Supreme Court Rules Financial Institutions Cannot Demand Loan Repayment from Identity Theft Victims

In a significant ruling, South Korea's Supreme Court has determined that financial institutions cannot demand repayment from individuals whose identities were used fraudulently to secure loans without proper verification. The Supreme Court's second division, led by Justice Oh Kyung-mi, recently upheld a lower court's decision in a case involving Orix Capital and an individual referred to as A.

In 2019, A entered into a lease agreement for an apartment in Namyangju and secured a collateral loan of 220 million won from an insurance company. A delegated the preparation of loan documents to a loan brokerage firm, B, providing them with necessary identification documents.

The issue arose when, a week after the initial loan was processed, B used A's documents to obtain an additional loan of 208 million won from Orix Capital, exploiting a delay in the credit information system's updates to commit a 'double loan' fraud.

Orix Capital later discovered the fraudulent loan and filed a lawsuit against A, demanding repayment of the loan amount and interest. Meanwhile, individuals associated with B were prosecuted for fraud and received prison sentences in 2022.

Initially, the first trial favored Orix Capital, as it was deemed unlikely that the loan brokerage would misuse A's identity. The court noted that B had all necessary documents to verify A's identity, thus placing some responsibility on A.

However, the appellate court overturned this decision, citing Orix Capital's failure to fulfill its obligations for identity verification and loan management. The appellate judges emphasized that Orix had a duty to ensure that the loan system, designed to support housing stability for citizens, was not misused for illegal loans. They stated that simply verifying whether the lease deposit was paid as per the contract could have prevented the double loan.

The Supreme Court echoed the appellate court's findings, asserting that financial institutions have a heightened duty of care in verifying identities and powers of attorney in financial transactions. It criticized Orix Capital for not conducting post-loan checks, which allowed B to repeatedly engage in fraudulent activities.