measures. Article 13, Clause 4, stipulates that employees will be disciplined for abnormal transactions or profit-seeking activities, including private financial transactions with clients or other employees, or violations of the prohibition on concurrent employment. Article 20 of the code of ethics requires that employees avoid conflicts of interest and do not engage in other work without prior approval, while Article 23 specifies that employees must not request or accept rebates or monetary gifts, regardless of the amount, in connection with their work.

After it was revealed that Team A’s head received lecture fees, he was only excluded from "review work" but continued to perform related tasks, such as serving as an intermediary approver in the internal approval process. "Review work" refers to evaluating and grading appraisal firms and assigning them requests accordingly. However, as disciplinary procedures are underway at the bank, it is reported that he will be transferred to another team within the same department in the future.

It is unclear whether Team A’s head requested the opportunity to lecture to the firms, but industry insiders believe that, given banks commission appraisals to these firms, it would have been difficult for the firms to refuse if such a request was made. During the loan process, collateral is evaluated by external appraisal firms. Once the appraisal firm completes its assessment and sends the relevant documents to the bank, the bank reviews the appropriateness of the price according to its internal regulations. Team A’s head was responsible for reviewing collateral appraisal prices.

An official from a small appraisal firm stated, "The person in charge of reviewing collateral appraisal prices at the bank holds absolute power over external appraisal firms," adding, "Although there is a system in place to review and decide fairly based on the prices submitted by various firms, in reality, there is a practice of repeated requests until the desired price is obtained, making it very difficult to refuse such demands."

The various unfair practices arising from the relationship where banks commission collateral appraisals from appraisal firms have not been easily corrected. Banks select appraisal firms at random for collateral appraisals. Because banks need higher collateral valuations to safely execute loans, they have preferred appraisal prices. Therefore, if the prices proposed by appraisal firms do not meet the bank’s expectations, banks repeatedly commission other firms at random until they obtain the desired price-a practice known as "repeated requests."

The issue of desktop appraisals (desk consultations) also persists. This is a preliminary evaluation process where banks ask appraisers or firms to estimate a value before a formal appraisal. There has been a practice of banks obtaining information through desktop appraisals without entering into a formal contract or paying a fee. In 2020, the Ministry of Land, Infrastructure and Transport announced "Improvement Measures to Strengthen the Competitiveness of the Appraisal Industry" to address this, but banks still rarely pay desktop appraisal fees to appraisers or firms. Even when a formal appraisal report is submitted, there are still cases where no fee is paid if the loan is not executed.

Some argue that concentrating appraisal authority at bank headquarters has exacerbated the problem. In the past, to prevent issues such as branches receiving rebates from external appraisal firms and resulting in bad loans, branches were prohibited from designating appraisal firms. Since then, the authority has shifted to bank headquarters, where a small number of people now exercise this power, forming the current bank appraisal system.

An official from a major commercial bank pointed out, "If penalties are imposed on appraisal firms, 'points' accumulate, preventing them from handling high-fee, high-value appraisals. When all the appraisal reports from across the country are concentrated at headquarters, those handling these matters at the bank become absolute authorities from the perspective of appraisal firms."