[Exclusive] Enhanced Debtor Protection Proves Insufficient in Practice... FSS Issues Multiple Criticisms to Major Banks

Inspection of Compliance With the Individual Debtor Protection Act at Five Major Banks

Multiple Cases of Inadequate Delivery of Debt Adjustment Notices Identified

Poor Management of Debt Collection Cap System Also Cited

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The Financial Supervisory Service (FSS) has reportedly uncovered multiple cases of non-compliance with procedures under the Individual Debtor Protection Act during its inspection of delinquent debtors’ protection practices at the five major banks. With the enforcement of the Individual Debtor Protection Act, pre-notification for actions such as acceleration of loan maturity, housing foreclosure applications, and transfer of claims must now be confirmed as actually received by the debtor, not just sent. However, it is reported that most banks continued to process work based on the traditional practice of simply sending notifications, without verifying whether debtors actually received them. The banking sector, however, has expressed concerns that the inspection included cases where it is practically difficult to confirm delivery, such as when a debtor’s contact information is deleted or their residence has changed, calling these requirements excessive.

According to the FSS and the banking industry on May 27, the FSS recently conducted an ad hoc inspection of the five major banks (KB Kookmin, Shinhan, Hana, Woori, and NH NongHyup) regarding their compliance with the Individual Debtor Protection Act. The inspection, which covered the period from April 17, 2023, to early April 2024, is now concluding with the collection of opinions from each bank. The Individual Debtor Protection Act came into effect on October 17, 2024, following a six-month guidance period that ended on April 16, 2024.

The main issue identified during the inspection was that banks did not comply with the delivery principle regarding their obligation to notify debtors of the possibility of debt adjustment. Previously, under delinquency management practices, banks could notify delinquent borrowers of acceleration of maturity by sending a letter or text message, and the notice would take effect after a certain period regardless of receipt. Acceleration of maturity refers to a situation where a debtor loses the right to repay in installments due to a breach of contract, such as delinquency, and must repay the full principal at once.

Since the enforcement of the Individual Debtor Protection Act, sender-based practices are no longer sufficient. Banks must now provide advance notice to debtors about response procedures and their right to request debt adjustment before taking actions such as acceleration of maturity, housing foreclosure applications, or transfer of claims. It is no longer enough for financial institutions to simply send a notice; they must confirm that the notice was actually received by the debtor.

Regulator points out insufficient confirmation of notice delivery and poor management of contact limits

It appears that most banks processed work without sufficiently confirming whether the notification was delivered. Specifically, banks were cited for not sending long message service (LMS) texts to debtors without mobile phones or those who had issued debt certificates for rehabilitation purposes. In cases where delivery confirmation is difficult, banks are required to take additional steps, such as verifying explicit returns of mail, but it was found that these steps were often not adequately followed.

Inadequate management of the debt collection contact limit system was also highlighted. The Individual Debtor Protection Act restricts debt collectors from contacting a debtor for collection purposes more than seven times per claim within seven days. This rule is designed to prevent debtors from experiencing excessive pressure due to repeated contact via visits, phone calls, or text messages.

An executive at a commercial bank stated, "It is my understanding that one of the issues identified was that the default notification system operates on an account-by-account basis rather than by borrower." In many cases, overdue notifications are issued per account or loan. For example, if a borrower has multiple loans such as personal loans or overdrafts at the same bank and defaults on several accounts, notification messages are sent for each account. Some banks reportedly failed to adequately adjust their notification practices after the law took effect, resulting in insufficient management of collection contact frequency.

Banks: "We agree with the intent, but practical limitations are not fully reflected"

Banks agree with the intent of protecting debtor rights but argue that the inspection process did not sufficiently account for practical limitations. Although they have established non-face-to-face debt adjustment processes and improved related systems in line with the new law, they point out that there are limits to ensuring delivery of notifications to debtors with no contact number or those who have changed their residence.

An official from a commercial bank explained, "Customers who have issued debt certificates for rehabilitation are often undergoing personal rehabilitation procedures, so in some cases, we do not send LMS messages to avoid complaints. It is also practically difficult to ensure that notifications reach debtors who have deleted their registered mobile phone number after initially applying for a loan."

Banks further argue that while notices must be sent to such debtors by certified mail or registered post, even this is difficult if the registered address differs from the actual residence. Another industry official said, "During the inspection, we were subject to intensive scrutiny even over minor details and were asked to submit excessive documentation. This was a period marked by trial and error before the law’s operation was fully stabilized, but banks found it challenging to be criticized or questioned for even minor deviations from the letter of the law."

This content was produced with the assistance of AI translation services.