SFCG Co., Ltd.

Infobox Company
company_name = SFCG CO.,LTD.
company_
company_type =
foundation =
location = Nihonbashi Muromachi Center Bldg., 3-2-15 Muromachi, Nihonbashi, Chūō, Tokyo, Japan 103-8305 (Tel: [phone])
key_people = Kenshin Ōshima (President)
area_served =
industry = Finance industry
products = Loans to small businesses underwritten by guarantors, secured loans, commercial discount notes
operating_revenue = (consolidated) 34,327 million yen
(As of July 2007)
total_assets = (separate) 666,199 million yen
(consolidated) 847,008 million yen
(As of July 2007)
net_income =
num_employees = separate) 109
(consolidated) 1,605
(As of July 2007)
parent = KE Holdings 52.92%
subsid = T-ZONE Holdings
homepage = http://www.sfcg.jp/
footnotes = Stock capitalization: 79,149.15 million yen
Annual closing date: July 31

nihongo|SFCG CO.,LTD.|株式会社SFCG, a subsidiary of nihongo|KE Holdings|株式会社KEホールディングス, is engaged in the loan business in Japan.

The company was founded in 1978 under the name nihongo|Shōkō Fund|株式会社商工ファンド, and changed to its current name in 2002.

Its main areas of business include loans to businesses and discounting bills. It is also noted for the fact that it has many foreign shareholders.

In June 2007, 46 companies, all named XX (name of prefecture) Asset Finance Co., Ltd., were established as finance subsidiaries throughout Japan. These subsidiaries take charge of extending loans to customers, all branch offices were closed. Currently, SFCG operates a loan office only in Tokyo and is under the jurisdiction of Tokyo metropolitan government.

Characteristics of SFCG

Since the time when it traded as Shōkō Fund, the company has operated a loan business. SFCG extended loans to companies that banks and other financial institutions reject for credit due to the inability of these institutions to evaluate credit risks. SFCG reduced the risk of these loans by using higher interest rates than banks and by requiring borrowers to provide multiple joint guarantors.

SFCG is also distinguished by its policy of collecting loans by using legal procedures, such as compulsory execution based on lawsuits, seizure of collateral and official documents.

When the Lopro problem made so-called shohkoh loans a social problem in Japan, the company president was summoned by the Japanese Diet to testify.

Due to a violation of the Money Lending Business Control and Regulation Law, the Kanto Local Finance Bureau, the regulatory agency overseeing SFCG, announced an order to suspend business operations for 12 days starting on December 5, 2005 (and for 22 days at the Tokyo and Omiya offices, where violations were particularly serious). SFCG asked the Tokyo District Court･Tokyo High Court for a temporary injunction･to declare the business suspension orders invalid, but the request was rejected.

SFCG's sales methods

The method of selling used by SFCG is to start with an approach to the manager or accountant of a business - a method commonly known as telephone appointment sales. The list of phone numbers used is based on data from the phone book, combined with results obtained from a private credit investigation agency, and is known as the "GS list." Companies who have a low credit rating are often selected by sales representatives as the targets of calls, since these companies are likely to find it difficult to borrow from institutions such as banks, creating demand for credit.

Companies who express interest on the phone are sent a credit application form via fax, and the information entered on this is used to conduct a credit screening. In addition to checks on the amount being borrowed from banks, the credit screening also involves checks on amounts borrowed from non-banks and the status of any financial trouble.

Setting SFCG apart from its peers is the policy of evaluating sales personnel based on the number of new customers they sign up. Because of this policy, sales personnel often extended loans to parties other than the business owner. To achieve their targets, sales personnel also extended loans to spouses and loans to individuals under fictitious company names in order to count them as new customers. In addition, when a borrower was unable to repay a loans, instead of having the guarantor assume responsibility, SFCG would treat the guarantor as a new customer. Within SFCG, this practice was called “creating new customers” and was regularly used in order to achieve sales targets. But these artificially created new customers were not true new customers in the generally accepted sense.

Currently, SFCG no longer treats these “created customers” as new customers because of tighter internal management and auditing standards. Therefore, this practice is no longer used because it can no longer be used to fulfill sales targets. To maintain standards for improving the soundness of loans, SFCG frequently extends loans that include terms requiring an additional joint guarantor if the value of collateral at current joint guarantors declines. This has no relation to the remaining principal that is backed by current joint guarantors.

Methods used for making contracts

When signing a loan agreement, SFCG requires signatures・seals on many documents along with official seal certification forms. This is because the Money Lending Business Control and Regulation Law requires that loan customers receive thorough explanations and certain documents. (Money Lending Business Control and Regulation Law Article 17, etc.）When extending a loan, major documents alone that are signed and stamped include the following items:
# Monetary loan contract (corresponds to an IOU)
# Joint basic guarantee contract (included in the above monetary loan contract)
# Proxyfor preparation of official documents
# Calculation Sheet（Money Lending Business Control and Regulation Law Article 17 document）and others

To confirm a borrower’s identity, the borrower must submit copies of identification documents (drive’s license, etc.) and photographs are taken of the borrower (primary individual responsible for the loan) and guarantors (joint guarantors).

SFCG's debt collection methods

To collect loans, SFCG uses the method of establishing joint guarantor contracts with guarantors for basic guarantee contracts.

By using this method, the borrower can increase or decrease the loan within the limits of the basic guarantee contract with no need to notify guarantors. As a result, there are cases where borrowers take out a loan that is more than what the guarantors had expected, without the joint guarantors knowing about this. This can result in lawsuits demanding that the guarantee be declared invalid due to an error. In addition, SFCG’s collection method is distinguished by the use of “official documents with approval for compulsory execution” to permit compulsory execution with no need to obtain a confirmation judicial ruling by submitting an IOU and joint guarantee agreements to a court.The method of using a blank proxy for the preparation of official documents is viewed as a problem by the Financial Services Agency. In fact, this was the reason for the 2005 administrative punishment. (SFCG apparently is no longer requesting blank proxies.)

If a borrower falls behind on payments, SFCG declares the loan in default and uses the official documents with compulsory execution clause to collect the loan through compulsory execution with regard to the borrower and guarantors. In this case, SFCG immediately seizes the salary as well as real estate and other assets of the joint guarantors as provided for in the official documents. However, this has become a social problem because there are instances where the seizure of a salary causes an employer to fire a guarantor.

For the purpose of protecting the rights of creditors, the provisional seizure procedure uses the submission of documents and a simple questioning process that speeds up the process. The provisional seizure is approved or rejected without giving the borrower or joint guarantors an opportunity to present objections. If the provisional seizure is approved, the court registers the provisional seizure for real estate. For seizures of salaries and other monetary items, the creditor submits an application for execution to the executing agency, which then performs the provisional seizure. (After the preliminary seizure order is issued, it is possible to submit an statement of objection. But the preliminary seizure order will remain on the register, making it difficult in some cases for that party to subsequently obtain loans from a bank or other lender.

In addition, SFCG in the past has conducted promissory note litigation using private promissory notes. But since this practice has been rejected by the law explained below, it appears that SFCG no longer even produces private promissory notes.

Defeats in court

In many cases, SFCG’s use of private promissory notes, official documents and compulsory execution in order to recover contractual interest (the portion in excess of the limit in the Interest Rate Restriction Law) is not permitted by law.In Supreme Court verdicts announced on February 20, 2004 and January 13, 2006, Money Lending Business Control and Regulation Law Article 43, the so-called deemed repayment provision, was, in effect, made invalid. Money Lending Business Control and Regulation Law Article 43 deemed repayments are defined as interest payments that are received after fulfilling the requirements of this law concerning the provision of written documents (Article 17, 18, etc.) to borrowers and received voluntarily from borrowers.

Since there is a 『default』clause for cases where interest exceeding the Interest Restriction Law limit is not paid, some believe that “this cannot be called a voluntary payment of deemed interest. But all loancontracts have a default clause. Therefore, although Article 43 has been invalidated, there is a problem concerning whether or not the judicial system can make a portion of the law invalid, in effect performing “negative lawmaking,” even though the law has not been ruled unconstitutional. But due to the recent trend toward protecting debtors, public opinion is now supporting the judicial system’s action. However, even after recent amendments to the Money Lending Business Control and Regulation Law, the deemed repayment provision (Article 43) remains.

Regarding private promissory notes, the promissory note section of the Tokyo High Court has ruled that SFCG’s private promissory notes are not intended to be bought and sold in the promissory note market. Therefore, the court ruled that these notes are not consistent with the purpose of promissory note litigation, which is to ensure the smooth flow of capital. This resulted in the unusual request from the Tokyo District Court that SFCG not file a promissory note lawsuit. SFCG lawsuits are said to account for about 80%, which is about 1,500 cases, of all promissory note litigation at the Tokyo District Court. Due to these events, SFCG does not handle private promissory notes.

Due to the February 20, 2004 verdict of the Supreme Court, the remanded ruling recognized the return of excess interest payments. Consequently, the number of claims for the repayment of excess interest was expected to increase.

All these verdicts reflect recent public support for protecting debtors. This created a difficult situation in which the judicial system rejected the loan collection methods and high interest rates of SFCG and other small business loan companies.

Response by government

On November 25, 2005, SFCG received an order from the Kanto Local Finance Bureau to suspend operations beginning on December 5 for a period of 12 days (22 days for some branch offices). This was because SFCG’s preparation of official documents by improperly receiving blank proxies and the subsequent exercise of rights in these documents were serious violations of the Money Lending Business Control and Regulation Law. SFCG’s request to the Tokyo District Court for a temporary injunction against this punishment was rejected. SFCG disagreed and immediately submitted an appeal to the Tokyo High Court, but the appeal was not accepted. The Japanese government was also concerned about SFCG’s practice of forcibly obtaining official documents that contain a clause permitting compulsory execution. One result was the imposition by the Ministry of Justice of stricter procedures for preparing official documents for the purposes of “ensuring a proper procedure for preparing official documents.”

In addition, at the Financial Service Agency’s Council Concerning the Money Lending Business (Sixth meeting), there were statements from borrowers about SFCG’s lending and recovery methods. There was much attention on upcoming actions by the government with regard to money lenders who charge high interest rates. The Financial Services Agency determined that SFCG’s practice of preparing blank proxies before customers become aware of what was happening and then using the official documents prepared based on those proxies to recover loans was a serious violation of the Money Lending Business Control and Regulation Law. The agency announced on November 25, 2007 an order for SFCG to suspend business operations from December 5 to 16, 2005 (and until December 26 at the Tokyo and Omiya offices). Due to this order, SFCG could not conduct any business activities (including sending out bank payment remittance forms for repayments on contractual repayment dates, but excluding activities involving lawsuits and settlements and operations that the Kanto Local Finance Bureau recognizes as necessary).

The suspension order was due to two violations. First, the SFCG Omiya office had signed joint guarantor contracts for 2 million yen but had then used blank proxies to prepare official documents stating that there were guarantees of 5.94 million yen. The office then seized deposits and life insurance assets of the guarantors (prohibition of receipt of blank proxies (violation of Money Lending Business Control and Regulation Law Article 20)). Second, the Tokyo office had established collateral rights with no prior notice for real estate purchased by borrowers after they had received an SFCG loan. (failure to provide written contract (violation of Money Lending Business Control and Regulation Law Article 17)). Normally, the suspension would apply only to the Omiya and Tokyo offices. But the Financial Services Agency said that it had discovered 75 other instances of the Omiya office’s violation at other SFCG offices throughout Japan. The agency pointed that these violations point to a company-wide practice of illegal loan collections. The agency thus decided to order a nationwide suspension.

SFCG asked the Tokyo District Court for a temporary injunction to stop the administrative punishment, stating that “there is no evidence that laws were violated.” But this request was rejected as expected because of legal precedents and attitudes regarding SFCG’s loan collection methods. SFCG immediately appealed to the Tokyo High Court, but the appeal was again rejected. Although SFCG then considered a special appeal to the Supreme Court, it appears that this appeal was not filed.

Based on events at recent meetings of the Financial Service Agency’s Council Concerning the Money Lending Business, there have been many statements from the standpoint of protecting borrowers who take out high-interest loans. For example, the Japan Federation of Bar Associations, in its “Opinion (Requests) Asking for Revisions to Enforcement Regulations for the Money Lending Business Control and Regulation Law,” asks for restrictions on SFCG and other “high-interest lenders.” The federation also wants to include in loan contracts a provision that protects borrowers from “harmful consequences” if they do not pay the portion of interest that exceeds the limit in the Interest Rate Restriction Law. It is easy to envision a legal framework that prevents money lenders from charging more than the limit in the Interest Rate Restriction Law (the so-called gray zone).

Response via legislation

Due to the frequency of losses caused by basic guarantee contracts of small business loan companies, civil laws have been amended for the purpose of protecting both borrowers・guarantors.
# Basic loan guarantee contracts with no credit limit are invalid.
# Guarantors need only guarantee loans that were extended up to the date when principal is due for confirmation. The principal determination date is either five years after the contract date or, if no deadline is specified, three years after the contract date.
# If the primary borrower or guarantor receives a compulsory execution order, initiates bankruptcy proceedings or dies, there is no need to guarantee any subsequent loans.
# Guarantee contracts, including basic guarantee contracts, are not valid unless they are a written document.On January 13, 2006, the Supreme Court ruled that, for contracts that include gray zone interest, borrowers have been effectively forced to pay an interest rate higher than the limit of the Interest Rate Restriction Law if the contract includes a clause concerning default. Consequently, the court ruled that it could not recognize payments as deemed repayments. In response to this ruling, The Financial Services Agency, announced on February 8, 2006 its intention to revise the “Cabinet Office Regulations for the Partial Revision of Enforcement Regulations for the Money Lending Business Control and Regulation Law.

Amendments to the Money Lending Business Control and Regulation Law (which was renamed in Japanese upon enactment of the amendments on December 19 2007) include several articles that apply to a business model like the one SFCG uses. (Example: For official documents, companies engaged in the money-lending business must recommend to borrowers an agent for preparing official documents and perform similar activities (Money Lending Business Control and Regulation Law Article 20 Paragraph 3).

Other events

On November 25, 2005, the Financial Services Agency penalized SFCG by ordering a suspension of business operations. The agency determined that SFCG’s attempted use of forged official documents for extending loans was a serious violation of the Money Lending Business Control and Regulation Law. In response to this action, the Tokyo Financial Services Association temporarily suspended SFCG’s membership on November 29, 2005. At an extraordinary directors meeting of this association on December 12, 2005, the SFCG president and other executives were given an opportunity to explain SFCG’s actions. Nevertheless, the association’s directors decided to punish SFCG with a six-month suspension of its membership (while imposing obligations).

Associated Verdicts

*Case where, due to strict interpretation of deemed repayments (Money Lending Business Control and Regulation Law Article 43), the case was remanded to a lower court based on the position that a deemed repayment cannot be recognized in cases where documents are incomplete.
** [http://courtdomino2.courts.go.jp/schanrei.nsf/VM2/F46BB5D2AD0905B149256EDE0026A893?OPENDOCUMENT Supreme Court 2003（Uke）No. 390 Demand for repayment of improper gain]
** [http://courtdomino2.courts.go.jp/schanrei.nsf/VM2/F46BB5D2AD0905B149256EDE0026A893?OPENDOCUMENT Supreme Court 2003（O）No. 386 Demand for repayment of improper gain]
*Case remanded to lower court because, due to strict interpretation of deemed repayments (Money Lending Business Control and Regulation Law Article 43), the court ruled that a deemed repayment cannot be recognized in cases where, for interest payments above the limit in the Interest Rate Restriction Law, there has been a effective or clear coercion by using terms associated with defaults.
** [http://courtdomino2.courts.go.jp/schanrei.nsf/VM2/11C516A8F4C2B560492570F50026838F?OPENDOCUMENT January 13, 2006 Second Petty Bench Verdict 2004 (Uke) 1518 Monetary Claim Case]
*Case where promissory note lawsuits demanding payment of promissory notes associated with private promissory notes demanded from major borrowers and joint guarantors when SFCG extends a loan was declared illegal as improper use of the promissory note system and promissory note lawsuit system.
** [http://courtdomino2.courts.go.jp/kshanrei.nsf/webview/F3654152124E26B149256DE3001509F7/?openDocument Tokyo District Court 2003 (Tewa) No. 168, 169 and 180 Promissory Note Monetary Claim]

Related Companies

Parent Company

*KE Holdings Co., Ltd. - A related company wholly owned by the founder (including indirect ownership of 9.36%). The founder is the representative director and president of both KE Holdings and SFCG. KE Holdings owns 52.92% of SFCG stock.

Major Subsidiaries

*Japan Asset Finance Co., Ltd. – Intermediary holding company for SME loan business
**Tokyo Asset Finance Co., Ltd. and 45 other companies (one subsidiary each for 46 prefectures) – Took over the business operations of SFCG
*T-ZONE Holdings Inc. – Intermediate holding company for investment business
**T-ZONE Strategy Corporation- Sales of personal computer products
**Former TZCS, Inc.（formerly T-ZONE Capital）- Merged with SFCG on March 26, 2008
*TZCI, Inc.
*Justice Servicer Co., Ltd. – Loan collection business (servicer)

External links (in Japanese)

* [http://www.sfcg.jp/ SFCG Co., Ltd.]
* [http://kokkai.ndl.go.jp/SENTAKU/sangiin/146/0006/14611110006002c.html The 146th session of the Diet - November 11 - House of Councillors Finance Committee - Investigation into finance and credit (The President of Shoko Loan was called before the House in relation to the problems surrounding the company)]
* [http://kokkai.ndl.go.jp/SENTAKU/sangiin/146/0006/14612140006005c.html The 146th session of the Diet - December 14 - House of Councillors Finance Committee - Investigation into finance and credit (The President of Shoko Loan was called before the House in relation to the problems surrounding the company)]
* [http://www.fsa.go.jp/news/newsj/17/kinyu/f-20050729-1.html Financial Services Agency - 6th round-table conference on the credit business system]
* [http://www.fsa.go.jp/singi/singi_kasikin/gijiyousi/f-20050907-kasikin.html Financial Services Agency - 7th round-table conference on the credit business system]
* [http://www.fsa.go.jp/news/newsj/17/kinyu/f-20051208-1.html Financial Services Agency - 8th round-table conference on the credit business system]
* [http://www.fsa.go.jp/news/newsj/17/kinyu/f-20051125-2.html "On the action taken by the government in relation to SFCG Co. Ltd." - November 25, 2005 - Financial Services Agency]
* [http://www.mof-kantou.go.jp/kinyuu/kinyu/3508syobun171125.htm "On the action taken by the government in relation to credit agencies" - November 25, 2005 - Kanto Financial Office]
* [http://www.mof-kantou.go.jp/kinyuu/kinyu/3540oshirase171202.htm "Notice" November 2, 2005 - Kanto Financial Office]
* [http://www.tokinkyo.or.jp/html/topics/index.html#17 "Suspension of membership of SFCG Co. Ltd. (as of December 12, 2005)"　Tokyo Credit Agency Association (tokinkyo)]
* [http://www.fsa.go.jp/singi/singi_kasikin/singi_kasikin.html Home page of the Financial Service Agency's Conferences on the Money Lending System, containing minutes and submitted documents]
* [http://www.tokinkyo.or.jp/html/topics/index.html#17 Tokyo Credit Agency Association ("tokinkyo")]

External links (in English)

* [http://www.sfcg-ir.com/en/index.html SFCG Company website]
* [http://www.yomiuri.co.jp/dy/national/20051220TDY04004.htm Supreme Court ruling blow to moneylenders]
* [http://www.asahi.com/english/Herald-asahi/TKY200511260161.html FSA tells loan giant to suspend operation]
*A brief biography of [http://jane.turtlemeat.com/Kenshin-Oshima.php Kenshin Oshima] , president of SFCG Co.
* [http://www.mizuho-sc.com/english/ebond/institutions/shokolenders.html Shoko (Small Business) Lenders]

Sources

Much of the information in this article was translated from the equivalent article in the Japanese Wikipedia, as retrieved on November 1, 2006.