Worries are increasing that the financial regulators’ ambitious “discount distribution” initiative, designed to assist victims of jeonse scams, may turn out to be just an empty vow. This is due to the fact that mutual finance organizations and savings banks, which manage numerous loans connected to villas and officetels where jeonse fraud often takes place, have been left out, resulting in only a few major banks being involved. As per industry reports, even if all loans from commercial banks associated with jeonse fraud are collected, the total would reach only 9 billion South Korean won.
The discount distribution system aims to assist victims of jeonse fraud by encouraging financial institutions to voluntarily relinquish a portion of their priority claim during property auctions resulting from such fraud. Normally, in rental properties that have mortgage loans, the lending financial institution holds the primary lien, while tenants hold a secondary lien. Consequently, when a property is sold due to jeonse fraud, the financial institution is paid first, leaving the victims with whatever is left. The main aspect of the discount distribution system involves financial institutions giving up part of their claim and transferring it to the secondary lienholders—those who are the victims.
Financial regulators anticipate that the discount distribution system will quickly assist those affected by jeonse fraud. On the 13th of last month, they convened a meeting to officially introduce the plan. During the meeting, suggestions were considered, including financial institutions returning one-third to half of the jeonse deposit to victims—amounting to a level similar to the Jeonse Fraud Victim Support Act. Nevertheless, only major commercial banks were present at the gathering.
In fact, only a limited number of banks are involved in the discount distribution system. These financial institutions do not possess numerous assets associated with jeonse fraud. As banks conduct thorough evaluations of borrowers’ backgrounds, they seldom provide loans to high-risk individuals such as those engaged in jeonse fraud. Industry projections suggest that each bank has approximately 1 billion South Korean won in loans connected to jeonse fraud. When combined across the entire banking sector, the overall amount is anticipated to be around 9 billion South Korean won.
Criminals involved in jeonse fraud are reported to have taken significant loans from secondary financial entities such as mutual finance companies and savings banks. These organizations typically offer loans with higher interest rates, even when they do not hold the primary lien. Authorities in the financial sector have encouraged these secondary financial institutions to get involved, yet they are reluctant, expressing worries about “violation of trust.” They are concerned that not maintaining senior liens on properties involved in jeonse fraud auctions might result in legal conflicts regarding damage to their business interests.
Large banks also encounter comparable risks of losing trust. The banking industry has managed legal risks via legal assessments. Nevertheless, secondary financial institutions are simply attempting to step back from the initiative. As a result, the discount distribution system is increasingly regarded as an “empty bun without red bean paste.” Comments from within the financial sector state, “If collaboration across the entire financial sector was challenging, authorities should have concentrated on practical actions such as creating a support fund for jeonse fraud victims rather than pushing ahead recklessly.” The policy, strongly advocated by financial regulators, seems to have failed to meet its objectives, making it difficult to escape criticism for being a superficial approach with minimal real effect.
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