The Knesset recently approved Amendment No. 5 to the Regulation of Nonbank Loans Law, which is now called the Fair Lending Law. This comes after years of deliberations and in the long wake of recommendations submitted in 2013 to increase competition in the banking system.
The importance of this amendment is two-pronged. On the one hand, the amendment expands the application of the law to also encompass institutional lenders, including banking corporations that, up until now, had been excluded from its application. On the other hand, it also prescribes a maximum interest on loans that is more in tune with the Israeli economy, and it imposes a list of sanctions against both those who violate the disclosure obligations by virtue of the law and those who charge interest rates that exceed the permitted maximum. This is another important component of the efforts to institutionalize the nonbank credit market and to differentiate it from the illegitimate “grey market.”
Being essentially a consumer protection law, the amendment focuses on strengthening measures to protect borrowers. In this context, the amendment authorizes the Minister of Justice to expand the definition of “borrower” from referring solely to individuals to also include corporations. The aim of this is to help small businesses, and it comes from the understanding that not all corporations have bargaining power opposite financial entities.
In addition, the amendment expands the definition of “lender” so that it also encompass anyone engaging in the operation of a credit brokerage system, such as online crowdfunding platforms that broker between people and businesses under a P2P (peer-to-peer) model, as well as institutional lenders. The term “institutional lender” refers to banking corporations, auxiliary banking corporations, clearing houses, insurers, management companies, licensed credit providers, licensees for the provision of deposit and credit services, and licensees for the operation of a credit brokerage system.
In other words, the amendment is leveling the playing field between institutional lenders currently not subject to any interest restrictions and the nonbank lenders.
The law emphasizes that lenders are obligated to draw up a written loan agreement. It also increases lenders’ disclosure obligations toward borrowers, including, inter alia, the interest rate, the rate of all payments to the lender (e.g. commissions), linkage to any index, and more. The amendment also differentiates between commissions or surcharges that are part of the credit cost (subject to the restrictions) and those relating to the provision of the loan that may be charged. However, to make some of these provisions operative, regulations and directives are needed from the supervisor of banks, the capital market supervisor, and the supervisor of regulated financial services.
With regard to the update of the maximum credit cost, the amendment prescribes a maximum “civil interest” – for NIS loan being the Bank of Israel interest rate + 15%. Any entity that provides a loan quoting a maximum credit cost that exceeds this maximum can expect monetary sanctions. These sanctions are liable to reach millions of shekels. The amendment also prescribes the maximum rate of arrears interest.
Furthermore, with the aims of increasing the protection of borrowers and of enhancing the enforcement authorities’ powers, the amendment prescribes that a violation of various provisions of the law, including the provision of a loan without drawing up a written agreement and without complying with the disclosure obligations, constitutes a criminal offense. A threshold criminal interest rate was also defined – the Bank of Israel interest rate + 30%. Any lender found guilty of charging interest at a rate higher than the aforesaid threshold will face up to three years of incarceration.
The law vests the Minister of Finance with the authority to revise the aforesaid interest rates, with the consent of the Bank of Israel commissioner and after having consulted with the Minister of Justice (and with the approval of the Knesset Constitution, Law and Justice Committee). It also grants the Minister of Finance flexibility in updating the interest-rate-setting mechanism from time to time.
The majority of the provisions of this amendment, including those prescribing pecuniary and criminal sanctions, will come into effect 15 months after its promulgation in the official gazette (November 2018). For institutional lenders that are neither banks nor auxiliary banking corporations, the provisions of the amendment will come into effect within 60 days (on October 9, 2017). For P2P operators, the amendment will come into effect as of February 1, 2018, when the licensing obligation imposed by the Supervision of Financial Services (Regulated Financial Services) Law comes into effect.