The FSS will require stricter income verification for co-signers if they are in their 20s, to help prevent them from falling into a debt trap. (image: KobizMedia/Korea Bizwire)
SEOUL, August 2 (Korea Bizwire) – The Financial Supervisory Service (FSS) revealed on August 1 that of 85,000 joint sureties issued by 10 loan companies, 23,000 (27.1%) had individuals in their 20s as co-signers. The value of joint loans co-signed by someone in their 20s added up to 79.5 billion won ($71.5 million).
Large financial institutions, however, have recently started to abolish the co-signer system, and the number of loan companies those that do not issue joint sureties increased from five in 2013 to 26 as of June 2016.
Yet there are still some loan companies that ask for a co-signer just because it makes it easier to collect any unpaid debts.
If a borrower defaults on their loans, co-signers have the financial responsibility to repay the debts, yet certain loan companies are not even in the habit of verifying the financial means of some co-signers.
People in their 20s often lack the ability to repay debt, but they still willingly become co-signers for friends or coworkers when asked. During the approval processes, loan companies rarely conduct a thorough due diligence on the financial abilities of co-signers, and usually focus on credit card usage history, which does not accurately reflect income levels.
As such, the FSS is taking steps to closely monitor loan companies, and ensure that they inform young co-signers about the risks involved and any legal obligations before any agreements are signed.
Loan companies must record any phone calls made to co-signers to confirm their decision to be bound by financial obligations.
Loan brokers must also submit signed confirmation from co-signers indicating that they have been thoroughly informed of the risks when they submit referrals to loan companies.
Furthermore, the FSS will require stricter income verification for co-signers if they are in their 20s, to help prevent them from falling into a debt trap. Income must be verified by one’s income tax report, health insurance payment certification, or bank account statements.
As many loan companies push borrowers to sign five-year loans in order to secure profits in a time of falling interest rates, the FSS says it it committed to pushing lenders to create different loan products with varying contract periods.
The FSS will also eradicate a common practice among credit collection companies whereby debts barred by the statute of limitations are revived by companies that file payment request orders.
Loans issued by financial institutions do not have to be repaid by debtors five years after the right has been exercised, as the statute of limitations expires. To get around this limitation, some collection companies file payment request orders, thereby extending the statute of limitations to 10 years if debtors do not object within two weeks of receiving notice from the court.
By Nonnie Kim (nkim@koreabizwire.com)
