The Financial Services Commission announced a plan to improve the early loan repayment charge system in the banking sector on November 29 after having a series of consultation with banks between October and November. The proposed measures intend to make banks’ early repayment fees more reasonable and transparent for consumers.

Currently, under the Act on the Protection of Financial Consumers, it is prohibited in principle for banks to impose early repayment charges on loans, although the law allows them to charge early repayment fees if the borrower make repayments within three years from the date of loan issuance.

In this regard, banks charge early repayment fees to make up for the loss expected from interest profits and to compensate for relevant administrative costs. On average, the volume of early repayment fees received by banks amount to about KRW300 billion every year.

However, there have been complaints about the fact that the banks’ early repayment fee system is being operated in a uniform way and that it fails to take into account the actual costs incurred by individual banks in a realistic way. For instance, the early repayment fee rates charged on home mortgage loans by five major banks are currently 1.4 percent for fixed interest rate loans and 1.2 percent for variable interest rate loans across the board. On the contrary, examples from overseas cases show that banks’ early repayment charges can be operated in various ways while taking into account the actual cost and particular operational needs of banks.

Therefore, the authorities plan to revise the relevant supervisory rules and best practice guidelines and strengthen disclosures to make the current early repayment charge system more reasonable and transparent. First, a set of guidelines will be established to ensure that banks charge early repayment fees reflecting only the necessary costs actually incurred in the process of handling loan products. For instance, the guidelines will reflect the cost difference between an in-person and a contactless loan subscription method. Second, calculating extra cost items that are not specifically listed on the guidelines for charging early repayment fees will be prohibited and treated as an unfair sales activity, which may be subject to an administrative fine of up to KRW100 million under the Financial Consumer Protection Act. Third, the banking sector will prepare specific standards for deciding when, how much and to whom to charge early repayment fees considering particular characteristics of their customers and types of loans, and disclose relevant information to help to ensure that adequate information is provided to consumers. This enhanced disclosure is also expected to boost competition between banks.

In the meantime, the five major domestic banks and the Industrial Bank of Korea announced a joint plan to provide a temporary exemption for early repayment charges on all types of household loans, effective from December 1 until December 31, 2023. The six banks will also extend the availability of temporary exemption offered to low-credit borrowers for one year until early 2025. The banking sector also pledged to actively seek ways to improve the early repayment charge system.

* Please refer to the attached file for details.