Co-signed Liability

2013-04-26

According to the Financial Services Commission’s comprehensive plan to abolish the loan co-signing system, co-signers for loans will no longer be required by financial institutions in Korea, starting in July.

Abolition of the Loan Co-signing System

Commercial banks have not required co-signers for their loans for some time. So the Financial Services Commission’s new measure mandates that secondary financial institutions, including savings banks, mutual finance companies, insurance companies, credit cards, and capital investors, should abolish the loan co-signing system. The measure comes in the wake of President Park Geun-hye’s criticism that the secondary financial institutions’ practice of requiring a co-signer for a loan is irresponsible. Now, money-lending institutions in Korea will be banned from asking borrowers to provide someone who can vouch for their loans and repayments. Savings banks or mutual finance companies used to demand collateral or credit when lending money, and Seoul Guarantee Insurance Company, and other credit insurance and surety companies, used to force co-signers to pay back the loans when those who took out the loan could not fulfill their loan contracts. Most of the loans are credit loans and only a few small-sized money lenders ask for co-signers, but the government is trying to wipe out the co-signing practice once and for all. There are currently 1.96 million co-signers in Korea vouching for some 75 trillion won (about 67.6 billion U.S. dollars). This translates to one co-signer burdened with a debt of 38 million won (34 thousand U.S. dollars).

Loan Co-signing

When a debtor fails to pay back a loan, a co-signer assumes the responsibility for making the repayment. There have been numerous cases in which the bankruptcies of loan recipients led to the financial ruins of co-signers as well. In most cases a relative or a friend stands in as a co-signer, so a loan recipient’s financial irresponsibility could put the entire circle of family and friends in serious jeopardy. In particular, small businesses with poor credit or little collateral tended to experience huge losses from loan co-signing. Thus the co-signing system has long been accused of financially suffocating ordinary Koreans or small businesses, but for financial institutions it has served as an easy safety net for defaulted loans, which makes it that much harder to get rid of.

Problems

The abolition of the co-signing system may free many people from the fearsome burden of financial liability, but it also comes with many problems. The biggest pitfall is that the FSC’s measure bans only new co-signers, but leaves existing ones as they are. The FSC is trying to design a set of solutions to rescue existing co-signers to be freed of their undue responsibility. One such solution is allowing co-signers to take out loans of their own to pay back the original loans, or extend the loan maturation dates. But the bigger issue is that the total termination of co-signing could effectively block low-income earners and small businessmen with bad credit or insufficient collateral from borrowing money in the first place. In order to address this problem, the FSC plans to allow some leeway or exceptions, such as permitting a limited co-signing clause for those who are deemed really in need. A standard set of provisions will also be written, which exempts a co-signer from any financial liability if a financial institution did not properly explain the responsibilities of a co-signer. Also, among three guarantor types – specific, limited, and included – the one with the heaviest responsibility, the included security type, will not be applied to individuals. In spite of these alternatives, loan requirements will only get tougher without the co-signing system for the financially vulnerable population, so financial authorities should set up more effective and all-encompassing rescue measures for the disadvantaged borrowers.

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