Joint Liability on Loans to Be Abolished

The Financial Supervisory Service announced yesterday that it will scrap joint liability placed on home mortgages by late June and come up with new measures. The current system has been criticized as an unfair system of “guilt-by-association.”

Banks will abolish the joint liability on household loans as soon as they successfully complete the preliminary process to set up a replacement system. By early June, Kookmin Bank and Woori Bank will cease using the system while Shinhan Bank will scrap it by late April.

However, mortgage loans of the Korea Housing Finance Corporation and loans of the National Housing Fund are excluded since relevant regulations require joint sureties. Also, savings banks will continue to require borrowers bring along joint sureties.

Joint liability on home mortgages has raised serious social questions. Since the Asian financial crisis, the system has used persons, not property, as a security guarantee.

FSS Vice Governor Kim Dae-pyeong said, “Only Japan requires joint liability on guarantee. It is desirable to remedy abuses of the system and encourage banks to lend money without this guarantee.”

However, some experts point out that if banks lend money solely depending on personal credit ratings, people with low credit ratings have no choice but to borrow money from savings bank or private money lenders with far higher interest rates.

As of late last year, 557,000 cases or 3.2 trillion won of loans were drawn on joint liability. This amounts to 0.9 percent of total household loans.

ssoo@donga.com