Banks barred from passing legal costs to borrowers in loan rates starting July 1

Banks will no longer be allowed to pass statutory contribution fees and other legal costs on to borrowers through loan interest rates starting July 1, a move expected to ease the rate burden on some borrowers.

The Financial Services Commission announced Sunday that amendments to the Banking Act and its enforcement decree, taking effect Tuesday, will restrict banks from factoring legal costs — including statutory contributions — into the spread component of loan rates.

Banks had previously incorporated a portion of the statutory contributions they pay to institutions such as the Korea Credit Guarantee Fund, the Korea Technology Finance Corporation and regional credit guarantee foundations into the spread on corporate loans and other products. The practice drew sustained criticism over the need to balance the beneficiary-pays principle underlying the policy guarantee system against banks' broader social responsibilities, prompting the regulatory overhaul.

Under the revised rules, reserve requirements, deposit insurance premiums and contributions to the Korea Inclusive Finance Agency may not be reflected in loan rates. Reserve requirements and deposit insurance premiums, however, have already been excluded from rate calculations by all banks since 2023.

The scope for incorporating guarantee fund contributions into loan rates will also be curtailed.

For policy-guaranteed loans — those backed by the Korea Credit Guarantee Fund, the Korea Technology Finance Corporation, regional credit guarantee foundations or the Korea Housing Finance Corporation — banks may not pass on more than 50 percent of their contributions through the rate. For general loans unrelated to any guarantee, contributions may not be reflected in the rate at all.

In addition, the increase in the education tax rate on financial firms — introduced under amendments to the Education Tax Act that took effect this year — may not be passed on to borrowers through loan rates.

Banks must conduct self-audits at least twice a year to verify that legal costs are not being incorporated into rates, and must keep records of the results. The requirements must also be embedded in each bank's internal control standards.

The new rules apply to loan contracts newly signed or renewed on or after July 1. The Financial Services Commission and the Financial Supervisory Service plan to conduct ongoing inspections to ensure banks comply with the ban on passing legal costs through to borrowers.