THE JERUSALEM INSTITUTE OF JEWISH LAW
Rabbi Emanuel Quint, Dean 

Lesson # 59 (part one) - Collateralized Loans

It was stated in Lesson 45 “It should be remembered that it is a Torah commandment and the responsibility of every Jew to lend money to those who are in need, even if the needy person is wealthy. In the phrase “If you lend money to any of My people” (Exodus 22:24), the word “if” is not fully permissive. It permits the lender the right to refuse only if he is not in a position to lend. If he can lend, however, he must surely do so. Rambam enumerates this as positive commandment 197, one of the 613 mitzvot.”

The lender is permitted to secure himself. He may attempt to do so by seeking a guarantor, or a mortgage on the property of the borrower, or collateral for the loan. This lesson discusses some of the questions regarding the collateral held by the creditor. What can he do with the collateral? 

The lender may ask that collateral be posted by the borrower before the loan is made and that the collateral stand as security from which the lender may exact payment if the loan is not repaid according to its terms. The lender may assume that the collateral deposited with him by the borrower may legally be deposited by the borrower. A husband may give his wife’s clothing or jewelry as collateral without her permission, unless he made them for her. Except for the last mentioned case, the husband does not require his wife’s permission. In all events, the lender is not required to ask the husband whether he has his wife’s permission; he may assume that the husband has permission. If the wife uses self-help and seizes from the lender the clothing or jewelry that the husband gave as collateral without her permission, she may take an oath that her husband did not receive her permission. If she does so, the collateral will remain with her in those cases where her permission is required. 

If the parties agree that the lender may use the collateral in consideration for reducing the indebtedness by a stipulated sum their agreement is binding. If the indebtedness is not reduced, the arrangement is not legal even if the borrower agrees that the lender may use the collateral, since the collateral will be in the nature of interest and the borrower may not waive the prohibition against taking or giving interest. This prohibition would apply even if the collateral is a Torah book and the lender can claim that he is performing a good deed with the collateral by studying Torah. There is an opinion that even if there is an agreement between the lender and the borrower regarding the lender’s use of the collateral, he nevertheless should not use it, since people will not realize that the loan will be reduced by the value of the use of the collateral. 

Unless so agreed upon between the parties, and except as later stated, the lender may not make use of the collateral. If the lender did use the collateral, then it is as if has transgressed the Torah command not to take interest. To use the collateral would in essence give the lender more than he loaned and would be akin to interest on the loan. However, the use does not amount to actual interest because it was not agreed upon when the loan was made that the lender would be permitted to use the collateral and the loan would not be reduced by the value of the use of the collateral. Had such an agreement been made, it would be actual interest. Furthermore, the lender has illegally used someone else’s property and it is akin to robbery and the lender is now liable if anything happens to the collateral even if destroyed by force majeure. Even absent an agreement, if the collateral is of a type that is usually leased to others, then the lender may use the collateral and give the rental value to the borrower, or the lender may lease the collateral to others without obtaining the permission of the borrower and reduce the debt by the amount of the rental income. If the value of the collateral will depreciate greatly, then it may not be leased by the lender to others even if the proceeds of the lease will be applied to reduce the loan.

The borrower cannot require the lender to accept the collateral in payment of the loan. The borrower borrowed money, and the collateral is only security for the lender. In the event that the borrower does not have money or assets with which to repay the loan, then the lender will collect out of the collateral. In case of default in repayment of the loan, the collateral belongs to the lender. While the lender holds the collateral he is deemed for the sake of care required to be taken of the collateral to be similar to a paid bailee of an object. A paid bailee is a person who gets paid for guarding an object. For example, a lady places her fur coat into a storage for the summer. The storage company receives compensation and the lady gets the benefit of her coat being guarded. Here too the lender has the collateral for his protection and the borrower has the benefit of the loan. When the storage company has the coat in its custody it is liable if anything happens to the coat through its negligence, or if the coat is lost or stolen. Similarly the lender is liable if anything happens to the collateral through his negligence or is lost or stolen. In those situations where the lender is liable for the loss of the collateral, if the collateral is equal to the amount of the loan, then the loan is cancelled and the lender is free of liability for the loss.

If the loan exceeds that value of the collateral, then the borrower pays the difference to the loaner. If the collateral exceeds the amount of the loan, then the lender pays to the borrower the difference between these values. 
The parties may agree when the collateral is given that it shall be in lieu of payment of the whole loan if the borrower does not repay the loan. In such event, if the lender loses the collateral, he cannot obtain the difference between the loan and the value of the collateral if the loan was greater. If the parties do not make any such stipulation, then the actual value of the collateral is calculated against the amount of the loan. If the borrower gives two items as collateral and one is lost then the respective values of the items are determined to calculate how much of the loan is satisfied against the loss of the item of collateral. 

A paid bailee is not liable if the object he is guarding is lost through force majeure. Thus the storage company will not be liable for the fur coat if there was an earthquake and the storage facilities were destroyed and the coat destroyed. Similarly, if the collateral held by the lender is lost or damaged through force majeure, the lender is not liable and the borrower must still repay the loan. 

The subject matter of this lesson is more fully discussed in Volume 2, Chapter 72 of A Restatement of Rabbinic Civil Law by E. Quint and on sale at local Judaica bookstores. 

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With the Chagim and other responsibilities I have fallen behind in answering your communications. I apologize and hope to get back on track after the chagim. - EQ