Financial Firms Banned from Selling Delinquent Claims of 30 Days or Less...Mandatory Checks for Illegal Collections After Transfer

FSC Unveils Measures to Protect Individual Delinquent Borrowers
Promoting Early-Stage Debt Adjustment and Improving Practices on Extending the Statute of Limitations for Delinquent Claims

Going forward, financial companies will no longer be allowed to sell delinquent claims that are up to 30 days past due and eligible for the Credit Counseling and Recovery Service (CCRS) fast-track debt adjustment program. Even when they do sell delinquent claims, they will be required to regularly check whether the buyer is engaging in illegal collection practices, and must immediately report any violations found to the supervisory authorities. The long-standing practice of financial companies routinely and automatically extending the statute of limitations on delinquent claims will also be curbed.

On the morning of the 26th, Financial Services Commission (FSC) Vice Chairman Lee Eok-won announced these measures in a plan titled “Measures to Strengthen the Management of Individual Delinquent Claims” at the 2nd Inclusive Finance Grand Transition Meeting held at the CCRS Gwangjin Integrated Support Center for Inclusive Finance. The new measures shift the focus away from maximizing recovery of delinquent claims toward strengthening the protection of delinquent borrowers and supporting their financial rehabilitation.

The government will first tighten regulations on the sale of delinquent claims by financial companies. The CCRS debt adjustment programs are divided into three stages based on the length of delinquency: ▲fast-track debt adjustment (delinquency of 30 days or less) ▲pre-emptive debt adjustment (delinquency of 31 to 89 days) ▲individual workout program (delinquency of 90 days or more). Among these, fast-track debt adjustment claims will, in principle, be prohibited from being sold. This reflects the fact that early-stage delinquent claims still have a relatively high likelihood of repayment, but once they are transferred to lending businesses, excessive collection practices and a decline in credit scores can cause significant disadvantages to borrowers. By contrast, delinquent claims in later stages are already in a low-credit situation, so the practical benefit of restricting their sale is limited, which is why they were excluded, the FSC explained.

When selling delinquent claims, financial companies must conduct regular inspections, every six months or every year, to determine whether the buyer is engaging in illegal collection practices. If any violations are identified, they are obligated to immediately report them to the supervisory authorities. Contracts for the sale of claims must specify whether and to what extent resale is permitted, as well as the debtor protection conditions that will be carried over in the event of resale. If the resale conditions are violated, additional sales of claims to that buyer will be restricted. Financial companies must also submit, in their quarterly business reports to the Financial Supervisory Service, information on the volume and scope of delinquent claims sold and the results of assessments on the level of protection afforded to customers whose claims were sold.

The government will also push to improve practices related to the statute of limitations on delinquent claims. It plans to amend the Act on Special Cases Concerning Expedition, etc. of Legal Proceedings to abolish the special provision that has allowed financial companies to use public service of process for payment orders. In the past, some financial companies have easily extended the statute of limitations by filing large volumes of payment order applications right before the expiration of the limitation period against borrowers whose whereabouts were unclear, regardless of their repayment capacity. The amendment is intended to block such purely formal applications and reduce unnecessary litigation.

In addition, for delinquent claims below a certain amount, if the statute of limitations has expired, the government will allow the claims to be treated as expenses under the Corporate Tax Act, thereby encouraging financial companies to choose to let the statute of limitations run its course. The measure will apply to delinquent claims of up to 50 million won for banks and insurance companies, and up to 30 million won for secondary financial institutions. However, if hidden assets of the debtor are discovered or in other cases where the financial company is not at fault, extensions of the statute of limitations will be exceptionally permitted.

Furthermore, to promote in-house debt adjustment at an early stage of delinquency, the government will require financial companies to inform borrowers in advance of their right to request debt adjustment. Financial companies will be evaluated on their debt adjustment performance, and principal reductions granted during the adjustment process will be recognized as losses, in order to encourage them to participate in debt adjustment.

Through these measures, the government plans to establish a phased protection system for delinquent claims that proceeds from “expansion of pre-emptive debt adjustment → minimization of long-term and excessive collection → limitation on the proliferation of long-term delinquent borrowers.”

Regarding concerns that bans on the sale of delinquent claims and debt adjustment by financial companies could undermine their soundness, Oh Yoo-jung, Director of the Inclusive Finance Division at the FSC, said, “Concerns about potential insolvency can be managed through write-offs and the accumulation of loan-loss provisions, so the impact on soundness will not be significant,” adding, “Recovering at least part of the principal through debt adjustment can actually be helpful.”