Newsletter
REGULATORY RESPONSE TO CARD DEBT ISSUE
Over the past several years, most of Taiwan''s financial institutions have entered the consumer credit market, and in particular have strongly promoted cash cards and credit cards. The result is large amounts of non-performing loans, not only causing huge losses for the financial insti-tutions themselves, but also creating general so-cial problems.
In order to address the financial and social issues, the Financial Supervisory Commission (FSC) and the Bankers Association of the ROC (Asso-ciation) recently announced a series of regulatory measures, as outlined below:
Risk management
When marketing credit cards, financial insti-tutions must not use marketing techniques such as offering quick approvals or similar inducements, and they may not give gifts or prizes to solicit a card application or the acti-vation of an issued card. Financial institutions may not set up stands on the street to market credit cards and cash cards, nor extend credit that would allow the aggregate amount of a borrower''s total unsecured loans (including credit card debt, cash card debt, and personal loans) with all financial institutions to exceed 22 times of the borrower''s average monthly income; and the minimum amount to be repaid by a credit holder per month should not be less than 10% of his card debt incurred during such month.
In the future, banks must comply with regu-latory policy by adopting differential interest rates for credit-card or cash-card customers with different creditworthiness. Card issuers already having a credit scoring system should adopt differential interest rates for all their cardholders within three months. Institutions that have not established a credit scoring sys-tem should draw up a differential interest rate charging plan within three months after the Joint Credit Information Center (JCIC) estab-lishes a credit scoring system. By the end of March 2006, JCIC is required to establish a credit scoring system, based on the system used by Fair Isaac Corporation of the United States, for Taiwanese card-issuing institutions to use as a basis for judging creditworthiness.
Mechanism for rescheduling repayment
If the aggregate amounts of unsecured con-sumer loan (including cash card debt, credit card debt, personal loans, and remaining amount of secured loan after the foreclosure of collaterals) of a borrower incurred before 15 December 2005 reaches NT$300,000 or above with multiple creditor banks, and the borrower meets the criteria for repayment ability set by the FSC, such borrower may apply to the largest creditor bank to negotiate a reschedule agreement for the repayment of loans. Upon receiving notice regarding the debtor''s request from the largest creditor bank, all creditor banks must temporarily suspend all debt col-lection activities against the debtor, except for provisional proceedings or ongoing litigation.
In addition, the Association has passed a resolution that for a certain period banks should suspend debt collection activities against borrowers who meet relevant condi-tions, and that for any debtor who by 10 April 2006 submits a written application to negoti-ate for the rescheduling of repayment which has been accepted by the banks, the banks should waive the interest incurred during the period of negotiation.
After the largest creditor bank has reviewed and accepted an application in accordance with the rules set by the FSC, the bank may determine the terms and conditions for re-payment of loans as agreed by the debtor, and then give notice to the debtor and the other creditor banks to proceed in accordance with such terms and conditions.
Outsourcing of card debt collection and sale of card loans
Because of the unlawful debt collection prac-tices by numerous entities to which financial institutions have outsourced their debt collec-tion, the FSC announced a list of debt collec-tors to which financial institutions are for-bidden to outsource debt collection. In coor-dination with this move, the Department of Commerce (DOC) of the Ministry of Eco-nomic Affairs has suspended the registration of companies to conduct related areas of business. For as long as the DOC maintains this restriction, new companies can no longer be set up to conduct debt collection business, and existing companies can no longer register debt collection as a new line of business. However, this measure does not affect existing debt collection enterprises that are already registered as such.
The FSC has also ordered that financial insti-tutions should not sell non-performing loans derived from credit card, cash card or unse-cured consumer loan to asset management companies (AMC). In addition, if any AMC is involved in illegal debt collection activities, and such illegal activities is on file at the JCIC, in the future no financial institution may sell any non-performing loans to the AMC con-cerned.
Other legislative action
To allow borrowers who cannot repay their debts to apply for bankruptcy as early as pos-sible, the relevant competent authorities plan to separate the provisions on personal bank-ruptcy that are currently included in the draft amendments to the Bankruptcy Act and sub-mit them to the legislature as a separate bill. Also, suggestions were made in the Legisla-tive Yuan to lower the cap on interest rate under the Civil Code. However, because of the international trend for interest rate de-regulation and consideration about financial institutions'' reasonable operating costs, this suggestion has not thus far gained support of the relevant competent authorities.