Keun mortgage creation fee

In Korea, keun mortgage (근저당권/根抵當權) is created subject to the registration with the Court Registry Office. So it is disputed who should pay the keun mortgage creation fee (근저당권 설정비/根抵當權設定費).

Why is the keun mortgage (meaning the continuing mortgage) generally used in Korea?

It's because ordinary Koreans buy a house or apartment with a loan(s) from the bank. The bank is ready to extend a loan secured by keun mortgage over the house or apartment, that the borrower wishes to buy, because the price of such immovable is relatively high and borrower could borrow some more money from the creditor bank in the near future. On account of the fluctuating nature of claims, the keun mortgage is preferred by the bank as well as the borrower.

Key words
keun mortgage, creation, registration, standardized loan agreement, collective suits

Dispute over the Keun Mortgage Creation Fee
In October 2010, the Supreme Court held that the Korea Fair Trade Commission's recommendation was within the scope of the Regulation of Standardized Contract Act, and that the Seoul High Court's decision failed to determine the fairness of the provision on the choice of customers. So the Seoul High Court rendered a new decision in that sense. Seoul High Court Decision 2010Nu35571 decided on April 6, 2011 held that:
 * Pursuant to Articles 19-2(5) and (6), and 34(2) of the previous Regulation of Standardized Contracts Act (prior to the March 22, 2010 Amendment to the Act by Act No. 10169, hereinafter referred to as the "old Act", 구 약관의 규제에 관한 법률, The English translation of the Act as of February 2008 is available here), KFTC's advisory notification on the use of standardized contract, which obligates the relevant businesses to explain the other clauses than the standard one in an easily understandable way, shall be the ground to impose the penalty for negligence in case of the non-performance thereof. This must be an administrative disposition, affecting directly the rights and obligations of the businesses, which shall be subject to an administrative lawsuit.
 * When reviewing whether any clause of the terms of service falls under the unfair clauses subject to Article 19-2(3) of the old Act, the judge shall take into consideration the conventional practices to which such terms apply, the characteristics of goods and services to be trade as well as the whole terms of service in a comprehensive way rather than reviewing only the clauses at issue in a separated manner.
 * KFTC's advisory disposition to promote the new terms of service rather than the previous one because the pre-amendment terms of service are unfair is deemed legal. 공정거래위원회가 은행대출과 관련하여 인지세와 담보권설정비용의 부담주체를 은행과 고객이 합의하여 결정하도록 하였던 종전 표준약관을 각 비용마다 은행과 고객 중 부담자를 구체적으로 명시하는 것으로 개정한 다음, 은행들에 개정 표준약관의 사용을 권장한 사안에서, 은행대출거래 분야에서의 거래사정이나 대출상품의 특성 및 그로 인한 악용의 가능성 등과 함께 개정 전 표준약관의 내용과 그 적용 실태, 약관 개정 경위 등을 아울러 고려해 볼 때, 개정 전 표준약관은 대출거래에서 우월한 지위에 있는 은행이 그 지위를 이용하여 대출 관련 부대비용 중 은행이 부담하여야 할 비용까지 고객으로 하여금 부담하게 하거나 가산금리를 적용하는 방법 등으로 사실상 이를 고객에게 전가시킬 수 있도록 한 것이어서 고객에게 부당하게 불리한 불공정 약관조항이라고 보는 것이 타당하므로, 개정 전 표준약관이 불공정 약관조항임을 이유로 한 사용권장처분은 적법하다.

Encouraged by the court rulings, the Korean Consumer Agency (한국소비자원) rendered the dispute mediations in favor of bank customers, and decided to support their collective suits by the affected customers against the banks. Plaintiff customers organized by some lawyers amounted to 46 thousand in the early April 2012.

Facts
Initially, under the Framework Act on Consumers (소비자기본법), the government-run Korea Consumer Agency requested the Fair Trade Commission to order the modification of several povisions of the Banks' Standardized Contract on Lending, in which customers are usually required to pay expenses, including the keun mortgage creation fee, necessary to execute a loan agreement with the bank. So the Fair Trade Commission revised the provisions at issue and recommended the adoption of such revised provisions to the Korea Federation of Banks. But the banks argued the Fair Trade Commission's recommendation is beyond the scope of the relevant law, and the problem provisions are not so unfair. At the first instance, the Seoul High Court held, as the provisions at issue could not seem to be unfair, the Fair Trade Commission's recommendation was illegal.

Banks' Position
Since July 2011, right after the ruling of the above-mentioned Seoul High Court decision, most of the banks were forced to revise their general terms for extending loans to household customers to reflect the Fair Trade Commission's recommendation. Furter, those banks could charge no more extra interest rate in exchane for their payment of the keun mortgage creation fee.

In the midst of ongoing avalanche of lawsuits, the Korea Federation of Banks and bank lawyers have maintained their previous position. They argued it is not true that customers bear unilaterally the keun mortgage creation fee, and they are deprived of the choice who pays such fee. As a matter of fact, 47 percent of all cases of bank lending, extended during the period from January 2007 to December 2007 and from July 2008 to December 2009, secured by keun mortgage was borne by the creditor banks.

The bank representatives explained that the customers who paid such fee have some advantages of the reduction of interest rate up to 0.2% point or the exemption of pre-payment charges. Such practices to treat customers are not regarded as unfair, they said.

Largest Collective Suits in Progress
In September 2011, a civil organization named the Financial Consumer Federation (금융소비자연맹) organized the affected customers totaling 24 hundred plaintiffs and filed a suit against Woori Bank for the damages up to 2.1 billion won. The Korea Consumer Agency which provided legal advices to thousnds of the bank customers has musterered the affected bank customers to join the legal proceedings. A number of small and medium-sized law firms are expressing their intention to file lawsuits on the Internet.

The legal community is expecting the largest collective suits ever made in Korea. In reality, they estimate most of citizens, who once borrowed from the banks, have been victims over the keun mortgage creation fee, and all the financial institutions are possibly sued. And the evidentiary documents are easily available. As a reusult, the amount would be 10 trillion won if banks lose the case.

The Woori Bank decision would be a watershed event. It's because, when the bank loses the case, the potential bank customers will join the lawsuits. At the moment, however, the court proceedings are temporarily suspended as the court approved the expert examination into the keun mortgage creation fee formula between the bank and customers, which the defendant asked for to the court in February 2012. A lawyer involved in the case said that, in view of the several month-long procedure, the outcome of the Woori Bank case could be expected in the end of 2012 or early 2013 at the earliest. Then other lawsuits will follow.

Prospects
Now a large number of household customers, who had borrowed money from banks for the period from January 2003 to June 2011 and paid the keun mortgage creation fee or accepted the additional 0.2 percentage point interest rate without payment of such fee, joined the plaintiff group sponsored by the Korea Customer Agency and the Financial Consumer Federation.

The arguments of both parties are in parallel. The legal issues are summarized as follows:
 * It is not clear that the above-mentioned Supreme Court decision is concerned about whether the standard provisions are unfair, or whether the creditor banks should pay the keun mortgage creation fee.
 * The appropriate priod of such fee is five years (creditors' side) or ten years (customers' side) in terms of the prescription period.
 * Under the the "beneficiary pays" principle, which party benefits from the creation of keun mortgage, a creditor bank or its customer?
 * Are the provisions of the bank-provided contractual terms prior to July 1, 2011 mandatory or optional?
 * How many advantages and how much profit would the creditor bank provide to its customer who pays the keun mortgage creation fee?
 * What kind of benefits are the bank customers using in general?
 * Is there any reason why the household customers other than corporate customers are entitled to special treatment of the keun mortgage creation fee?

The defendant banks are represented by big law firms such as Kim & Chang, Ajou, Barun, Yulchon, Horizon, BKL, etc. The two legal disputes against Hana Bank and SC Jeil Bank was under mandatory mediation, but refused by defendants in February 2012. If the defendants accepted the demand of the plaintiffs, the related bank officer said, the damages and costs borne by the banks will be escalating to an astronomical amount.

On the other hand, the lawyers representing the bank customers insist that the problem provisions are null and void because they were proved unfair in breach of the principle of "trust and good faith" by the afore-mentioned Supreme Court Decision. They argue the banks are required to pay back the keun mortgage creation fee.