South Korea's Financial Supervisory Service (FSS) issued new auto-secured loan guidelines to savings banks on July 24, capping the loan-to-value (LTV) ratio at 100% and requiring any excess amount to be underwritten as standard credit loans. The measure aims to prevent a balloon effect following the tightening of credit loan regulations implemented on June 27. Daily average applications for individual auto-secured loans at savings banks surged approximately 150% after the June 27 regulation, reaching 5,636 per business day compared to 2,230 per day during January to May, according to data submitted by the FSS to lawmaker Kim Sang-hoon's office on July 19. The guideline follows a similar directive issued earlier to the capital finance sector, where excessive lending beyond vehicle collateral value had raised concerns.
FSS Sets LTV 100% Cap on Auto-Secured Loans for Savings Banks
The FSS distributed a business cooperation notice titled "Precautions Related to Auto-Secured Loans (Household)" to individual savings banks on July 24. The notice mandates that auto-secured loans operate within an LTV of 100% as a principle, and any loan amount exceeding this ratio must be screened and issued according to the same standards as general credit loans. Previously, no explicit LTV regulation existed for auto-secured loans, but the FSS has now effectively established 100% as the management benchmark. Under this rule, if a borrower's credit loan limit has already been exhausted up to their annual income level, obtaining a loan exceeding the vehicle's collateral value becomes difficult.
The FSS exempted commercial vehicle loans from the credit loan annual income cap regulation, even when the LTV exceeds 100%, recognizing that these loans use business-purpose vehicles as collateral. The FSS reportedly explained the guidelines by phone to some savings banks with relatively large auto-secured loan portfolios.
Auto-Loan Applications Surge 150% Post-June 27 Credit Tightening
Data submitted by the FSS to lawmaker Kim Sang-hoon's office on July 19 shows that daily average applications for individual auto-secured loans at savings banks reached 5,636 per business day after the June 27 loan regulation took effect. This represents approximately a 150% increase from the daily average of 2,230 applications recorded during January to May. The savings bank sector, where household credit loans account for over 40% of total loan portfolios, has been pursuing revenue diversification since credit loan limits were restricted to within borrowers' annual income starting last year.
Although the savings bank sector previously had few cases of auto-secured loans exceeding LTV 100%, the sector showed signs of expanding products relatively less affected by household loan regulations—such as auto-secured loans and business loans—after credit loan regulations tightened. The FSS appears to have initiated preemptive management in response.
FSS Clarifies Principle for Auto-Loan Underwriting Standards
The FSS previously issued identical precautionary guidelines to the capital finance sector after concerns arose regarding cases of auto-secured loans exceeding vehicle collateral value. This latest measure corrects the practice where auto-secured loans, while principally issued within vehicle collateral value, could also exceed vehicle value by reflecting borrowers' creditworthiness and repayment capacity. An FSS official stated, "Among savings banks, only some handle auto-secured loans, and the scale is smaller than the capital sector with issuance concentrated in a few companies. We conveyed the principle that auto-secured loans should be handled within LTV 100%, and any excess should be screened by the same standards as general credit loans, to normalize parts of the market where auto-secured loans were excessively operated."
FAQ
What did South Korea's FSS do on July 24 regarding auto-secured loans?
The FSS issued guidelines to savings banks capping auto-secured loan LTV at 100%, with any excess amount required to be underwritten as standard credit loans.
Why did auto-loan applications at savings banks increase after June 27?
Applications surged approximately 150% as borrowers sought alternatives following the tightening of credit loan regulations implemented on June 27, which restricted credit loan limits to borrowers' annual income.
