Shabbat Parashat Beha'alotcha 5782

P'ninat Mishpat: Limits of Interest Rate for Loan with Heter Iska – part I

Case: The plaintiff (=pl) is a lender who lent 500,000 NIS to a contractor (=def) to carry out a Tama 38 project (a special plan to strengthen and improve a building in return for the right to add stories to it). They used the heter iska used by Bank Mizrachi, and the rate of interest was 18% annually plus punitive interest of $200 a day for late payment. Def gave three checks and three promissory deeds, and put certain properties in a lien to pl. Def paid 527,000 NIS but late, so that some interest was outstanding. Pl made a claim of 390,360 NIS with Hotza’ah Lapo’al, which def opposed, and the courts transferred the case to beit din. Pl claims that since def owed 135,000 NIS and it has been over three years, def owes 61% interest plus around a quarter million dollars for the punitive interest. Def claims that since he already paid more than the principal he took, he cannot be subject to punitive interest, and that it is enough to pay 18,000 NIS for outstanding interest.

Ruling: We will start with a look at the halachic workings of a heter iska. The ostensible lender (the noten) gives money to the ostensible borrower (the mitasek) in a manner that half of the money is a loan and half is given for the mitasek to invest on behalf of the noten and thereby make profits for the noten, to justify his receiving what would have been interest. Thus, the envisioned interest rate comes from only half of the money. If the mitasek claims that the investment actually lost money, he must provide witnesses, and if he claims lower than expected profit, he must swear that this is the case. If he fails to do either, he must pay the d’mei hitpashrut, i.e., the expected interest.

In this case, it is doubtful that the heter iska can justify the rates put forward in this document. First, due to the high rate of interest, it is doubtful that the agreement was made with serious intent to be based on the mechanism of a heter iska (Chut Hashani, Ribbit 18:2). Second, for a heter iska to work, there must be a possibility that the investment half of the money can realize the level of profit of the d’mei hitpashrut (Minchat Shlomo I:27; Igrot Moshe, Yoreh Deah III:41). In previous rulings in our beit din network, we cited the minhag of several batei din to disallow d’mei hitpashrut of more than 15% annually. According to Israeli law, as well, it is forbidden for an individual to lend money at 15% higher than the level of interest of the Bank of Israel, and the courts can adjust the rate downward. We have ruled that we accept this law according to Halacha. Finally, there is logic to claim that since the loan document states that the loan was taken to finance a Tama 38 project, if that project was known to not have borne profits, then it is possible that the interest is not due (interest might be possible because of a clause that the mitasek can use the funds for any profitable investment he chooses).

In this case, the 18% annual interest was valid based on the law and Halacha, but with the additional punitive interest, it becomes forbidden according to the law and Halacha.

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