There are approximately one million debtors with overdue loans in Korea. The total extent of delinquent loans reached 142 trillion won last year, an amount six times larger than Seoul city’s annual budget (24 trillion won). As such, crimes related to illegal lending and unfair debt collection have been on the increase. ‘Fair Debt Collection Practices Act’ was legislated in 2009 to prohibit debt collectors from employing abusive, unfair, or deceptive practices to collect debts. Illegal debt collection practices continued to persist even after this legislation however, leading to the Act’s recent amendment in 2014. Although the amendment was criticized by some as an overregulation of creditors’ exercise of property rights, the need for effective supervision and regulation of illegal collection practices is undeniable. Continued maintenance and improvement of the Act could ultimately eliminate illegal collection practices and protect the basic rights of our citizens
I. Introduction – Credit Loans and Debt Collection Practices in Korea
There are approximately one million debtors with overdue loans in Korea. The total amount of delinquent loans reached 142 trillion won last year, six times larger than Seoul city’s annual budget (24 trillion won) . For lenders, collection of loans is crucial – hence they hire the services of professional debt collectors to issue payment reminders by mail or through telephone calls. Problems arise over this process in the form of excessive, and sometimes illegal debt collection practices.
As such, crimes related to illegal lending and unfair debt collection have been on the increase. The National Police Agency reports that the number of such crimes over the past few years has increased from 2541 cases in 2010 to 6535 cases in 2012 . ‘Fair Debt Collection Practices Act’ was legislated in 2009 to prohibit debt collectors – including collection agencies and companies that buy delinquent debts and then try to collect them – from employing abusive, unfair, or deceptive practices to collect debts. However, the practices of illegal debt collection have continued to persist even after this legislation, leading to the Act’s recent amendment in 2014. This article will first review the contents of the initial ‘Fair Debt Collection Practices Act’ of 1999, examine the problems that have persisted despite the legislation, and then inspect the recent amendments to the Act. Criticism on new amendments, along with suggestions for improvement of the law, will follow.
II. Notable Contents of the ‘Fair Debt Collection Act’ Enacted in 1999
Article 4.1.1 defined ‘debt collector’ as ‘a credit business operator under the Act on Registration of Credit Business and Protection of Finance Users, a credit broker, a person who actually engages in credit business without the registration of credit business, a credit financial institution, or a person to whom a debt under a loan agreement has been assigned or re-assigned by any of the persons named above’. Article 2.4 defined ‘debt collection’ as ‘all activities conducted for the satisfaction of a debt, such as investigation into the whereabouts of a debtor and his/her property, demands to pay a debt, and the receipt of payments from a debtor.’
2. Prohibition against Violence and Threats in Debt Collection
Article 9.1 stipulated that ‘no debt collector shall, in connection of debt collection, commit assault and battery on, threaten, arrest, or confine a debtor or his/her related person or use fraud or physical force upon a debtor or his/her related person.’ Article 9.2 prohibited any debt collector from ‘seriously disturbing privacy or peace in business by repeatedly or at nighttime paying visits to a debtor or his/her related person without any justifiable reason, to arouse fear or apprehension,’ while Article 9.3 prohibited any debt collector from ‘seriously disturbing privacy or peace in business by repeatedly or at nighttime delivering words, writings, sound, images, or goods by phone or any other means without any justifiable reason to arouse fear or apprehension.’
3. Prohibition against Demanding Payment from a Person Other than a Debtor
Article 9.6 stipulated that ‘no debtor shall, in connection of debt collection, seriously disturb privacy or peace in business by repeatedly demanding any person, other than a debtor, who does not owe any legal obligation to repay a debt on behalf of a debtor to arouse fear or apprehension.’
4. Prohibition against Divulgence of Personal Information
Article 10.1 prohibited debt collectors from ‘[divulging] credit information or personal information known.. about a debtor or his/her related person in connection with the incurrence of a debt or debt collection to any other person or [using] such information for any purpose other than debt collection.’
5. Prohibition against Knowingly Demanding Payment of Discharged Debt
Article 12.4 stipulated that ‘no debt collector shall, in connection with debt collection, repeatedly demand to repay a debt in any way other than the proceedings prescribed by relevant Acts and subordinate statutes, knowing that the debt has been fully or partially discharged by the proceedings for rehabilitation, bankruptcy, or personal rehabilitation under the ‘Debtor Rehabilitation and Bankruptcy Act.”
III. Problems that Ensued Despite the Legislation
In spite of the 1999 legislation of ‘Fair Debt Collection Practices Act,’ the practices of illegal debt collection continued to persist. A few problematic clauses of the Act even exacerbated the situation. An examination of such post-legislation problems, as well as their respective causes, will be presented below.
1. Evasive Collection Practices Stemming from Obscure Legislation
Before ‘Fair Debt Collection Act’ was enacted, ‘Act on Registration of Credit Business, Etc. and Protection of Finance Users’ and ‘Use and Protection of Credit Information Act’ together dealt with issues surrounding debt collection. The two laws stipulated that visiting a debtor at his home or workplace to make payment demands was illegal per se and therefore punishable. The same applied to pushing the spouse of a debtor to pay off the debt.
However, the then-newly legislated ‘Fair Debt Collection Act’ included Article 9.2 which only punished the act of payment demands that ‘occurs repetitively, or at nighttime (specifically, from 9 pm to 8 am).’ Therefore, from August 2009 onwards it became impossible to punish creditors who visit debtors’ homes or workplaces at irregular intervals, or during daytime. Repeated visits, while they are theoretically punishable, are difficult for debtors to prove. Legislation of the Act saw the return of illegal payment demands and visits which had been strictly regulated from 2006 to early 2008.
2. Financial Supervisory Authorities’ Passive Stance on Regulation and Punishment
(1) Laying the Burden of Proof on the Debtor – The Problems that Ensue
‘Fair Debt Collection Act’ lays the burden of proof on debtors regarding any illegality that might arise during a debt collection process. Thus, problems ensue even after a debtor files a police report. In reality, it is often impossible for debtors to collect evidence in the face of sudden threatening visits or phone calls. Current law makes undue demands on the debtors when they are under psychological duress.
(2) Supervisory Authorities’ Passive Stance on Regulation and Punishment
Regional governments and law enforcement organizations with the authority to inspect illegal debt collection only conduct one-time crackdowns, rendering any regulation ineffective. Inspection forces are perpetually understaffed and regional governments lack the initiative to properly regulate illegal debt collection. Approximately 2600 complaints about illegal debt collection are annually filed to Korea’s Financial Supervisory Service and Financial Services Commission. However, the former did not report any cases of illegal debt collection on the part of credit agencies or designated debt collectors, whereas the latter only issued fines in 41 cases between 2010 and 2011 where designated debt collectors sent out false payment notices . Financial Services Commission is also authorized to revoke registrations or suspend business operations of designated debt collectors engaging in illegal collection. However, the Commission did not impose any such sanctions in the last 5 years.
(3) Ineffective Punishment
Out of 6,495 offenders of credit business laws in the last 5 years, only 2%, or 133, were actually sentenced to imprisonment. On the other hand, a whopping 59.3% were ordered to pay fines. Current credit business laws stipulate that those who engage in illegal debt collection can face up to 5 years of imprisonment or a fine not exceeding 50,000,000 won. However, money lenders are rarely subjected to criminal punishments. They are most commonly sentenced to a fine below 3,000,000 won, or suspension of indictment. Such light punishment may be linked to the high number of repeat offenders. The percentage of repeat offenses in the last 3 consecutive years rose from 8.7%, to 12.9%, and again to 17.4% .
IV. Amendment to the ‘Fair Debt Collection Practices Act’ in 2014
1. Reasons for Amendment
‘Fair Debt Collection Practices Act’ was amended on January 14, 2014 and again on May 20, 2014 so as to stabilize living conditions of debtors and to supplement insufficiently regulated areas of the initial legislation. [The new amendment includes ‘buyers of commercially traded debts’ in the scope of ‘debt collectors’, prohibits debt collectors from engaging in litigation acts (unless they also happen to be licensed attorneys), prohibits collectors from revealing the existence of a debtor’s debt in the presence of multiple persons, and provides grounds on which to punish collectors who refuse to issue a bill of costs upon request of a debtor.] The most recently amended act is due to be in effect from November 21, 2014.
2. Notable Changes in the Act
(1) Prohibition against Contacting a Debtor Who Has Hired an Agent
Newly legislated Article 8-2 allows a debtor to appoint private attorneys, NGOs, or social enterprises as his legal representative. When a debtor wishes to contend either the existence or the amount of his debt, he may send the debt collector a notice of such appointment. Once the collector receives such notice, he is prohibited from directly contacting or visiting a debtor concerning payment. Violation of this clause may result in an administrative fine under 2,000,000 won (Article 17.1.2).
(2) Inclusion of ‘Purchasers of Commercially Traded Debts’ in the Scope of ‘Debt Collectors’
The existing law limited the scope of ‘debtor collector’ to financial creditors, such as credit finance corporations. However, the amendment of the act expanded the scope of ‘debt collector’ so as to include ‘purchasers of commercially traded credit ‘ derived from transactions regulated by the Commercial Code (Article 2.1).
(3) Prohibition against Debt Collectors Engaging in Litigation Acts
Newly legislated Article 8-4 prohibits debt collectors from engaging in litigation acts related to debt collection, unless they also happen to be licensed attorneys.
(4) Additions to the List of Prohibited Acts
The amendment introduced additions to the list of prohibited acts, allowing authorities to regulate a wider scope of illegal collection practices. Newly legislated Article 9.7 prohibits collectors from revealing the existence of a debtor’s debt in the presence of multiple persons. Article 12.3-2 prohibits collectors from demanding payment outside of legal procedures whilst knowing such demands are banned under the ‘Debtor Rehabilitation and Bankruptcy Act.’ Violation of this clause may result in criminal punishment, or an administrative fine under 2,000,000 won (Articles 15.2 and 17.3).
(5) Obligation to Issue a Bill of Costs upon Request of a Debtor
Articles 13-2 and 17.2.7 provide grounds on which collectors who refuse to issue a bill of costs can be punished upon request of a debtor. The amendment was made so as to prevent excessive charging on the part of the collector.
V. Controversy and Criticism Surrounding the 2014 Amendment
Conflicting views surround the newly legislated Article 8-2 that prohibits a collector from contacting a debtor who has hired the services of a legal representative. Some scholars see this clause in a positive light, as it strengthens a debtor’s legal defense against illegal collection practices. Others are concerned over its potential unconstitutionality, the specifics of which are explained below.
1. Problem of Excessive Regulation
One problem is that by prohibiting all forms of contact between the collector and the debtor following the latter’s notice of appointment, Article 8-2 could be seen as excessive regulation. Contact is prohibited regardless of its legality, which limits a creditor’s exercise of his rights. By excessively regulating the exercise of an individual’s property rights, the very constitutionality of this Article may be called into question.
2. Violation of the ‘Least Harm Principle’
The amendment may also violate the Constitution’s ‘Least Harm Principle,’ because it indiscriminately regulates all forms of direct payment demands against all debtors. Some scholars criticize the fact that the Act failed to limit the scope of ‘creditor’ to what was absolutely necessary, thereby failing to minimize the limit imposed upon a creditor’s exercise of his property rights. As notices of various kinds have to go through the debtor’s legal representative first, the whole debt collection procedure may slow down substantially – incurring additional costs on the part of the collector.
3. Moral Hazard
Moral hazard is another potential danger. A debtor may intentionally hire a legal representative to avoid having to pay his debts, circumventing the law as to obstruct a creditor’s rightful exercise of debt collection.
Lastly, ordinary citizens may not always enjoy the protection offered by this Article, as attorney fees are usually quite costly. Considering the range of potential problems that may arise, critics assert that protection against illegal collection practices should take the form of education and promotion, timely response against reports of illegal practices, and strict supervision on the part of relevant authorities .
VI. Suggestions for Future Amendments
1. Regulation of Transfer of Bonds
(1) Regulating the Transfer of Bonds after a Certain Period
49.4% of bonds owned by loan companies (registered under the Credit Counseling and Recovery Service) last year had been purchased by those same companies . A lot of them include old bonds from years ago that debtors scarcely remember, the payment for which they would suddenly be hounded for without prior notice. Thus, transfer of such bonds should be regulated in order to secure legal stability. Insolvent debt extinguished by prescription should not be traded in the market. Those who seek to stop extinctive prescription should be the original creditors themselves, not loan companies that purchase such debts at cheap prices aiming to gain profits.
(2) Transfer of Bonds Should Require the Debtor’s Agreement
In the case of transfer of bonds, the procedure should be known by the debtor. If possible, such transaction should require the debtor’s agreement (and not merely a one-way paper notification sent by the creditor). In the case of refusal on the part of the debtor, the legislation of a clause that obliges him to engage in payment plan negotiation with the creditor could be considered.
2. Reinforced Supervision of Credit Loan Companies on the Part of Relevant Authorities
Credit information companies and savings banks conduct the most extensive debt collection practices. Financial Supervisory Service announced in January 2010 that business management evaluation of credit information companies would be based on five grades – Excellent, Strong, Average, Weak, and Critical . Companies receiving lower grades would be supervised on a more frequent basis by a larger number of supervisors. Such measure, if implemented, would be sufficient to cut down illegal collection practices by a substantial margin. The Supervisory Service, however, later withdrew its implementation plans, citing that applying the same standard of evaluation on credit information companies and loan companies- when the former has much less capital – will prove to be impractical. Future amendment of the Act should include a standard of evaluation by which relevant authorities could conduct a more active supervision of credit loan companies.
VII. Analysis and Conclusion
The present economic depression, with its rising household debts and overdue interest rates , will see a growing number of ordinary citizens exposed to illegal debt collection practices. The need for effective supervision and regulation of illegal collection practices is undeniable. ‘Fair Debt Collection Practices Act’ is a relatively new law still in its infancy, and some part of its recent amendment should undergo further discussion – however, continued maintenance and improvement of the Act could ultimately eliminate illegal collection practices and protect the basic rights of our citizens.