All lenders are equal before the law

All lenders are equal before the law

Written by

Tal Schiller
December 19, 2017

A person seeks a loan. Were collaterals available (for example, an apartment) one can receive a loan at low interest rates. Without collaterals acceptable on the bank or bargaining power, the bank will most likely refuse the loan or demand compliance with harsh conditions. When such person approaches a non-banking entity (which is subject to the provisions of the Law for Regulation of Non-Banking Loans, setting a relatively low interest cap to prevent usury and ostensibly create justice. The Non-Banking entity also refuses to provide credit (if the person had proper collaterals, the bank would have provided the credit) or, alternatively, charges high and illegal interest but names it with a nice and “legal” name, such as a file opening fee, check discounting fee, etc. In other words, legislation intended to do justice with borrowers in fact harms them. On July 26, 2017, the Israeli parliament passed a law, to be named “Fair Credit Law” to amend this decades old Israeli legislative distortion which imposed draconian restrictions on non-banking lenders in a manner which caused dependence of borrowers on the banking system.
The amendment to the law now applies the same obligations and restrictions on any lender, including an institutional lender (a banking corporation, an auxiliary banking corporation, a clearinghouse etc.). Such include both disclosure obligations and limits on interest rates, as well as other restrictions. Financial sanctions and even criminal liability may be imposed in the form of imprisonment for up to three years in case of exceeding the maximum interest rate. However, the Law after its amendment continues to apply only to borrowers who are individuals, but not on corporate borrowers.
The maximum interest rate has been updated and is now the Bank of Israel prime rate + 20%, to include all commissions that a lender may demand (other than exceptions such as arrears interest and reasonable debt collection expenses). In addition to the criminal liability upon grant of a loan exceeding the prescribed maximum interest the law sets that a grant of exceeding interest will constitute a source offense for the purposes of the Prohibition on Money Laundering Law. The law sets that the whole interest rate issue will be recontemplated November, 2021. The new interest limits apply as of October 2017, other than in the case of banking corporations to receive an adjustment period, so that some of the provisions will apply gradually as of November 2018.
The implications of this legal amendment will be unveiled only in the future but until then, it is certainly important that any loan transaction will be examined by lawyers specializing in the field, including as to the legality of the loan agreement under such legal amendments.