Legalising Loans

Question

  1. Sean lent Ira $20,000 when Sean’s business was booming
    and Ira was just starting out. Since neither of them were then religious,
    Ira thought Sean was doing him a great favor by charging him only 4%
    interest,
    instead of the bank’s 9%. Now that both of them have become religious,
    they are aware that it is forbidden for a Jew to charge or pay interest to
    a fellow-Jew. How can the loan continue with Ira (now Yitzchok) continuing
    with his payments and Sean (now Shlomo) not losing out? 
  2. Shaya took out a mortgage in order to buy an apartment. He
    meticulously made his monthly payments to the State Bank of Outer Mongolia
    on time. One day, he receives a letter informing him that the bank’s
    domestic mortgage department has been sold to Bank Cohen-Levy. Shaya knows
    that the owners of this bank are Jews and therefore no further interest
    payments may be made. To stop making payments would be to risk the bank
    foreclosing on his apartment. Is there any way he can continue with
    payments without violating the prohibition of ribbis?

Answer

Whenever Jews find out that they have unwittingly
borrowed or lent with forbidden interest, the preferred option is to
immediately terminate the loan. The borrower should repay all the
outstanding capital and the lender should return any interest he received
(but see Yoreh De’ah 161:4 and Shach ad loco). The
borrower can then take out a new loan, paying the lender more than he
received, on the basis of a heter iska document. The borrower does
not have to repay the original loan in cash. He can also use other items
of property, such as his gold watch or his computer, to make all or part
of the repayment. These can subsequently form part of the new loan he
takes out. According to Rav Blau (Bris Yehudah 40:23), he need not
hand the items being used for repayment to the lender. It is sufficient
for him to legally transfer the items to the lender by means of a kinyan
sudar (whereby transfer of a handkerchief or other item from buyer
to seller effects acquisition of other items, wherever they may be
located). Thus, goods belonging to the borrower which are in a different
town can be used to repay the original loan.

This would seem to be the appropriate solution in
case (a), where Shlomo (Sean) and Yitzchok (Ira) are on good terms.
However, when it comes to the Jewish mortgage bank, this may not be
practical. If Shaya thinks he may be able to persuade the owners of the
bank to agree to a heter iska, then a suitable declaration will allow him
to continue making payments as before. He should declare in front of Beis
Din
(Rav Moshe Feinstein [Igros Moshe, Yoreh De’ah
2:65] is of the opinion that no Beis Din is required) that all
payments he will make from now on will consist exclusively of capital
repayment and not interest, regardless of what the bank says. He will then
have to persuade the bank to enter into a heter iska agreement
before continuing with the “interest” part of the monthly payments.

However, if the Jewish bank
owners refuse to enter into such an agreement, Shaya will be left with a
difficult problem. It is strictly forbidden for him to make interest
payments to another Jew. Rav Moshe Sternbuch (T’shuvos VeHanhogos
2:418) offers a solution. If the borrower declares that he is not making
interest payments to the lender, but just making payments in addition to
capital repayment under duress, in order to avoid trouble with the civil
legal authorities, he may continue with the payments as usual. The
interest part of the payment is viewed by Jewish law as theft, the lender
having no right to receive such forbidden payment made under duress. There
are other solutions – see Bris Yehudah (Chapter 6, Note 48).