No more joint and several guarantees in the subprime sector

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Hello readers~
The weather is getting more pleasant, and I have good news which will make many even happier. Before I get to the point, let me start with a story which we you may have often heard of.
Mr. Kim did not have a good credit rating but wanted to start a business. He got a loan from XX savings bank under the condition that his family will consign. Without any other options left, his family members guaranteed a substantial note as joint sureties. However, few months later the recession came and all faced personal bankruptcy. We often heard of tragic stories similar to Mr. Kim’s family around us.
As of 2012, there are about 1.4 million cases similar to Mr. Kim’s family (joint sureties from subprime sector) in our society. Joint and several guarantees from the subprime sector are widely used for loans and surety insurances. The estimated figure for loans is 51.5 trillion won, while that of surety insurances is 23.2 trillion won. These numbers are significant because they mean up to 14% of total contract value in Korea are from joint and several guarantees in the subprime sector.연대보증폐지 In the case of a typical surety, the principal (the debtor) is primarily liable for the debt, while sureties are secondarily liable. That is, sureties are obligated to pay the principal’s debt only when the principal defaults on the loan. However, in the joint and several guarantees, the creditor can designate a single joint surety (if there are several) and ask him or her to pay the entire principal’s debt even before requiring it from the principal. Moreover, joint sureties are also obligated to pay future debts or extension. These characteristics let financial companies to collect the debt more easily which caused the popularity of a joint and several guarantee.Even though collective surety could benefit ordinary people with small businesses by increasing the finance and capital access, it produced many adverse effects as well. Not only principals but also joint sureties who were often close to principals often ended up facing economic crisis, since sureties were equally liable for the debt. Accordingly, many people involved in the contract found it more difficult to recover from the damage. In addition, financial companies became less responsible about their own loans, as they relied on the joint and several guarantee. Finally, financial consumers were vulnerable to financial crisis because joint and several guarantee contracts did not give full and reasonable explanation about the surety liability.

The Financial Services Commission(FSC) and other financial authorities realized problems caused by collective sureties earlier, and since 2000 they came up with many improvements. The abolition of collective sureties in the prime (banking) sector took place on May 2012, and very recently the FSC declared the abolition in the subprime sector as well. According to the new announcement, the joint and several sureties are prohibited from July. The only exceptions are when the largest shareholders need loans in order to perform business matters or one’s living is directly related to the purpose of the loan. These cases are very limited to handicapped people and cargo owners buying their cars for their livings. In addition, to prevent the drastic reduction in the financial flow, the sunshine loan will increase. Furthermore, the joint and several guarantee contracts will become more descriptive to help people clearly understand terms and conditions..

This new announcement includes many new changes, and you might have some questions. So I prepared some Q&A’s for you~
-How will the abolition of the joint and several guarantees be implemented?
The improvements will be effective from July. 1. 2013. Every new contract after that day will be affected and previous contracts will be given five years as a grace period. After six months the Financial Supervisory Service(FSS) will monitor and guide the process.

-Are there any plans about the joint and several guarantees in the third-tier financial institutions?
On the first day of July, like the subprime sector, top five loaners in the third-tier financial institutions are expected to voluntarily do the joint and several guarantee on every new contracts. With more investigation, the FSC plans to downsize or abolish the guarantee in the third-tier financial sectors in the near future.

-Wouldn’t this reform cause reduction in financial supply for common people or working classes?
Financial companies will improve credit and loan evaluation systems in order to minimize the reduction of financial supply. In addition, the restriction at regional financial institutions will become more flexible, and the number of sunshine loan for low income families will increase.

Often, we are told to take great caution before personally guarantee in collective sureties, and to say no was recommended. However, in reality many people who sympathized the principal, who were often close to them, failed to say “no” and ended up becoming debtors as well. Frank hopes that this financial reform will reduce the number of families like the Kim’s and help those who are suffering from the collective sureties.
See you~

-Soon-Hyang Yoon (shyoon720@gmail.com)

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