Law Says 'Ban,' Rules Say 'Allow'... Banks' 'Self-Appraisals' Remain an Exception for 53 Years [Real Estate AtoZ]

Despite MOLIT's 'illegal' ruling, banks fail to specify a halt date
Korea Association of Property Appraisers mulls FTC complaint and Board of Audit petition

The conflict between the appraisal industry and the banking sector over financial institutions' in-house real estate collateral appraisals is escalating into legal action. The Ministry of Land, Infrastructure and Transport ruled last year that banks' in-house appraisals are illegal, and the same criticism was repeatedly raised during the National Assembly audit. The Financial Services Commission also pledged improvements. However, even after five months, the banking sector has yet to specify when it will stop conducting in-house appraisals.

Talks deadlocked... volume at a particular bank nearly triples

On November 11 last year, appraisers urged a halt to in-house appraisals in front of KB Kookmin Bank's new building in Yeouido, Seoul. About 300 appraisers attended the protest rally. Korea Association of Property Appraisers

According to the appraisal industry on the 17th, the Korea Association of Property Appraisers plans to file a complaint with the Fair Trade Commission, arguing that banks' in-house appraisals constitute unfair practices in the market if negotiations with the financial sector fall through. It also plans to petition the Board of Audit and Inspection for a public-interest audit of the financial authorities, which have condoned the practice. At joint meetings convened in December last year and January this year under the mediation of the Financial Services Commission, the association proposed a compromise that would allow up to a three-year grace period before in-house appraisals are completely halted. However, the banking sector is said to have stuck to its position of maintaining 50% of the current volume even after 2030.

While talks have been deadlocked, the scale of in-house appraisals has instead expanded. Among the four major commercial banks, KB Kookmin Bank stands out in particular. Data disclosed by Democratic Party lawmaker Kim Yongman, a member of the National Assembly's Committee on Economy and Finance, during last year's National Assembly audit show that KB Kookmin Bank's in-house appraisal amount ratio more than doubled from 19.89% in 2021 to 44.60% in the first half of last year, in just three years and six months. In terms of the number of cases, the ratio surged nearly threefold over the same period, from 6.72% to 17.82%. The number of appraisers employed by the bank increased from 18 to 26. This expansion in share translated into a real surge in volume. The association estimates that KB Kookmin Bank's in-house appraisal volume jumped from 26 trillion won in 2022 to about 75 trillion won in 2024, nearly tripling in just two years.

This situation is the result of the lack of effective follow-up measures, despite the Financial Services Commission having been called out at the National Assembly audit every year since 2022 and having repeatedly promised improvements. Since September last year, the association has held condemnation rallies eight times in front of KB Kookmin Bank's new building in Yeouido. At the beginning of this year, it suspended rallies in the hope of progress in negotiations, but the situation has not changed.

Ministry of Land rules 'illegal'... but power to correct lies with FSC

Response documents from the Ministry of Land, Infrastructure and Transport disclosed by Kim Yongman, a Democratic Party of Korea lawmaker on the National Assembly's Committee on Economy and Finance, at a National Assembly audit on October 27 last year. The ministry said in the documents that, in working-level meetings with the Financial Services Commission and the Financial Supervisory Service, it had repeatedly explained that financial institutions' self-assessments risked violating the law and required correction. Screenshot from National Assembly Broadcasting

Financial institutions have been prohibited from conducting in-house real estate collateral appraisals since 1969. Before that, financial institutions assessed collateral values on their own. Because the lenders themselves were setting the collateral values, appraisal standards differed from bank to bank, and collateral was frequently inflated to boost lending performance. As non-performing loans increased, the soundness of financial institutions was undermined. The government responded by establishing an independent appraisal institution (now Korea Real Estate Board) and, in 1973, enacting the Act on Appraisal, which explicitly mandated that financial institutions commission external appraisals. Although the name of the act and the article numbers have changed since then, the obligation to commission appraisal corporations has remained consistently in place for 53 years.

However, banks have continued to rely on in-house appraisals based on the "Detailed Regulations on the Supervision of Banking Business," a subordinate administrative rule of the Financial Supervisory Service. These detailed regulations stipulate that when calculating the collateral value of non-residential real estate, banks may conduct in-house price assessments if they use data from credible institutions such as the National Tax Service's officially assessed standard prices. In effect, a lower-level administrative rule is allowing conduct that is prohibited under the higher-level Appraisal Act.

The difficulty of imposing criminal penalties under the current law is another reason the banking sector has maintained in-house appraisals. The Act on Appraisal and Appraisers defines "appraisal business" as "engaging in appraisals as a business for compensation at the request of another party." The banking sector argues that, because banks assign work to appraisers employed by the bank itself, this does not constitute "at the request of another party," and because no separate fee is paid, it does not qualify as a "business." Under the banks' logic, there would be no subject for punishment in the first place.

Against this backdrop, the Ministry of Land, Infrastructure and Transport, which had long turned a blind eye to in-house appraisals because banks are major clients of appraisers, moved into action after in-house appraisals surged in recent years. In September last year, through an authoritative interpretation, it officially ruled for the first time that banks' in-house appraisals are illegal. It concluded that when appraisers employed by banks "determine the economic value of land and other property and express the result as a monetary amount," this falls under "appraisal" as defined in Article 2, Paragraph 2 of the Appraisal Act, and that failing to commission an external appraisal corporation (or appraiser) in such cases itself constitutes a violation of Article 5, Paragraph 2 of the Act.

Nevertheless, the situation has not changed because jurisdiction is split among different ministries. While the Appraisal Act falls under the jurisdiction of the Ministry of Land, Infrastructure and Transport, the authority to supervise banks and amend the detailed supervisory regulations lies with the Financial Services Commission and the Financial Supervisory Service. The ministry that determines whether a practice is illegal and the authorities that have the power to correct it are different. After issuing its authoritative interpretation, the Ministry of Land, Infrastructure and Transport effectively stepped back. It did not participate in the task force set up by the Financial Services Commission, taking the position that putting a matter already deemed illegal on the negotiating table would itself be inappropriate. The Financial Services Commission, for its part, has confined itself to playing the role of mediator between the banks and the appraisal industry.

Focus on high-value collateral... "conflicts of interest inevitable"

According to the association, in-house appraisals by banks account for only 1% of the overall appraisal market, but they are concentrated in high-value properties averaging around 12 billion won each. The association explains that, for such high-value properties, even small valuation errors can change loan amounts by billions of won, creating a high risk of non-performing loans or breach of trust.

Appraisers employed within banks are subject to the banks' personnel authority and performance-based pay systems. Cho Junghun, head of the Land and Housing Committee at the Citizens' Coalition for Economic Justice, said, "If the lender directly sets the collateral value as well, conflicts of interest are inevitable," and asked, "Can appraisers employed by banks really withstand pressure from the sales department and confidently issue low valuations that run counter to lending profits?" His point is that appraisers employed by banks are structurally constrained from making decisions that conflict with the interests of the sales department. In fact, in just the first half of 2024, two commercial banks were caught in breach-of-trust cases totaling 55 billion won, involving inflated collateral values.

Some in the banking sector argue that if external commissioning is made mandatory, the added fee burden could push up lending rates. However, appraisal fees were definitively assigned to banks after revisions to standard terms and conditions by the Fair Trade Commission in 2008 and a Supreme Court ruling in 2012. An association official said, "Given that each of the four major banks is earning net interest income approaching 10 trillion won, it is hard to understand why they are so fixated on in-house appraisals that they are willing to endure controversy over violating the law."

Experts say that to enhance the fairness of collateral valuation, the principle of separating lending and appraisal functions must first be re-established. Cho said, "In the United States, too, after the subprime mortgage crisis, mechanisms to ensure objectivity were strengthened, such as having a third-party institution act as an intermediary," and added, "The debate should be broadened to how we can ensure fair and safe appraisals in order to safeguard financial stability." He went on to say, "We also need to advance market analysis techniques and build an appraisal system capable of deriving appropriate prices even during stagnant periods with few transactions or during periods of sharp price spikes."