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

As financial authorities continue to postpone a conclusion on whether it is lawful for commercial banks to conduct collateral valuation for loans in-house without commissioning external appraisal firms, the conflict between the appraisal industry and commercial banks is deepening. While the Ministry of Land, Infrastructure and Transport (MOLIT), which is in charge of appraisal policy, has issued an authoritative interpretation calling this practice "illegal," the financial authorities, which have the authority to revise the detailed regulations, have yet to make a decision. In response, appraisers have once again taken to the streets. They are calling for immediate corrective action, arguing that "banks' in-house valuation is unlawful and carries a high risk of overvaluing collateral, which could lead to bad loans."

At 11:00 a.m. on the 4th, about 300 appraisers took part in the "KB Kookmin Bank Appraisal Market Illegal Invasion Act Condemnation Rally" held in front of the new building of KB Kookmin Bank in Yeouido, Seoul. This was the fourth such rally, following those held on September 29 and on the 14th and 27th of last month. On this day, the appraisers demanded that KB Kookmin Bank halt its in-house appraisal practices, dismantle its "Valuation Department," and reassign the approximately 30 appraisers belonging to that department back to their original work in review. Appraisers are experts who officially determine the value of real estate such as housing, commercial properties, and land. Their appraised values serve as benchmarks for bank lending, taxation, 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 there was no progress. The association explained its demands, but KB Kookmin Bank only gave a principled response, saying, "We will discuss this with the bank president and others."

Clash emerging after 2016 legal split..."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 banks' in-house appraisal practices began to surface in 2016 when the "Act on the Public Notice of Real Estate Values and Appraisal" was split into two separate laws. The newly enacted Appraisal Act stipulates that "when a financial institution conducts an appraisal of land and other real estate in the process of extending loans or purchasing and selling assets, it must commission an appraisal from an appraisal corporation or similar entity." The same requirement was also included in the former "Act on Appraisal" enacted in 1973.

However, a lower-level administrative rule of the Financial Supervisory Service (FSS) still contains provisions allowing in-house valuation, creating a conflict between the law and the regulation. The relevant detailed regulation allows banks to assess prices on their own when calculating the collateral value of non-residential real estate by using data from authoritative institutions, such as the National Tax Service's officially assessed standard market values.

Commercial banks consider in-house collateral valuation lawful on the basis of this detailed regulation. A representative of one bank said, "Banks' collateral valuation is being carried out lawfully in accordance with the standards set forth in the 'Enforcement Detailed Regulations of Supervision of Banking Business,'" adding, "Appraisal in accordance with the Appraisal Act is merely one of the methods of calculating collateral value stipulated in the detailed regulations, and it does not mean that banks are always required to commission external appraisals when determining collateral value."

In contrast, in September, MOLIT issued an authoritative interpretation that KB Kookmin Bank's in-house appraisals violated the relevant law. The ministry interpreted that, even if the enforcement detailed regulations, which are lower-level administrative rules, allow in-house valuation, it still constitutes a violation of the law under the principle of the supremacy of statutes over subordinate rules. The FSS also notified each financial institution in 2011 that "banks should refrain from in-house valuation and should only handle cases with small appraisal amounts on a limited basis." An association representative said, "There is no problem with banks referring to publicly available price information such as KB market prices, but conducting internal valuation of commercial properties or high-priced buildings, for which it is difficult to judge solely based on market prices, may constitute a violation of the Appraisal Act."

MOLIT: "Just correct it," FSC: "We will form a consultative body"

However, the Financial Services Commission (FSC) has so far not presented a clear position. An FSC official said, "There may be aspects where the illegality is not entirely clear." When asked whether it was the responsibility of the financial authorities, which hold the power to amend the detailed regulations, to resolve the conflict between the Appraisal Act and the FSS enforcement detailed regulations, the official replied only, "We are currently reviewing the matter."

The industry conflict was also raised at the National Assembly's Political Affairs Committee audit of state affairs on the 27th of last month. Representative Kim Yongman of the Democratic Party of Korea, a member of the committee, said, "The issue of financial institutions' in-house appraisal has been pointed out at every annual audit of state affairs since 2022, but the FSC has dragged its feet, citing a task force (TF)," adding, "During this period, the proportion of KB Kookmin Bank's in-house appraisals has tripled as of the end of the first half of this year compared with 2021." In response to Representative Kim's criticism, FSC Chairman Lee Eog-weon said, "The FSC vice chairman and the head of the Korea Association of Appraisers recently met and reached a basic agreement to improve the valuation method," adding, "We expect a reasonable plan to be drawn up."

MOLIT does not view this matter as something to be negotiated, but rather as an issue that requires correction. Since November last year, the ministry has held three working-level meetings with the FSC and FSS, while repeatedly stressing that immediate corrective action is necessary because the violation of the law is clear. When the FSC later proposed forming a task force, MOLIT refused to participate, saying, "It is not appropriate to deal with an illegal matter in a TF." A MOLIT official emphasized, "Since an authoritative interpretation has already been issued, it is simply a matter of correcting the practice."

The expansion of banks' in-house valuation could lead to overestimation of collateral values and, consequently, to bad loans. An association representative said, "Appraisers within financial institutions are supposed to be responsible for review work, checking for errors in external appraisal reports, but KB Kookmin Bank has these personnel performing both valuation and review at the same time," adding, "It is like having the player and the referee on the same team."

The association had previously tolerated a certain level of in-house valuation in consideration of its business relationships with the banking sector. However, as KB Kookmin Bank expanded its internal valuation organization and rapidly broadened the scope of in-house valuation, a consensus has formed that it can no longer be left unchecked. An association representative said, "Other banks also have some internal valuation staff, but none have expanded their organizations as rapidly as KB Kookmin Bank," adding, "The situation has gone beyond what the industry can tolerate."

According to the association, the amount of KB Kookmin Bank's in-house appraisals is estimated to have increased from 26 trillion won in 2022 to 50 trillion won in 2023 and to about 75 trillion won last year. In just two years, the amount has roughly tripled. If these appraisals had been commissioned to external appraisal firms, the fees alone are estimated to have amounted to about 55 billion won. While this is a cost saving for KB Kookmin Bank, for the appraisal industry as a whole it represents lost revenue caused by KB Kookmin Bank, in other words, work for which the market has been taken away. The amount exceeds the annual revenue (35 billion won) of A Appraisal Corporation, the top-ranked firm in terms of collateral valuation performance.

An association representative said, "The association has not yet received any official documents or external notifications regarding the TF." The representative added, "Since MOLIT has already made its position clear that this constitutes a violation of the law, the ball is now in the court of the FSC and the FSS," and continued, "It is up to these two supervisory authorities, which oversee financial institutions, to answer how they intend to resolve a matter that involves a violation of the law."