The government is set to determine whether it is illegal for financial institutions to conduct their own appraisals of real estate collateral. The appraisal industry points out that banks conducting their own collateral appraisals violate the Appraisal Act and pose a risk of using poorly assessed collateral for abusive lending. Banks counter that there is no illegality, claiming they can evaluate collateral with clear market values.
According to sources from the National Assembly, the Ministry of Land, Infrastructure and Transport, and financial authorities on the 23rd, the Financial Supervisory Service has recently launched an investigation into the practices of financial institutions conducting their own collateral appraisals. This effort is aimed at accurately diagnosing the situation of self-conducted appraisals prior to determining the legality of the long-standing debate between the appraisal industry and the financial sector regarding the valuation of self-collateral.
The appraisal industry has argued for several years that financial institutions' self-valuation of collateral violates the Appraisal Act. They contend that among the methods of self-appraisal, employing appraisers directly to determine value is a violation of the law.
Financial institutions conduct appraisals to assess the value of collateral when granting loans. To reduce external appraisal expenses, they sometimes calculate the value of collateral independently. It is reported that 70% of appraisals are self-assessed, while the remaining 30% use appraisal agencies. Among these, the proportion of financial institutions employing appraisers for self-assessment is only about 1.1%.
According to Article 5, Paragraph 2 of the Appraisal Act, financial institutions, insurance companies, trust companies, or other institutions designated by presidential decree must request valuations of land and similar properties, including the preparation of financial statements related to loans, purchase and sale of assets, management, and external audits as per the Corporate Financial Statement Preparation Act.
At a recent policy meeting hosted by Representative Kwon Young-se, the Korea Real Estate Economic Association requested improvements to the illegal self-appraisal practices of financial institutions. The association asserted, "Financial institutions are employing about 100 appraisers directly to assess the value of collateral, and hiring appraisers to determine collateral value is not compliant with the Appraisal Act as well as the Regulations on the Implementation of Bank Supervision Tasks."
The association emphasized, "Self-assessment of collateral by hired appraisers undermines the fundamental purpose of an independent appraisal system, raises the risk of moral hazard such as abusive lending by banks, threatens bank soundness, and acts as a barrier to cooperation between financial institutions and the appraisal industry. Therefore, the need to resolve this issue is increasing."
The financial sector dismissed the appraisal industry's claims, stating that the procedure for assessing the value of collateral for loan execution is merely a measure to increase efficiency and reduce expenses. A source from the financial sector explained, "Using internal appraisers to evaluate collateral values is only a small part of the process, and it is essential to efficiently assess the collateral before executing loans. For collateral with clear market values, such as apartments, self-assessment is possible." This individual added, "The cost of external appraisals is high and is fully reflected in loan interest rates," and noted, "There are also instances of self-assessment to save expenses."
Once the results of the Financial Supervisory Service's investigation are released, the government plans to delve into whether the independent valuation of collateral by financial institutions is illegal. A Ministry of Land, Infrastructure and Transport official stated, "This month, the Financial Supervisory Service is assessing the status of self-conducted collateral appraisals in the banking sector," adding, "It will take about one to two months to obtain the results, and discussions on the legality will begin after reviewing the findings." A source from the financial authorities mentioned, "Currently, there is no basic stance on whether it is legal or not, and we will make a determination after reviewing the investigation results and hearing from the Ministry of Land, Infrastructure and Transport."