Banks grow frustrated as regulator leaves exception decisions to lenders

Confusion and frustration are growing across the banking sector after financial authorities left banks to determine when to grant exceptions in some loan reviews under the latest comprehensive real estate finance measures, industry officials said Tuesday.

The Financial Services Commission (FSC) said the approach is designed to allow lenders to take borrowers’ individual circumstances into account. Banks, however, argue that the policy effectively shifts the burden of making such judgments onto them. They also fear that concerns over accountability for flawed assessments could prompt lenders to tighten their standards further.

Under the package unveiled on Thursday, the FSC, the country’s top financial regulator, said "jeonse" loan guarantees would be restricted for one-home owners in the Seoul metropolitan area and other regulated zones, affecting homeowners who rent out properties they or their spouses have not personally occupied. Such cases will be classified as speculative investments.

Jeonse is a unique Korean housing rental system in which tenants pay a large upfront deposit instead of monthly rent and typically recover the full amount from the landlord at the end of the lease.

The FSC added that borrowers with clear unavoidable circumstances, such as people caring for elderly parents or relocating for work, can still qualify for an exception. In such cases, individual bank loan review committees will assess potential borrowers’ circumstances and decide whether to approve the loans.

The regulator also gave the bank committees discretion over whether to grant exceptions when determining eligibility for the preferential loan-to-value ratio available to first-time homebuyers.

Banks claim that loan review committees are unlikely in practice to be able to perform the role envisioned by the regulator. With no clear guidelines or established precedents, banks face significant accountability risks when exercising discretion to assess individual borrowers’ circumstances and grant exceptions. As a result, they have little choice but to take a conservative approach, focusing on cases covered by clear regulatory standards or similar precedents.

“Loan review committees do not generally exercise their own discretion to determine whether individual borrowers have legitimate reasons for seeking an exception,” an official from a commercial bank said. “Instead, they approve loans mainly in cases covered by existing regulatory guidelines or established precedents.”

There are also concerns that differences in how banks interpret the rules could add to confusion for borrowers, since applicants in similar circumstances could receive different decisions on loan approval depending on which bank they approach.

Authorities said they would allow lenders to seek official interpretation from the FSC in ambiguous cases and share those rulings across the financial sector to help clarify the rules.