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The Jewish Ethicist  - Predatory Lending

The Jewish Ethicist - Predatory Lending

Mortgage lenders are entitled to protection from sudden foreclosure.


Q: I've heard the great sub-prime crisis was caused by predatory lending practices. Is it wrong for banks to lend to high credit-risk homebuyers?

A: The so-called "subprime crisis" resulted when many mortgage defaults occurred within a short time. The borrowers on these mortgages were individuals with bad credit risks. Historically such individuals could not easily obtain mortgages, but a combination of new financial instruments (mortgage securities) and a rising housing market gave banks the confidence to lend to such people.

I certainly don't think it was unethical of the banks to extend credit to these individuals. One of the main criticisms of banks in the past has been that they deny credit to people who really need it. The saying was that the only people who can get loans are the people who don't need them. In Jewish tradition it is a special mitzvah to lend to needy individuals (without interest). In fact the verse which commands us to provide for the needy individual "enough for whatever he lacks" (Deuteronomy 15:8) specifically refers to lending money, not giving charity.

Some accusations have been made that the banks gave credit on terms that were likely to lead to default and repossession. I can't comment on these accusations, and I have seen no convincing evidence so far. But it is worthwhile to see how Jewish tradition deals with the ethical dilemma involved in the decision to extend credit when there is a good chance that it will result in repossession.

The mishna states:

One who lent money against [the collateral of] his field, and said to him: "If you don't pay me within three years, it becomes mine", it becomes his. (1)

The commentators understand that this refers even to the case where the field is worth less than the loan. In this case, the lender has an interest in default, enabling him to take possession of the valuable field. Perhaps he would like to tempt the borrower into taking the loan! Yet from the mishna it seems that there is no problem lending money when foreclosure (seizure) is an evident consideration in the eye of the lender, and not merely a last resort in case of default.

However, the subsequent discussion in the Talmud concludes that at least in the case where the field is worth more than the loan, such an agreement is an "asmachta". Asmachta is a legal expression meaning that a person doesn't have true "informed consent" to an agreement, because he doesn't properly understand the risks involved. For example, a hustler's gambling winnings may be considered asmachta. (2)

So such a deal is void, unless it is originally drawn up in a way which draws attention to the risks involved.

Another type of protection provided by Jewish law is the right of redemption. Even after the property has been repossessed, the borrower has the right to buy it back if he obtains the money. (Such a right exists in many jurisdictions today as well.) The Talmud teaches:

The scholars of [the city of] Nahardaa said: An assessment can be reversed up to twelve months. But Ameimar said, I am from Nahardaa and I say an assessment can be reversed indefinitely. And the law is, an assessment is reversible indefinitely because of "Do the right and good" (Deuteronomy 6:18).

The power of redemption is originally conceived not as a right of the borrower, but rather as an ethical obligation of the repossessor. One result in defining the law this way is that there are certain equitable exceptions to the law. After all, it doesn't make sense to compel the "right and the good" of the borrower at the expense of the right and the good of the lender.

To sum up: I have seen no evidence that sub-prime lenders were in any way scheming to foreclose. However, the whole crisis has brought public attention to the foreclosure process and possible inequities in it. Jewish law includes a number of safeguards against predatory lending practices, including a demand for truly informed consent to lopsided foreclosure conditions, and a right of redemption for someone who has lost his house.

SOURCES: (1) Babylonian Talmud Bava Metzia 65b (2) Babylonian Talmud Sanhedrin 24b (3) Babylonian Talmud Bava Metzia 35a



The Jewish Ethicist presents some general principles of Jewish law. For specific questions and direct application, please consult a qualified Rabbi.



January 5, 2008

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Visitor Comments: 5

(5) J. Abeles, January 14, 2008 8:42 AM

Dr. Meir's column on predatory is a "straw man" argument, i.e., it does not adequately address the real issues. It is really important to understand whether Halacha provides an approach that deals with these issues.

Especially since the beginning of the industrial age, innovative financiers have developed new methods in each successive generations to "separate a fool from his money." In the age of railroad barons, the method was cornering markets. In the 1920s, prior to the Great Depression, the method exploitation of banks. In the 1960s, the method was mergers and acquisitions. As each method became known, it was eliminated either by regulation or by market forces.

The subprime method is a manifestation of the precipitous market peak of 2001, which led the markets to careen (led by the Federal Reserve) to lower interest rates to avoid depression, but its origins are deeper. Beginning in the 1960s, the credit industry spearheaded by Citibank (led by Walter Wriston) innovated a method of extending credit to the less credit-worthy strata of consumers thereby to expand the business dramatically. As only one consequence, these cards enable families to be torn apart by spending enabled by these cards, e.g., when a young adult or spouse spends funds the family cannot truly afford in conflict with other family members. But this is not out topic.

To wit, Dr. Meir does not address the halacha of predatory lending practiced by Countrywide and other mortgage brokers. The issue has not been to place a homeowner-consumer in a collision course with mortgage default. Rather, the issue is that these loans were sold on the basis not of their competitiveness and enduring affordability but on the basis of the *monthly payments*. Homeowners lacked analytical or mathematical skills and proper advice, to understand how much money mortgage companies extracted in financing, or refinancing, contracts.

But significant equity can, and was, extracted from these real assets by these contracts. It is the loss of this equity that prevents new affordable financing arrangements from being put in place subsequently. I.e., the homeowner can not reverse the deal by refinancing because of the quantity of funds removed.

What does halacha have to say about that?

(4) Pinny M., January 10, 2008 5:29 PM

Fruits of Their Labor

Interesting article.

However the premise of the question is seriously flawed, and is based on a liberal "es kumt mir" attitude that pervades society.

When banks were offering 0.99% financing, or other lures to get people to take loans with them, it was obvious to even the most blockheaded dumkopf that these were just "teaser rates" and that it was inevitable that rates would go up after 3 months, 6 months or whatever. The fact that these buyers rationalized with themselves that the floating rate which will ensue would not be so bad, or that they would get a raise, or their spouse will start working etc, is irrelevant. Only an fool would take a loan like that– unless they had a sure fire exit strategy.

Instead of locking into a 30 year fixed mortgage at a decent rate (rates have been at historic lows throughout 2000-2007), they opted for the super duper high leverage loans. And now they are suffering the results of their foolishness and crying foul.

Anyway, that's my rant on the current "subprime crisis".

I would propose a follow up article addressing the following: In light of the subprime market debacle, and the Federal Government strong-arming lenders into freezing rates, thereby affecting the income of the people who purchased the mortgage backed securities (MBS) - is this sanctioned by halachah? Does the Government have the right to change the terms of a contract (shtar) post facto?

(3) fred, January 8, 2008 1:55 PM

Who is Ultimately Lending?

When institutions lend to those who are unlikely to be able to pay, they recoup their losses either from government bailouts ostensibly to help the borrowers, and/or through higher interest rates to those who will commit to keep up their payments. I am certainly willing to recognize my obligation to lend to the needy, but I think it should be on my own terms, with the timing and amounts determined by my ability to give and not by some institution's gamble.

(2) Neil Clifton, January 8, 2008 12:37 PM

You read and signed the papers

With all due respect the mortgage company did not over mortgage your house-you did. It's not the mortgage companies house-it's your house. When it came time to refinance "your" house the value went down? Why is that someone else's problem? You took a chance on an investment in this case "your" house. If a stock goes down and you can not sell it, is that the stock brokers fault? You need to take responsibility for what happened. You took a risk and lost. I did not hear a single complaint about 20-30% appreciation when that was happening. Having said all that, I'm sure some consumers were lied to but you were the one reading and signing the papers. Is it within the realm of possibility you took that adjustable rate mortgage because it had lower payments and you could have a larger home or another luxury item? The government getting involved with this in any other way than asking lenders to help consumers when they can is a mistake. The market and market forces should be allowed to work as they always have. Government involvement will only delay the problem and make it worse.

(1) Anonymous, January 7, 2008 3:58 PM

Not all the time is this true

We borrowed not by a bank, unfortunately, for us, but from a mortgage company, who over mortgage our house in a Arm mortgage, with the stipulation, we will be able to refinance in 6-9 months. When it came to refinance the mortgage, we were told, they cannot do it, because the value of the house went down. Now are mortgage will be going up each 6 month, and the end will be, we will be losing our house, because we won't be able to pay our mortgage. It is not the bank I blame for this disaster but the private lending company that jumped on the band wagon to make a quick buck. You signed up with them, closed with them, then they sold you to the highest bidder. I tried desparately to renegotiate with this company, but they told me, sorry, no can do. The most they can do for us, after sending a letter of hardship, to lower the mortgage bill $3.25 per month, which is a total joke. The government woke up a little to late to fix this program. Foreclosure seems to be sign of the times for middle class Americans, which unfortunately were one of them. We could have been able to apply for a regular mortgage, because we had the finances for it, but we were told to go with an ARM mortgage, because this is were the most money was to be had. Little did we know, where it is going to lead us into what situation. We are not the only ones that were swindled like that.
victim of the sub-prime crisis.

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