Effective June 12, 2019, borrowers with improved credit standing can request for a reduction in the interest rate charged by their banks (the “Application”).  The Bank Act and its Enforcement Decree have been amended (the “Amendment”) to entitle borrowers to make such a request to their banks (the “Borrower Right”).  The Amendment also requires banks to inform customers of the Borrower Right.  

Key Aspects of the Amendment:

1.   Explicit legal basis for the Borrower Right 

Prior to the Amendment, borrowers were contractually allowed the right to request for a reduction in interest rates through the General Terms and Conditions for Credit Transactions, which are standard terms that banks are required to use.  Under the Amendment, this right is now explicitly set out in the Bank Act.  Specifically, Article 30-2, Paragraph (1) of the Bank Act provides that customers with credit extension agreements with a bank may request for a reduction in the interest rate applied to the customer when the borrower’s credit standing is improved.  “Customer” in this context includes both individuals and institutions.
 

2.   Disclosure obligation of banks

Pursuant to the Amendment, a bank must disclose the Borrower Right to its customers intending to enter into a “credit extension agreement.”¹  Banks, through its webpage or product brochure, for example, must inform customers of the: (i) criteria for reviewing the Application; and (ii) procedures for handling such Applications.  If the bank breaches this disclosure obligation, it and/or its officers/employees can be subject to an administrative fine under the Bank Act.  The maximum administrative fine under the Enforcement Decree to the Bank Act is KRW 10 million which may be reduced in the absence of willful misconduct.
 

3.   Prerequisites for the Application and review criteria to be considered by the bank 

Improvement in the customer’s credit standing is a prerequisite to filing the Application.  For individuals, an improvement in credit standing may be viewed to exist if he/she has been newly employed or has had a job promotion, has realized an increase in his/her assets, or has had an upgrade in credit rating.  For institutional customers, an improvement in credit standing may be shown if the company has improved its financial status or has had its credit rating upgraded. 

Banks can review the Application based on several factors, most significantly, whether the terms of the credit extension product was based on the customer’s credit standing, and whether the extent of change in the customer’s credit standing is significant enough to affect the applicable interest rate. 

However, as the Amendment does not clearly stipulate the conditions for accepting or rejecting the Application, the customer may challenge a rejection.
 

4.   Bank’s duty to notify customers of the result of its review 

Under Article 18-4, Paragraph 1, Item 3 of the Enforcement Decree to the Bank Act, banks have the duty to notify its customer of the results of its Application review within ten business days of receiving the Application by telephone, written notice, text message, e-mail, facsimile, or other means of communication.  Banks must also maintain records of such communication.