KB Kookmin Bank's Internal Appraisals: Ministry of Land Says "Illegal," Financial Services Commission "Reviewing" [Real Estate AtoZ]

Controversy Over Banks Conducting In-House Collateral Appraisals
Ministry of Land Issues "Illegal" Ruling
Financial Services Commission Delays Decision, Proposes "Consultative Body"
Appraisers Hold Protest, Urge Immediate Halt

The conflict between the appraisal industry and commercial banks is deepening as financial authorities continue to delay their decision on whether it is lawful for banks to conduct collateral appraisals for loans internally, without outsourcing to external appraisal firms. The Ministry of Land, Infrastructure and Transport, which oversees appraisal policy, has issued an authoritative interpretation deeming such internal appraisals "illegal." However, the financial authorities, who have the authority to revise the detailed regulations, have yet to reach a decision. In response, appraisers have once again taken to the streets. They are demanding immediate corrective action, arguing that "internal appraisals by banks are illegal and pose a significant risk of leading to non-performing loans by overvaluing collateral."

At 11 a.m. on November 4, approximately 300 appraisers participated in the "KB Kookmin Bank Appraisal Market Illegal Invasion Act Condemnation Rally" in front of the new building of KB Kookmin Bank in Yeouido, Seoul. This was the fourth such rally, following previous demonstrations on September 29, October 14, and October 27. On this day, the appraisers called on KB Kookmin Bank to halt internal appraisals, dissolve its "Value Assessment Department," and reassign the approximately 30 appraisers in that department to their original review work. Appraisers are experts who officially determine the value of real estate such as houses, commercial properties, and land. Their appraisals serve as the basis for bank loans, tax levies, and compensation for public projects.

Before the rally, the Korea Association of Appraisers held an informal meeting with KB Kookmin Bank, arranged by a ruling party lawmaker's office, but no progress was made. While the association explained its demands, KB Kookmin Bank responded only with the standard position that it would "consult with the bank president and others."

Conflict Emerges After 2016 Legal Separation: "Law vs. Detailed Regulations"

On the 4th, appraisers held the "4th KB Kookmin Bank Appraisal Market Illegal Invasion Act Condemnation Rally" in front of the new building of KB Kookmin Bank in Yeouido, Seoul. Korea Association of Appraisers

The controversy over internal appraisals by banks began in 2016, when the "Act on Public Notice of Real Estate Values and Appraisal" was split into two separate laws. The newly established Appraisal Act included a provision requiring financial institutions to commission appraisals of land and other properties to external appraisal firms when making loans or conducting asset purchases and sales. This provision was also present in the "Appraisal Act" enacted in 1973.

However, the subordinate administrative rules of the Financial Supervisory Service still allow for internal appraisals, resulting in a conflict between the law and the regulations. These detailed rules stipulate that, when assessing the value of non-residential real estate collateral, banks may conduct their own appraisals using data from authoritative institutions such as the National Tax Service's standard market prices.

Commercial banks consider internal collateral appraisals to be lawful based on these detailed rules. A representative from one bank stated, "Collateral appraisals are conducted in accordance with the standards set forth in the 'Detailed Rules for the Supervision of Banking Business.' Appraisals under the Appraisal Act are just one of the methods for determining collateral value specified in the detailed rules, and banks are not required to commission external appraisals in every case."

In contrast, the Ministry of Land, Infrastructure and Transport issued an authoritative interpretation in September, stating that KB Kookmin Bank's internal appraisals violated the relevant law. The ministry argued that, even if the lower-level administrative rules permit internal appraisals, the principle of the supremacy of law means that the practice is still illegal. The Financial Supervisory Service also notified financial institutions in 2011 to "refrain from internal appraisals by banks and only handle small-value appraisals on a limited basis." A representative of the association commented, "It is not problematic for banks to refer to publicly available price data such as KB market prices, but conducting internal appraisals for commercial buildings or high-value properties, where market prices are difficult to determine, may constitute a violation of the Appraisal Act."

Ministry of Land: "Just Correct the Issue"; Financial Services Commission: "Form a Consultative Body"

However, the Financial Services Commission has yet to present a clear position. A representative of the commission stated, "There may be areas where the legality is not entirely clear." When asked whether the financial authorities, who have the authority to revise the regulations, should resolve the conflict between the Appraisal Act and the Financial Supervisory Service's detailed rules, the representative replied, "We are currently reviewing the matter."

The industry conflict was also raised at the National Assembly's Political Affairs Committee audit on October 27. Kim Yongman, a lawmaker from the Democratic Party of Korea and a member of the committee, pointed out, "The issue of internal appraisals by financial institutions has been raised at every audit since 2022, but the Financial Services Commission has delayed action, citing the formation of a task force. During this period, the proportion of internal appraisals at KB Kookmin Bank has tripled from the end of 2021 to the end of the first half of this year." The vice chairman of the commission responded to Kim's remarks by saying, "The vice chairman of the Financial Services Commission and the chairman of the Korea Association of Appraisers recently met and reached a basic agreement to improve the appraisal method. We expect a reasonable solution to be found."

The Ministry of Land, Infrastructure and Transport views this issue not as a matter for negotiation, but as one requiring correction. Since November of last year, the ministry has held three working-level meetings with the Financial Services Commission and the Financial Supervisory Service, emphasizing the need for immediate corrective action due to the clear potential for legal violations. When the Financial Services Commission later proposed forming a task force, the ministry refused to participate, stating, "It is not appropriate to address illegal matters in a task force." A ministry official emphasized, "Since an authoritative interpretation has already been issued, the matter simply needs to be corrected."

The expansion of internal appraisals by banks could lead to inflated collateral values and non-performing loans. An association representative stated, "Appraisers within financial institutions are supposed to review external appraisal reports for errors, but at KB Kookmin Bank, these personnel are handling both appraisals and reviews simultaneously. It's like having both the player and the referee on the same team."

The association had previously tolerated a certain level of internal appraisals in consideration of its business relationships with banks. However, as KB Kookmin Bank rapidly expanded its internal appraisal organization and scope, the association concluded that it could no longer overlook the issue. An association representative said, "Other banks also have some internal appraisal staff, but none have expanded their programs as rapidly as KB Kookmin Bank. The situation has exceeded what the industry can tolerate."

According to the association, the total value of internal appraisals by KB Kookmin Bank is estimated to have increased from 26 trillion won in 2022 to 50 trillion won in 2023, and to approximately 75 trillion won last year. This represents a threefold increase in just two years. If these appraisals had been outsourced to external firms, the estimated fees would have amounted to about 55 billion won. While this represents cost savings for KB Kookmin Bank, for the appraisal industry as a whole, it is lost revenue and market share taken by the bank. The amount far exceeds the annual revenue of the top-performing appraisal firm A, which is 35 billion won.

An association representative stated, "The association has not yet received any official documents or external notifications regarding the task force." He added, "Since the Ministry of Land, Infrastructure and Transport has already clearly stated its position that the law has been violated, the matter is now in the hands of the Financial Services Commission and the Financial Supervisory Service. It is up to these two supervisory bodies to determine how to resolve the legal violations."