Jeonse Loan Fraud Exposes Weakness of Deposit-Backed Lending

The government views gap investment financed by indiscriminate jeonse loans — a lump-sum deposit lease — as one of the main drivers behind the surge in property prices. On that premise, it is now regulating jeonse lending more aggressively than at any time before. There is no denying that the restrictions have stripped away some of the momentum behind rising home prices. On the other hand, demand has shifted toward loans arranged through moneylenders and loan brokers, and side effects have multiplied — including tenants who lose their jeonse deposits to fraud that exploits exactly this channel.

Because I advise a number of financial institutions on legal matters, I frequently encounter cases in which borrowers fall victim to various forms of fraud while obtaining loans through moneylenders or loan brokers. The schemes run by these unscrupulous lenders and brokers are, in most cases, nearly impossible for an ordinary person to detect.

So why does fraud cluster so heavily around the jeonse loan process?

Looking for what the damage cases have in common, the problem ultimately stems from the incomplete nature of jeonse deposits as collateral. Financial institutions can extend jeonse loans, which are large sums for low- and middle-income households, because they take the jeonse deposit — the lease deposit — as security at the moment the loan is made. But collateral over a jeonse deposit, or more precisely over the claim to its return, is security over a claim. Unlike a mortgage on real estate, which is entered in the property register, it is far less stable as collateral. Suppose you hold some claim other than a jeonse deposit. Would you even consider looking for a financial institution willing to lend against it?

To shore up the stability of that security, lenders taking a jeonse deposit as collateral obtain the landlord's written consent or serve notice of the assignment of security on the landlord. But because a jeonse deposit is recognized on the basis of a private contract between landlord and tenant, problems surface at the enforcement stage: the deposit may differ from the stated amount, it may have been offset against monthly rent, and when a third-party security holder appears, determining which claim ranks ahead of the other is difficult.

Consider a jeonse deposit loan fraud case I recently advised on. Tenant A saw an advertisement from a moneylender saying jeonse deposit loans were available and applied for one. The moneylender, however, lacked the funds to lend on its own account, so it borrowed from B Savings Bank and used that money to lend to Tenant A. B Savings Bank, for its part, had nothing to take as security when lending to the moneylender other than A's jeonse deposit, so it took the deposit as collateral. Several months later, the landlord received notice from B Savings Bank that the security over the jeonse deposit was being released, and a certificate of the bank's corporate seal was attached. As a result, B Savings Bank's security over the deposit ceased to exist. Several more months later, while extending the loan received from the moneylender, Tenant A pledged the same jeonse deposit as security to C Capital. A then heard that the loan could be refinanced at a lower rate and borrowed from D Credit Union, using the proceeds to repay the loan claim held by C Capital.

The fraud came to light only years later. It turned out the moneylender had forged the release notice issued in B Savings Bank's name, along with the certificate of corporate seal. A release of security effected through forged documents is void, so the holder of security over the jeonse deposit is still B Savings Bank. As the security holder, B Savings Bank will apply the jeonse deposit toward repayment of its loan, meaning Tenant A will not get the deposit back. On top of that, even after losing the deposit, Tenant A still owes D Credit Union a loan obligation equal to the deposit amount. An official at the Financial Supervisory Service, who received A's complaint and sympathized with the situation, tried to mediate by asking the savings bank whether it could release the security over the jeonse deposit. I proposed a way to protect Tenant A and untangle the rights between the savings banks in this situation, but the legal reasoning is complex and a detailed explanation is omitted here.

In short, to create security over a jeonse deposit, a lender must contact the landlord and verify whether a third party has already taken security over that deposit. The reality, though, is that guarding against cases where forged documents deceive both the landlord and the lender is not easy.

There is another type of fraud involving jeonse deposits worth mentioning. Applicants should also be wary of cases in which a household merger application is forged and submitted to a community service center, producing a resident registration certificate for the property that makes it appear as though no jeonse tenant lives there. Among lower court rulings, there is a case in which a property owner manipulated such a certificate in this manner, deceived an acquaintance into believing there was no jeonse tenant, borrowed money against an underwater property and was punished after failing to repay it.

Because loans secured by jeonse deposits are so weak as collateral, public guarantee institutions often provide guarantees on behalf of tenants. Such public guarantee schemes are necessary to protect the jeonse funds of low- and middle-income households. But because the guarantee institution pays the deposit to the tenant even when a fraudulent loan is involved, a growing number of cases treat the money as if it were there for the taking. In one case I advised on, a group had in fact carried out a fraudulent lending scheme, yet the guarantee institution did not file a criminal complaint for fraud on the grounds that the amount it had paid out was not large. Given how many guarantee-related losses occur, filing a criminal complaint in every instance is presumably no easy task for these institutions either. Even so, filing a civil suit against fraudsters who have already siphoned off every asset in their own name yields no practical benefit at all. It is simply regrettable to think that such a passive response may be handing con artists easy prey.