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.[i] 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?

There is a crucial halachic distinction between loans to an individual and loans to a corporation: The former usually carry personal liability, while the latter typically do not. Rav Moshe Feinstein (Igros Moshe, Yoreh Deiah 2:62) posits that the Torah definition of a borrower is one who bears personal responsibility for repayment of a debt and its accruing interest. Hence, in the case of a corporate loan, since there is no personal liability for repayment of the loan, there is no actual “borrower” and, therefore, no prohibition of ribbis in regard to such loan.

While some Acharonim disagree with Rav Moshe, many contemporary poskim in America rely upon his opinion even l’chatchilah. Accordingly, where a corporation takes a commercial loan from a Jewish-owned lending institution, the severity of the sh’eilah is reduced significantly. Yet, Rav Moshe’s reasoning only applies to corporate borrowers. Where the borrowing party is personally liable, the prohibition of ribbis does apply — even if the lending party is a corporation.

Does Sale of the Loan Help Matters?

One might argue that the current popular business model of loan reassignment eliminates any ribbis concerns in loans from a Jewish-owned mortgage institution. Although the lender calculates portions of each monthly debt payment as going toward both interest and principal, in practical terms they are all payments of principal until the amount equal to the entire principal has been paid up, and only then do the actual ribbis payments begin.[ii] Consequently, where the Jewish-owned lender sells the debt shortly after the loan is issued, any ribbis payments by the borrower will be made long after the loan has been sold. Given the great difficulty of determining who bought the loan, one may assume that the purchaser is a non-Jew (based on the rule of rov goyim), to whom the borrower is permitted to pay ribbis.

However, there are two basic flaws in this approach: First, according to most poskim, mere stipulation of a ribbis arrangement in a loan is a transgression of the ribbis prohibition, because the pasuk states (Shemos 22:24), “lo sesimun alav neshech,” implying that merely obligating a borrower to pay neshech is forbidden by the Torah, regardless of whether the payment is ultimately made. And while it can be argued that this prohibition applies only to the lender, who is the one “placing” the ribbis, the borrower would still be prohibited from entering such an agreement due to the prohibition of lifnei iver, since he is facilitating the lender’s transgression.

Even more problematic is the ruling of the Tur (Yoreh Deiah 168-169) that it is forbidden for a Jew to lend money with the stipulation that ribbis be paid to a different individual of his choice, even a non-Jew, because it is viewed as if the lender actually received the funds and forwarded them to the specified individual. Therefore, in our scenario, payment of the interest accrued during the period when the loan was under Jewish ownership is a transgression of the ribbis prohibition, even though the payment is being made to the subsequent non-Jewish purchasers of the loan.

Jewish Banks in the Writings of the Acharonim

In truth, the question of ribbis on loans from Jewish banks is hardly a novel one, and is actually a subject of extensive discussion in the works of the Acharonim. While some specifics about banking corporations and their laws may be relatively new, the institution of banking is an ancient one. In the case of the banks discussed by the poskim, individuals would deposit money in a lending institution thatwas then used to provide interest-bearing loans to those in need of funds, while the depositors earned interest on their deposits. The specific policies for loans varied with the bank — some banks lent only to bank depositors, others lent indiscriminately to all — but both non-Jew and Jew alike participated in these institutions. Technically speaking, ownership of these institutions was in the hands of the bank’s depositors.

Rav Shlomo Ganzfried, in Kitzur Shulchan Aruch (65:28), ruled that it is a violation of the ribbis prohibition for Jews to borrow from banks into which Jews have deposited funds. It is likewise prohibited for Jews to deposit in such institutions because of the possibility that this will facilitate lending those monies to Jews in the future. However, Rav Yosef Shaul Natansohn, in his Sh’eilos U’teshuvos Shoel U’meishiv (Mahadura Kamma 3:31) penned a lengthy teshuvah to Rav Ganzfried expressing strong disagreement with his position for several reasons.

First, he asserts that since the bank has money on deposit from non-Jews as well, the rule of retroactive clarification (braira) may be applied to assume that the funds borrowed by Jews were from the non-Jewish portion of bank funds. He adds that even those who generally disallow the use of the rule of braira would accept its applicability here, since the uncertainty only arose after the funds were all mixed together, thus rendering it an issur hanolad b’taaruves, regarding which it is universally agreed that the rule of braira applies.

Second, the Rema (Yoreh Deiah 160:16) cites the opinion of Rashi (Teshuvos Rashi:177) that there is no prohibition of ribbis where the owner of the money is not personally involved in the loan process and no loan contract is drawn up (ribbis al yedei shaliach). Since, in the case of a large banking corporation, its Jewish majority shareholder isn’t involved in the actual loan process, which is transacted by bank employees, and the Jewish owner’s name doesn’t appear in the loan documents, such transaction constitutes ribbis al yedei shaliach. The Shoel U’meishiv concluded his letter to Rav Ganzfreid by stating “therefore, the permissibility [of this practice] is certain, thus absolving the entire Klal Yisrael who engage in this practice. In my opinion, when you reprint your sefer, you should state that you have retracted your opinion.”

But the Kitzur Shulchan Aruch did not retract, and in fact, found support among many Acharonim who disagreed sharply with the Shoel U’meishiv, refuting his basis for leniency in regard to the concept of braira, and arguing that since a loan contract is executed, it does not constitute ribbis al yedei shaliach, despite the fact that the Jewish individual’s name does not appear in it. Additionally, Bris Yitzchok (Yoreh Deiah, Vol. 2, kuntres acharon, siman 32) writes that even the Shoel U’meishiv would agree that braira could only be applied if the Jewish monies constitute a minority of the funds in the bank. Thus, a bank in which the majority of funds on deposit are owned by Jews would be subject to the prohibition of ribbis even according to the Shoel U’meishiv.

What Exactly Is a Bank?

Subsequent discussion in the Acharonim led to several potential new angles on the topic of borrowing from Jewish-owned lenders. Teshuvos Mahari’a HaLevi (Vol. 2, siman 54), when asked about borrowing from banks in possession of Jewish funds, responded that a bank is an entity unto itself, and the funds it holds are considered the property of the bank rather than of the individual depositors. This is demonstrated by the fact that all bank transactions, including loans, require the approval of its CEO and directors, not the depositors, and loans are tendered solely by bank employees. Moreover, the fact that the loan contract is in the bank’s name and the bank retains the sole power to collect on the debt indicates that the depositors are not direct owners of the bank’s assets, but rather shareholders in an independent entity that owns them, although those assets are designated to benefit solely (meshubad to) the shareholders. As such, any ribbis concern is eliminated, because the bank, not the Jewish depositor, is the lender.

Teshuvos Maharam Schick (Yoreh Deiah 158) and Teshuvos Tzafnas Paneiach (Vol. 3, siman 184) take a similar approach. The latter compares a bank’s status to that of a tzedakah fund that possesses money designated for the poor. Just as the charity monies are designated for the poor’s benefit, but they do not actually own the funds, which are the property of the fund, so, too, is the bank, as an abstract independent entity, the sole owner of its assets.

Another View on Corporate Ownership

However, this concept of corporate ownership of assets is a matter of great dispute among the poskim. On the one hand, the Maharam Schick’s disciple, the Maharshag (Vol. 1, siman 3), expresses the position of many other poskim with his view that a bank is simply a large partnership, albeit with complex conditions and rules, and its assets are the property of the individual partners.

On the other hand, in Teshuvos Chelkas Yaakov (Yoreh Deiah 64-65), Rav Yaakov Breisch offers a defense of the concept of independent corporate identity. He cites a mishnah in Nedarim 48a that considers municipally owned assets to be the property of all the city’s inhabitants. Yet were these assets considered owned by a simple partnership comprised of each individual in the city, why is it that when an individual moves out of the city, he need not be bought out, but instead, automatically relinquishes his share of the city’s assets?

Rav Breisch explains that there is a distinction between a partnership among specific individuals, known as a shutfus, and a communal partnership, called a tzibbur. In a tzibbur structure, the communal ownership comprises an abstract entity that owns the assets, which are, in turn, designated for the benefit of the individuals who are that entity’s constituent members. Rav Breisch reasons that banks are akin to a communal entity structure and thus give rise to a form of communal ownership, albeit one restricted to its shareholders.

However, Minchas Yitzchok (Vol. 4, 17:2) and Rav Shlomo Zalman Auerbach in Teshuvos Minchas Shlomo (Vol. 1, siman 28), both derive a strong proof that this concept cannot be applied to bank loans from Teshuvos HaRashba (Teshuvos Hameyuchasos, siman 222). The Rashba states that although money in a tzedakah fund is technically considered ownerless and thus potentially exempt from ribbis prohibitions, that is only the case where the money has not been allotted for distribution in predetermined amounts to specified needy individuals. In the event, however, that it is known how much each individual will receive from the money in the fund, those individuals are considered full-fledged owners of those funds, to which the full prohibition of ribbis will apply. Thus, since a bank’s depositors have a claim to its funds in precise proportion to the funds deposited, they are considered full-fledged owners of those funds, triggering the prohibition of ribbis.

In an effort to understand the position of the aforementioned Acharonim who took the lenient view, perhaps a distinction can be made between a tzedakah fund and a bank. When a tzedakah fund’s money is designated for distribution in predetermined amounts to specified needy individuals, those individuals may have the right to demand receipt of the funds, thus rendering them full-fledged owners of the funds. Conversely, since a bank’s shareholders have no direct control over the assets and the operations of the banks, they lack ownership status.

However, if this distinction is correct, it would seem that in the case of a lending institution with a Jewish majority shareholder, since he has complete control over its assets, all ribbis prohibitions would apply, just as they do for the assets of a tzedakah fund that makes designated allocations for specified individuals. This means that the current widespread problem of observant Jews unwittingly taking mortgages from lenders that are wholly or majority Jewish-owned remains problematic even according to those Acharonim who ruled leniently regarding the banks of their time that held Jewish-owned funds.

Rav Henkin’s Approach

The aforementioned responsum of Maharam Schick mentions two other bases for mitigating the ribbis concern with bank loans. First, he suggests that since the pasuk (Vayikra 25:37) states, “es kaspecha lo sitein lo b’neshech” — your money may not be given with interest, which addresses Jews, this implies an exclusion from the ribbis prohibition of loans made with money owned jointly by a Jew and non-Jew.

Second, he writes that lending institutions serve the important societal function of making funds available to the public for various needs of daily living. In order to perform this function, however, a bank has basic operating expenses like payroll, capital costs, equipment and supplies, and the like. Halachah dictates that it is the borrower who pays the fees for a scribe to write a loan contract, and this does not constitute ribbis, since he is merely defraying the lender’s expense in making the loan. In similar fashion, a lending institution, which, like an individual lender, is entitled to charge fees to cover the costs of making its loans, should be able to characterize the interest it charges as payments to defray the costs of its overall lending operation, while also factoring into each specific loan as well.

The Maharam Schick adds that although banks generally realize a profit on their operations, since those profits are far from guaranteed, and cannot be calculated until after the bank’s books are closed, they are viewed as karov lis’char v’rachok meihefsed, which creates only a Rabbinic prohibition of avak ribbis, thus making it possible for the previous leniencies to be relied upon. He concludes his responsum by stating that everything he has written is intended only as a limud zechus on Klal Yisrael who deposit money in, and borrow funds from, Jewish-owned banks.

The Maharshag takes note of the Maharam Schick’s arguments but offers a refutation of them. Regarding the derashah suggested by the Maharam Schick to exclude money owned jointly by Jew and non-Jew from the prohibition of ribbis, the Maharshag argues that we cannot simply create a derashah not found in the words of Chazal.

As for the contention that interest can be viewed as the bank’s attempt to recoup part of its overall operating expenses, the Maharshag questions the premise of the argument: How can a bank justifiably charge one borrower fees to cover expenses incurred due to loans made to other borrowers? Clearly, then, the fee charged any given borrower is in the nature of interest on his specific loan. He also is dubious regarding Maharam Schick’s presumption that the primary goal of lending institutions is an altruistic one of benefiting society rather than to realize profit.

Rav Yosef Eliyahu Henkin writes, however, in Gevuros Eliyahu (Yoreh Deiah 44), that after considering all of the arguments presented by the aforementioned Acharonim, the most substantial basis for a leniency is in fact the final point presented by the Maharam Schick. He explains that the interest applied to the loan is not a typical interest charge for extended use of funds (agar natar); rather, it is a necessary fee to ensure that the lender’s costs of doing business are covered.

Although with each loan viewed in isolation the interest charged is much more than the actual costs and expenses of that loan (and many banks are in fact profitable), since mortgage banks frequently incur heavy losses due to defaults on loans, that risk is factored in as an expense of their overall business operation. The only way for such an institution to cover that risk is by charging each borrower higher fees than the specific expenses attributable to each individual loan. Were it to only charge a fee determined by the costs of each individual loan, the bank could not survive, due to the inevitability of major losses on other loans. Since each individual loan depends on the existence of a viable lending institution, the overall financial viability of the institution as a whole can be factored in as a necessary component of the individual loans it makes. The interest charged is thus not ribbis, but, in effect, a fee to cover the costs of operating the company, akin to a scribal fee for drawing up a promissory note.

Rav Henkin adds that even if there are eventual profits resulting from the loan, since they can only be realized after a long period of time, and given the risk factor involved in the overall lending operation, this is a situation of “karov lis’char ul’hefsed.” Rav Henkin concludes that this rationale can be relied upon l’halachah.

It should be noted that Rav Henkin takes the Maharam Schick’s logic further than the latter himself does. While the Maharam Schick only used this line of reasoning to reduce to severity of the ribbis issue regarding bank loans from a Torah prohibition to one that is Rabbinic in nature, it is clear from Rav Henkin’s words that this rationale eliminates the entire concern of ribbis involving bank loans. Rav Henkin omits all discussion of the Maharam Schick’s understanding of banks as providers of societal benefit rather than capitalistic generators of profit, which he apparently found to be irrelevant.

Seemingly, Rav Henkin’s approach should apply in the contemporary context to permit Torah-observant Jews to take loans even from a Jewish-owned loan institution. Yet Rav Henkin himself writes elsewhere (Yoreh Deiah 47) that his approach to the topic is only a limud zechus for those who are lenient, and that a strong basis for a heter is still lacking. Additionally, in subsequent teshuvos (Simanim 45-47), Rav Henkin alludes to the fact that his basis for leniency is also based upon the other aforementioned approaches of the Acharonim. This raises the question of whether Rav Henkin would rule leniently in our scenario where the other approaches of the Acharonim seemingly do not apply.

What Can a Borrower Do Post Facto?

It would seem clear from the preceding discussion that l’chatchilah one should not take a loan without a heter iska from a mortgage lender whose primary owner is Jewish. But what does one do upon discovering this fact after having already procured a mortgage?

At first glance, it would appear that this question depends on when the individual makes this discovery. As noted earlier, the prevailing industry practice is for lenders to reassign (sell) their loans to investors within days or weeks of the loan closing. Since the loan only accrues interest for the Jewish lender for a short period of time, if the borrower finds out the identity of his lender after having already made a few payments, the forbidden interest has already been paid, albeit unwittingly, and he may proceed with payment of his mortgage, the interest on which will now be paid permissibly to non-Jews. Only if the borrower finds out about this issue immediately does he have a post-facto dilemma regarding how to proceed.

Yet it may be argued that even if a few payments have already been made, with the bank statements reflecting payment in the amount of the forbidden interest accrued while the loan was owned by the Jewish lender, nevertheless, halachah may consider it as if no interest has yet been paid. The reason is that although banks attribute portions of each monthly payment toward both interest and principal, practically speaking, all payments are considered principal payments until an amount equal to the entire principal has been paid. Only after the principal has been paid in full do actual ribbis payments commence.[iii]

As a result, even if the borrower has already made a few payments, he hasn’t yet actually paid any ribbis at all, nor will he yet do so for a long time. Getting out of the loan by refinancing with a different lender upon discovery of the original lender’s Jewish identity would not be a viable solution to avoid the ribbis prohibition, since at the time of the refinancing he will ostensibly be paying the ribbis of the original loan, thus transgressing the prohibition of ribbis at that time. Consequently, most borrowers who learn the Jewish identity of their lender will indeed need to grapple with the issue of forbidden payment of ribbis that accrued while the loan still belonged to the Jewish lender.

Is there any basis for allowing payment of the ribbis post-facto (bedieved)? Contemporary works on hilchos ribbis discuss various possible, albeit highly novel, methods for making such payments. Among these are:

1. If the borrower fails to make payment of the forbidden interest, various dire consequences will ensue, including long-term damage to his credit rating and the possibility of foreclosure of the mortgaged property. Perhaps payment of interest under duress for the expressed purpose of averting these consequences can be viewed as a ransom, extorted to prevent financial harm, rather than as a ribbis
2. Perhaps the borrower is permitted to set up an automatic payment system whereby the bank automatically charges his account, thus rendering the funds withdrawn as stolen from his account, not a forbidden ribbis
3. In a variation of b), perhaps the borrower would be permitted to remit a check for the interest payment to the bank, accompanied by a note stating that he does not grant permission to cash the check due to the Torah’s prohibition of ribbis. Thus, should the bank cash the check, it would be viewed as a theft of the funds by the bank rather than a payment of ribbis by the borrower.
4. Perhaps the debtor is permitted to inform a good friend of his predicament in the hope that the friend will pay the lender an amount equal to the forbidden sum of interest in order to absolve him of being charged the forbidden interest by the lender.

Each of these approaches raises serious and difficult questions which require in-depth halachic analysis, and will ultimately need the approval of gedolei haposkim in order to be implemented in practice. For now, however, with major Jewish-owned mortgage corporations continuing to lend money to countless Torah-observant borrowers without the benefit of a heter iska, the byword for the Torah observant public must be the age-old one of caveat emptor — let the buyer beware. Until greater halachic clarity is brought to this area, any prospective borrower applying for a mortgage should definitely research the lender’s ownership to ascertain that there is no ribbis concern.

Rabbi Daniel Osher Kleinman is the rav of K’hal Nachlas Dovid in Brooklyn, and the author of the nine-volume Kovetz Halachos: Piskei HaRav Shmuel Kamenetsky. He also published Sh’eilos U’teshuvos Gevuros Eliyahu, the teshuvos of Rav Yosef Eliyahu Henkin, among other seforim

[i] The actual technical wording and arrangement of such an iska is obviously more complex and detailed than the specifics provided and is beyond the scope of this article; the primary objective here is to provide the general, overall concept of the options available.

[ii] See Igros Moshe (Yoreh Deiah 2, siman 65) and Gevuros Eliyahu (Yoreh Deiah siman 44 end of s.k. 5).

[iii] Based on the aforementioned Igros Moshe (Yoreh Deiah 2 siman 65) and Gevuros Eliyahu (Yoreh Deiah siman 44 end of s.k. 5).

[1] The importance of the parties to a heter iska having a full understanding of the iska concept cannot be overstated — if they do not, there is serious doubt as to the iska’s validity. See Chochmas Adam (143 se’if 3) and Chofetz Chaim in Ahavas Chesed (Inyanei Gemilas Chesed, perek 15).

[2] This method is mentioned by Rav Yosef Eliyahu Henkin (Gevuros Eliyahu Yoreh Deiah 51-53) and Rav Moshe Feinstein (Igros Moshe Yoreh Deiah 2:62).

[3] See Shoel U’meishiv (Mahadura 1, vol. 3, siman 160 and Mahadura 3, vol. 1, siman 137) who rules leniently in the case of a teacher who needed funds for a child’s wedding and had no assets to apply as the iska, based upon a novel approach to the profit aspect of heter iska. However many poskim are dubious of this, see Har HaKarmel (C.M. siman 25), Erech Shai (Yoreh Deiah 177:7), Maharshag (Yoreh Deiah 4), Harei Besamim (Mahadura 2, siman 143), Chut Shani (Hilchos Ribbis, perek 18 se’if 3). See also Imrei Yosher (vol. 1 siman 108) and Maharsham (vol. 2 siman 216).

[4] Based on the concepts discussed, it is obvious that the interest rate of an iska must be a realistic percentage in sync with a typical investment return. An iska that stipulates high interest percentages unrealistic for any true investment opportunity is clearly invalid, as this demonstrates that the iska is not genuine, rather a facade for a loan with interest payments. “Hard Money Loans” are a good illustration: Since they have high percentages of interest (~16%), they are clearly not a realistic investment and are classified as a loan even if a heter iska was employed. Many poskim have already warned that Hard Money Loans are a transgression of ribbis.

[5] The actual technical wording and arrangement of such an iska is obviously more complex and detailed than the specifics provided and is beyond the scope of this article; the primary objective here is to provide the general, overall concept of the options available.

[6] See Igros Moshe (Yoreh Deiah 2, siman 65) and Gevuros Eliyahu (Yoreh Deiah siman 44 end of s.k. 5).

[7] Based on the aforementioned Igros Moshe (Yoreh Deiah 2 siman 65) and Gevuros Eliyahu (Yoreh Deiah siman 44 end of s.k. 5).

(Originally featured in Kolmus, Issue 37)