In short: arrears on a mortgage do not leave the bank free to do as it pleases. Proper Conduct of Banking Business Directive 451, issued by the Supervisor of Banks, sets out what an arrears notice must contain, requires the bank to notify the borrower a reasonable time in advance of its intention to start foreclosure, governs how payments received outside the schedule are allocated, and requires the bank to display full information about the loan. The provisions below are quoted from the Directive.

What an arrears notice must contain

Section 13(a): in a housing loan as defined in the Housing Loans Law, 1992, the notice to the borrower about the possibility of applying to the special committee for assistance shall be given within the notice of arrears. It must include a detailed explanation of the committee’s existence, its purpose, its composition, the borrower’s right to apply to it, how to apply and what to attach, and the relevant dates.

Most borrowers do not know this. A dedicated assistance route exists for a borrower in difficulty, and the bank must set it out inside the arrears notice itself.

Section 13(b): the arrears notice shall also include how to contact the bank on any matter concerning the debt in arrears.

Section 13(c): where the bank is obliged to report the borrower under section 16(a)(5) of the Credit Data Service Law, 2002, every notice of an intention to take debt-collection steps shall say so — the borrower is meant to know the debt is about to be reported.

A request for an arrangement sent to the bank’s lawyer

Section 13(d): the bank shall take adequate measures to ensure that any borrower’s request to settle the arrears, addressed to the bank’s lawyer, is brought to the bank’s knowledge.

This speaks to a recurring complaint: we approached the collection firm, and it stopped there. Under the Directive, a request for an arrangement sent to the bank’s counsel must reach the bank, and the bank is responsible for making sure it does.

Advance notice before foreclosure

Section 13(e): the bank shall notify the borrower, a reasonable time in advance, of its intention to begin proceedings to realise the mortgaged property.

This is a free-standing duty, separate from any earlier demand for payment. “A reasonable time” is not fixed in days, so it turns on circumstances — which is exactly why every letter, notice and date is worth keeping.

Allocating payments in the borrower’s favour

Section 14(a): where the borrower has loans from different sources and on different terms, money received outside the payment schedule is allocated as the borrower directs. Absent a direction from the borrower, the bank shall use the money to repay the loan that is the most expensive from the borrower’s point of view. Absent both a direction and a clear preference — for example where the loans have different linkage bases — allocation follows each loan’s proportionate share of the outstanding balance on the day the payment was deposited.

Section 14(b) qualifies this: the duty does not apply where the bank acts under a binding agreement with the Ministry of Finance, or where the bank considers that such allocation might prejudice a guarantor.

In practice: if you paid a lump sum without a direction, check which loan it went to. The default is the loan that is dearest for you, not the one convenient for the bank.

Partial early repayment

Section 15(a): on a partial early repayment the loan term shall be shortened; the borrower may instead choose to reduce the periodic payments. Section 15(b): where the term was shortened, the shortened term is treated for every purpose as the loan term.

The information the bank must show you

Section 15A(a) requires the bank to display, in the online application it offers customers, current information about the loan for each component separately, including: the purpose of the loan, the original amount, the payoff balance broken down into principal, linkage and interest, the type of loan, the date it was granted, the first and expected last payment dates, the repayment method, the linkage basis, the base index, the base exchange rate on foreign-currency loans, the interest type, and for variable rates the anchor, its level, the frequency of change and the next change date.

This is the most practical tool in the Directive. Breaking the balance into principal, linkage and interest is the basis of any check of a debt, and you are entitled to see it.

Crediting shekel payments to the right day

Section 12: on a shekel payment the bank shall credit the borrower’s account at the “value” of the day the periodic payment was actually made, subject to the Banking (Service to Customer) (Methods of Interest Calculation) Rules, 1990. Crediting at a later value date generates interest that should not be there.

What the courts held against Mizrahi Tefahot on mortgages

Judgment

Zaghroun v. Mizrahi Tefahot: the bank was negligent in providing a mortgage, and the customer lost an Israel Land Authority tender

The Magistrates' Court held that the bank was negligent when a customer's equity funds were not reflected in time, causing him to lose an Israel Land Authority tender, and ordered it to pay NIS 300,000 less 40% …

Court
Beersheba Magistrates' Court (upheld by the District Court and the Supreme Court)
Amount
300,000 NIS
Topic
mortgages and housing loans
Go to the decision page

What this page is not

This page quotes the language of the Directive and is not legal advice. The Directive is updated, and every loan has its own terms. A breach of a Proper Conduct Directive is not in itself an automatic cause of action, but it bears on arguments of bad faith and breach of the bank’s duties. If in doubt consult a lawyer; you may also complain to the Banking Supervision Department.

Sources

  1. הוראות ניהול בנקאי תקין 451, "נהלים למתן הלוואות לדיור" — בנק ישראל (PDF)