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An American Wrinkle in Korean Loans : Finance: A judge’s ruling on the legality of <i> kyes </i> threatens to introduce litigation to the private lending groups.

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A recent ruling by a Superior Court judge raising questions about the legality of private loan groups, known as kyes in the Korean-American community, is unlikely to halt the centuries-old lending practice, according to people familiar with the informal financial networks.

But Judge Edward M. Ross’ characterization of one such group as an illegal lottery and an unregistered security, and his ruling that members’ payments are unenforceable by law since they rely on trust rather than written contracts, threatens to introduce into this ancient Korean practice a quintessentially American element--litigation.

“All the kye chiefs I know are involving lawyers now,” said kye member Daniel Oh, vice president of the Korean Restaurant Assn. of Southern California and general manager of a restaurant where many kyes meet. “They’re making contracts and getting members to sign.”

A typical kye (pronounced “kay”), with 10 to 50 members making monthly payments ranging from a few hundred dollars to as much as $20,000, distributes shares monthly according to a sequence assigned to members, or by a bidding process in which those who want the lump sum sooner agree to higher interest payments.

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Some kyes are largely social gatherings in which members pitch in for small personal loans. Others are organized to help members raise money for educational expenses or a business without the paperwork, collateral, credit checks and high rate of rejection involved with banks loans.

For most participants in the lending groups, popular in the Korean-American community as are variations among other ethnic groups, lawyers are an unnecessary complication to a practice that works well among friends. Benjamin B. Hong, president and chief financial officer of Hanmi Bank, one of several banks serving the Korean-American community, called Ross’ ruling “ridiculous and unrealistic.”

There is no difference, Hong said, between kyes and a situation in which “friends put money in, make a pool and give personal loans. I don’t know if the law should be involved in this kind of activity.”

Kyes , the origins of which can be traced back centuries in Korea, are “an extremely useful institution that have done a lot to benefit immigrants and this city’s economy,” said Ivan Light, a UCLA sociology professor who has written extensively on the subject. “They recycle funds into the community that generated them.”

Light’s research on Korean-Americans in the garment industry, in addition to anecdotal evidence from the restaurant and grocery industries, confirms the importance of kyes in supporting entrepreneurship among immigrants.

Moreover, many established business owners, such as Oh, participate in the informal lending circles to help with cash flow, business expenses or to start other businesses.

“It’s the way our community is growing,” Oh said. He estimated that there are about 2,600 kyes of various sizes in the Korean-American community in Los Angeles. Other observers say there are hundreds going on at any one time.

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Light said Ross’ ruling, which becomes a binding legal precedent only if it is appealed and upheld by a higher court, would be unsettling if it has a chilling effect on kyes .

“We’re allegedly rebuilding L.A., but (this ruling) is like kicking the crutches out from underneath a (disabled person),” Light said, referring to the role kyes have played in providing capital for small-business owners.

Kyes work best when the members are friends, former schoolmates or members of the same church, said Eui-Young Yu, a sociology professor at Cal State Los Angeles and a leading authority on the Korean-American community.

A kye “based on long-term friendships and trust” gives each member the confidence that the obligation to continue payments will be honored until everyone receives his or her share, Yu said.

“The code of trust is very strong among Koreans,” he said. “A person would be ostracized by their friends if that trust was violated. Sometimes that can seem more severe than going to jail.”

Despite concerns about some aspects of kyes , including possibly usurious interest rates and the temptation to avoid taxes on income derived from a kye , the police do not investigate the groups unless they receive a complaint.

“When it turns out well, no one says anything,” said Detective William Jang of the Los Angeles Police Department’s Asian Crime Investigation Section.

But with a sour economy and large kyes involving several organizers and less binding relationships, things can go wrong, Jang said.

Although kye members are often reluctant to talk about a breakdown in the system, complaints about members who have absconded with the group’s funds or refused to make payments are on the rise, Jang said, although he declined to discuss figures or details.

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“I hope people will be more cautious,” Jang said, but added that kyes have “been done for many generations based on face and respect. People always kept their word.”

Attorney Angela Oh advises people to avoid kyes if they can because of the potential for financial loss and the slim prospects for legal recourse. While acknowledging the historical and economic significance of kyes for the Korean-American community, she wonders whether the pressures and conflicts might erode the trust and solidarity kyes require.

“It may be that traditional structures don’t always work here,” she said.

But Edward Chang, an assistant professor of ethnic studies at UC Riverside, said that, despite problems, including the impact of last year’s riots on the financial status of many Korean-American business owners, kyes “will remain popular, especially among the newest immigrants,” as an alternative to mainstream financial institutions.

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