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Jewish-Owned Banks and the Frum Borrower: An Ongoing Halachic Crisis

Rabbi Daniel Osher Kleinman

Borrowing money with ribbis is prohibited by the Torah. Outside of Eretz Yisrael, though, many reason that such a situation hardly ever arises. Not so

Wednesday, September 28, 2016

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R

ecently, mortgage companies in the UShave greatly simplified their once-complicated procedures, making loan funds more readily accessible to borrowers. For Torah-observant Jews, however, there remains one aspect of the mortgage industry that is far too often overlooked, namely, the prohibition of ribbis.

While many large banks and other lenders are owned primarily by non-Jews, who are not subject to the prohibition of ribbis, some of the foremost mortgage companies in theUS, lending billions of dollars each year, are indeed Jewish-owned. Many times, however, borrowers fail to realize this fact because the owner of the lending institution is not Torah-observant and thus, to all outward appearances, is indistinguishable from a non-Jew.

In fact, one of the most popular mortgage programs in Americais run by a well-known multibillion-dollar corporation whose majority shareholder is Jewish. The result is that thousands of scrupulously Torah-observant Jews — residing in places like Brooklyn, Lakewood, Monsey, and beyond — have been unwittingly borrowing money with ribbis.

The Solution of Heter Iska

An easy solution to this issue would be to arrange for the availability of a heter iska for prospective Jewish borrowers, which would obviate all ribbis concerns. The basic premise of heter iska can be summarized as follows: While viewed by many as more heter and less iska, in fact, the opposite is true. A proper heter iska is a legally binding contract that transforms the loan into a genuine investment with a specific forecast for returns earned from the funds invested. The “lender” is in actuality an investing partner, investing his money with the “borrower,” who is, in essence, the managing partner in the investment toward which the loan principal will be applied. While the specifics of the actual partnership of the iska can be structured in a few different ways, an iska is a real investment partnership, not a loan, and the managing partner must apply the principal toward an investment for which there is a realistic expectation that it will produce the specified return.

In the event that the funds are being put by the borrower/managing partner toward personal expenses, the Acharonim rule that the managing partner must have some source of business that is at least equal to the amount of the loan principal and that can potentially earn the dividends specified in the iska contract. In this scenario, the investing partner must make a kinyan, at the time of the transfer of the loan funds, to acquire a portion of the managing partner’s business assets equal to the value of the loan, which allows the loan funds to be put to personal use by the managing partner

To illustrate: Yosef runs a supermarket, and is in need of cash for his son’s wedding. He approaches Zevulun and requests a loan, offering an iska arrangement. In this scenario, Zevulun makes a kinyan at the time of the transfer of funds, thereby acquiring ownership of that share of the supermarket’s inventory equal in value to the funds provided by Zevulun. Yosef and Zevulun are henceforth iska partners in the supermarket. Yosef must make periodic payments to Zevulun to “buy out” the inventory now owned by Zevulun, while paying dividends on the investment as well. Such an arrangement limits the iska to the supermarket and makes the borrowed funds available for Yosef’s personal use.

The same will hold true where the mortgage loan proceeds are being applied to the purchase of real property, or if the managing partner does not have any business or other investment assets but does own a home. The managing partner’s real property becomes the subject of the iska, a typical real estate investment for the investing partner. An iska against a home can be structured as a “rent-buy” agreement as well, in which case the investing partner receives an ownership share in the home equal to the value of the funds provided. Subsequent principal payments by the managing partner will be for the purpose of buying out that share in the home and “interest” payments are essentially rental fees for his use of the investing partner’s share of the home.

Absent the aforementioned arrangements, if one borrows money for personal use with no available venue to invest the funds or their equivalent, the iska is invalid and the funds are treated by halachah as a loan, thereby rendering all subsequent interest payments as ribbis. The reason is that when the iska is not a serious investment agreement between the parties, but instead an attempt to obfuscate the true nature of a loan by calling it an iska, halachah defines it as the loan it in fact is.

Protecting Users of a Heter Iska

Usually, an investment has obvious practical downsides, chief among them the fact that unlike a typical loan, which is personally guaranteed by the borrower, an investor receives no guarantee against the loss of his principal. Accordingly, when a heter iska is employed, the managing partner may not give the investing partner a guarantee that he will be repaid, which would demonstrate that it is in reality a loan rather than an investment.

Thus, in a typical iska arrangement, the investing partner cannot recoup his principal if lost. Moreover, in the event the investment generates no profits, the investing partner receives no return on his investment.

Since most investing partners would be reluctant to use an iska arrangement involving such risks, the standard heter iska form protects the investing partner by incorporating a condition stating that any loss of principal must be verified by two valid, trustworthy witnesses. If the managing partner does not produce such witnesses, the investing partner is entitled to assume that no loss has occurred, and his principal must be returned to him.

In addition, the iska form sets forth a projected profit, with a condition that should the managing partner claim that such profit was not realized, he must verify the claim with a solemn oath in the presence of beis din. Due to the seriousness with which observant Jews treat such oaths, such stipulation gives the investing partner relative assurance of receiving the projected profits. The iska form also states that the terms of all other legal contracts pertaining to these funds are subordinate to the iska.

 

Although major corporations may be wary of lending money under a typical heter iska arrangement due to the potential risks involved, however minimal and remote, there are several halachically valid methods for greatly reducing and potentially even eliminating corporate risk under a heter iska. For example, major mortgage institutions typically reassign their loans to investors within a few days or weeks following the closing. In this case, the iska can be structured to expire once the loan is sold. This would significantly reduce the lender’s potential exposure, since it allows for only a very short window of time in which a verifiable drop in the iska’s value could occur.

In addition, the lender can include a stipulation requiring immediate repayment of the entire outstanding balance in the event that a loss is incurred. This would practically eliminate all corporate risk due to the iska.

Borrowing from Jewish-Owned Lenders Without a Heter Iska

The fact remains, however, that some prominent Jewish-owned mortgage institutions remain hesitant to implement an iska agreement, raising a series of questions: Is it in fact prohibited for an observant Jew to take a mortgage loan from such lenders? If so, what does a borrower do upon discovering that his mortgage was issued or subsequently purchased by such a lender? Since the prohibition of ribbis applies to both lenders and borrowers, is he required to refrain from paying interest, even if that results in a default on his loan and foreclosure on his assets?

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