Arrears and Warning Before Initiating Proceedings

Bank of Israel
Supervisor of Banks
(Regulation of the Unitary Customer)
Tel: 02-6552422 / Fax: 02-6552631 / 02-6669422 P.O.B. 780, Jerusalem 91007

23 Iyar 5773
01 May 2013
Circular No. 06-6-23

To:
Banking Institutions

Subject:
Arrears and Warning Before Initiating Proceedings (Directive on the Management of Banking Business No. 451)

Introduction

1. After consultation with the Advisory Committee on Banking Matters, and with the approval of the Governor, I have determined the following instructions regarding matters under their jurisdiction.
   This is a directive.

Amendments to the Directive
2. In the title of the directive, the word "realization" is replaced by "implementation".

Explanatory Remarks
The content of the section does not refer only to situations of implementation of proceedings, as amended by the title of the section.

3. After the words "to submit a request" in Section 13(a), the words "regarding arrears in payments" are inserted. The notice shall include an explanation of the following matters:
   (1) The existence of the Special Committee;
   (2) The purpose of the Special Committee;
   (3) The composition of the Special Committee, as specified in Section 5(a)(g) of the Housing Loans Law; (4) The borrower's right to apply to the Special Committee for assistance; (5) The manner in which the borrower may submit a request for assistance to the Special Committee, and the documents that must be attached to it; (6) The relevant deadlines under Sections 5(a) and 5(b) of the Housing Loans Law.

(b) A notice by a banking institution regarding arrears in payments to a borrower shall include, among other things, the manner of contact with the banking institution, and the identity of the authorized body to which the borrower may refer, so that the borrower knows whom to contact regarding any matter related to the debt in arrears.

(c) In circumstances in which the banking institution is obligated to transfer information to the borrower in accordance with the instructions, it shall include in the notice to the borrower its intention to initiate proceedings for the collection of the debt, as specified in Section 16(a)(5) of the Credit Data Service Law, 2002.

(d) A banking institution shall take appropriate measures to ensure that any request by the borrower to arrange the debt of arrears is examined by a person authorized to act on behalf of the banking institution.

Explanatory Remarks
Given the importance of providing detailed information about the Special Committee established under the Housing Loans Law, 1992, which aims to facilitate the repayment of loans due to the borrower's situation, the information provided to the borrower regarding arrears in payments is expanded to include the borrower's economic status.

The banking institution is required to specify in the notice regarding arrears in payments the manner of contact with it, and the identity of the authorized body to which the borrower may refer, so that the borrower knows whom to contact.

Section 13(g) establishes an obligation on the banking institution to inform the borrower of its intention to initiate proceedings for the collection of the debt, as specified in Section 16(a)(5) of the Credit Data Service Law, 2002.

Section 13(d) establishes an obligation on the banking institution to take appropriate measures to ensure that any request by the borrower to arrange the debt of arrears is examined, even if such request is made through a person authorized to act on its behalf.

Commencement
4. The commencement of this directive is on 1.8.13.

Update of the Book
5. The following instructions shall be inserted in the update pages of the book of the Directive on the Management of Banking Business No. 451.

Insert Page | Remove Page
451-1-22 [15] (06/11) | 451-1-22 [4] (13/05)

With respect,

David Zaken
Supervisor of Banks

Directive on the Management of Banking Business No. 451-1 Guidelines for the Provision of Housing Loans

Contents
Section | Detail | Page

1. Introduction | 451-2
2. Application | 451-2
3. Definitions | 451-2
4. Explanatory Pages | 451-3
   4a. Limitation on the Maximum Loan Amount | 451-3 4b. Loans from the Government Deposits and Others | 451-3 4c. Maintenance of Basic Approval and Interest Rate | 451-3
5. Cancelled | 451-4
   5a. Housing Loan on Land of the Israel Land Administration | 451-5
6. Transfer of Loan Funds to the Seller | 451-5
7. Security under the Chattels Law | 451-5
   7a. Conversion of Guarantee | 451-5
8. Fees for Securing the Loan and Others | 451-5
9. Valuation of Property by a Valuer | 451-6
10. Procedure for Conducting Property Valuation | 451-6
11. Insurance of Property and Life | 451-6
    11a. Insurance through a Controlled Insurance Agent Entity | 451-8
12. Date of Credit to Borrower for Periodic Payment | 451-8
13. Arrears and Warning Before Initiating Proceedings | 451-8
14. Allocation of Payments | 451-9
15. Partial Early Repayment | 451-9
    15a. Request for Information by Borrower | 451-9 15b. Request for Early Repayment | 451-10 15c. Approval of Loan Repayment | 451-10
16. Monthly Repayment Date of the Loan | 451-11
    16a. Determination of Interest Rate | 451-11
    16b. Transitional Provision to Section 16a | 451-12
17. Date of Execution of Loan for Determination of Repayment Schedule | 451-14
18. Settlement for the Interim Period | 451-15
19. Balance of Borrower's Account | 451-15
    19a. Second Rank Charge on Asset | 451-15
20. Mortgage Dragging | 451-16
21. Cancelled | 451-16
    Appendix 1 | List of Urban Rehabilitation Companies - 451-71
    Appendix 2 | Determination of Base Index for Loan - 451-81
    Appendix 3 | Letter of Intent - 451-91
    Annex | Questions and Answers regarding the Implementation of Directive 451 (Guidelines for the Provision of Housing Loans)

Directive on the Management of Banking Business No. 451-1 Guidelines for the Provision of Housing Loans

1. Introduction
   The guidelines specified in this directive apply to housing loans granted by institutions from all available banking resources.

2. Application
   (a) The following guidelines shall apply to housing loans.
   (b) There is no intention in these guidelines to change any existing instruction regarding directed loans.
   Institutions acting under the regulations of the bodies regulating the direction shall continue to act accordingly.

3. Definitions
   For the purpose of these guidelines, unless otherwise stated:
   "Housing Loan" - a loan granted to any of the following, provided it is not granted for any other purpose:
   (1) A loan intended for the purchase or lease of a dwelling for residence, renovation, expansion, or construction; (2) A loan intended for the purchase of a plot for the construction of a dwelling for residence; (3) A loan granted against a pledge of a dwelling for residence, or for the acquisition of the right to reside in a dwelling for residence in exchange for developer fees; (4) A loan intended to finance the early repayment of a loan in whole or in part, as specified in paragraphs (1)-(2) above.

"Directed Loan" - a loan granted under an arrangement with the Government, the Jewish Agency for Israel, the National Insurance Institute, the Jewish National Fund, the World Zionist Organization, a local authority, the Ministry of Immigrant Absorption, or one of the companies listed in Appendix 1, or a loan granted by a banking institution from its own resources, or a supplementary loan granted by a banking institution, excluding a loan granted by a banking institution from its own resources.

"Periodic Payment" - a payment in monthly or quarterly installments, or any other period for the repayment of the loan, as determined in the loan agreement.

"Date of Execution of the Loan" - the day on which the loan funds were actually made available to the borrower, or transferred to the account of the seller of the property by written instructions from the borrower.

"To Notify" - to notify the customer in writing.

4. Explanatory Pages
   (a) A banking institution shall provide to any person seeking to obtain a loan explanatory pages, at the latest, regarding the terms of the loan, which shall include, inter alia:
   (1) A description of the rules of the loans offered by the banking institution, such as: a loan with a fixed or variable interest rate, or linked to an index (and the like); (2) Details of the steps to be taken by the loan applicant, including the submission of various documents, examples of repayment schedules up to NIS 10,000, and the method of calculating interest; (3) Common interest rates for different time periods; (4) Fees and charges of any kind, including expenses transferred by the banking institution to third parties; (5) Repayment arrangements, including arrangements for charges on security, and the determination of the monthly repayment date of the loan; (6) Early repayment fees for the various types of loans; (7) The requirement to effect insurance of property and life, in accordance with Sections 11(b)(1) and 11(g) below.

(b) In addition to the provision in paragraph (a) above, a banking institution shall publish the explanatory pages on its internet site.

4a. Limitation on the Maximum Loan Amount
A banking institution granting a loan for the purchase of a dwelling shall limit the amount of the loan so that the total of all loans, including those from the Government Deposits and others, does not exceed a certain percentage of the value of the dwelling, as determined by the board of directors of the banking institution.

4b. Loans from the Government Deposits and Others A banking institution granting a loan for the purchase of a dwelling from the Government Deposits, intended for the liability of the depositor, shall regulate in the agreement with the depositor the details of the security to be obtained from the borrower.

4c. Maintenance of Basic Approval and Interest Rate (a) A banking institution shall grant a borrower basic approval to a person who has filled out a form requesting a loan, specifying the specific property into which the loan falls, and the loan applicant is not a housing loan as defined in Section 3 above. The banking institution shall determine a reasonable period during which the loan applicant may receive the loan, without any costs imposed on him, and shall notify him of the interest rate for that loan, not less than 12 days from the date of granting the basic approval, in a prominent manner. For the purpose of this section:
"Fixed Interest Rate" - in loans with a fixed interest rate; "Variable Interest Rate" - in loans with a variable interest rate, i.e., the set mechanism - the base interest rate plus or minus the discount or addition.

(b) The basic approval shall include the following data:
(1) The loan amount;
(2) The loan term;
(3) The interest rate set for the loan;
(4) The monthly repayment amount;
(5) In loans with a variable interest rate, instead of paragraphs (3) and (4) above, the following shall be specified:
(a) The mechanism for determining the interest rate, i.e., the base interest rate plus or minus the discount or addition; (b) The principles for changing the interest rate; (c) The interest rate derived from these principles on the date of granting the basic approval (in percentages); (d) The monthly repayment amount derived from these principles on the date of granting the basic approval; (e) The interest rate that may change on the date of granting the loan (in percentages); (6) The amounts of fees and charges, including expenses transferred by the banking institution to third parties; (7) The risks that the banking institution requires to be covered by insurance, and in case the loan applicant chooses to effect insurance through the banking institution, the premium of the insurance.

(c) The banking institution shall provide the loan applicant with a list of documents required to be submitted for the receipt of the basic approval for the execution of the loan.

(d) In case the loan applicant fails to submit the required documents from the banking institution within the time limit, the banking institution shall notify him of the date for maintaining the interest rate, and in cases where the new interest rate differs from the guaranteed interest rate.

5. Execution of the Loan
   Cancelled.

5a. Housing Loan on Land of the Israel Land Administration In a transaction involving the granting of a housing loan on land of the Israel Land Administration - hereinafter: "the Administration" - the banking institution shall inform the borrower, upon signing the development contract with the Administration, of the agreements between the borrower and the Administration, and the signing of the guarantee contract by the guarantors, that there is a possible situation where it will not be possible to collect from the real estate, and consequently, the guarantee may become the sole and exclusive security for the repayment of the loan.

6. Transfer of Loan Funds to the Seller
   A banking institution shall transfer the loan funds received from the borrower by written instruction to the seller of the loan, unless the loan is executed on the date specified in the contract between the borrower and the seller, or on a later date agreed upon in writing by the borrower and the banking institution. The banking institution shall notify the borrower of the date of payment to the seller, and attach a copy of the notice to the seller confirming the payment of the loan funds to the seller. The banking institution shall ensure that there is a full overlap between the date of credit to the account of the seller and the beginning of the interest charge to the borrower.

7. Security under the Chattels Law
   A banking institution shall act as follows, immediately upon the purchase, before the transfer of the loan funds to the seller:
   (a) When a banking institution finances the seller in any way, such as in a loan or guarantee, it shall ensure that the borrower has received the security for the dwelling as required by the Chattels Law on the Sale of Dwellings (Protection of Purchasers) (Dwellers) (1974) - hereinafter: "the Dwellers Law". (b) If there is no business relationship between the seller of the dwelling and the banking institution, the banking institution shall notify the borrower of the compliance with the Dwellers Law on behalf of the seller.

7a. Conversion of Guarantee
A banking institution shall not refuse, at the request of the purchaser of a dwelling, to convert the guarantee under the Dwellers Law to a loan provided by another banking institution for the benefit of the purchaser.

8. Fees for Securing the Loan and Others
   A banking institution shall not require any fee from the seller or the borrowers or any other person related to the transaction, such as a fee for securing the loan, for example, a payment for an option or reservation fee for obtaining a loan.

9. Valuation of Property by a Valuer
   (a) In general, there is no place to charge the borrower for expenses of property valuation, unless the conditions require the loan to be linked to specific expenses related to the loan.
   (b) If the banking institution has requested that the property subject to the loan be pledged as security for the loan, and considers that there is a place to conduct a property valuation in accordance with paragraph (a) above, the banking institution shall act as follows regarding the property valuation:
   (1) For directed loans - in accordance with the rules set by the Ministry of Construction and Housing and the Ministry of Finance (the competent authorities of the Government); (2) For loans other than directed loans, composed of loans from the Government Deposits - a property valuation shall be conducted in accordance with the rules set by the competent authorities of the Government. (c) The banking institution may charge the valuer who conducts the property valuation, the borrower, the actual expenses incurred or the fees set in the tariff, whichever is lower. (d) The banking institution shall provide the borrower with a copy of the valuation report.

10. Procedure for Conducting Property Valuation
    (a) The valuation shall be conducted by a competent valuer in a manner independent of information held by the banking institution. The conduct of the valuation requires a physical visit to the property and the preparation of a diagram of the property. The valuation submitted to the banking institution shall include a detailed description of the property, and in case of directed loans, the required details as specified by the competent authorities of the Government, and the valuer's declaration on the date of the visit to the property.

11. Insurance of Property and Life
    (a) A banking institution may require the borrower to insure the property serving as security for the loan, and also to effect life insurance within the limits of the loan amount, provided that the banking institution is not disadvantaged by the return. The banking institution shall notify the borrower that it is authorized to effect the insurance through a controlled insurance agent entity - hereinafter: "the Banking Institution" - directly, and not through an external insurance agent. In this case, the banking institution may require the borrower to meet the necessary conditions to ensure its rights, which shall appear in a prominent manner in large letters in the notice, and in the loan agreement according to Section 4(a) and the explanatory pages according to Section 11(b)(1).

(1) If the borrower effects external life insurance or external property insurance, and submits the policy to the branch of the banking institution, the banking institution shall notify the borrower of the receipt of the policy from the banking institution. Within forty days of the submission of the policy, if it does not meet the requirements, the banking institution shall notify the borrower of this, and following this, the insurance shall be effected by the banking institution on its behalf, or alternatively, the policy shall be cancelled.

(2) If the borrower effects external life insurance or external property insurance, as mentioned, the banking institution shall notify the borrower at the end of the insurance year, no later than thirty days before the end of the insurance year, of the expiration of the insurance. The banking institution may require the customer to submit a policy until the date of expiration of the insurance, and shall notify the insurer of the details of the insurance conditions, including the lack of insurance, which implies any lack in the insurance. The insurance amount shall not exceed the value of the unencumbered property, as defined in paragraph (d) below.

(g) A banking institution shall not require the borrower to insure a dwelling purchased from a contractor at an early date, unless the date specified in the sale contract for the delivery of the dwelling to the purchaser is earlier than the date specified in the contract, or if the purchaser requested a later date than the requested date - the banking institution shall determine the date of the increased risk in writing.

(1) A banking institution shall not require the borrower to insure the property in an amount exceeding the value of the pledged property. For this purpose, the banking institution shall make available to the borrower, in a separate document, the option to choose insurance of the property in an amount not exceeding the unencumbered balance of the loan. The meaning of this amount shall be clarified in the document.

(2) In case the customer chooses to insure the property through the banking institution, the banking institution shall update the insurance amount in accordance with the unencumbered balance of the loan, for a period not exceeding one year, as specified in paragraph (1) above.

(3) A banking institution shall not require the borrower to effect insurance of property and life in loans in amounts up to NIS 30,000, or whose balance does not exceed NIS 30,000, at least the unencumbered balance of the loan. The banking institution shall notify the borrower during the upcoming calendar year that he is authorized to cancel the insurance policies as mentioned. For the purpose of this section:
"Unencumbered Balance of the Loan" - 20% of the value of the land relating to the dwelling, minus the appraised value, plus the amount received.

(h) The banking institution shall notify the customer, through the banking institution, of the expiration of the validity of life insurance or property insurance, at least one year in advance, regarding:
(1) The amounts paid during the replacing year, including approval for insurance, and the percentage of the annual premium paid for each of the insurances, which must also comply with income tax requirements; (2) The coverage percentage for each of the insurances, for the purpose of property insurance, the insured amount is a part of the value of the structure (establishment); (3) A clarification that the customer may cancel the policy at any time without a fee, and that the banking institution may alternatively present a policy of the banking institution's insurance, which is not disadvantaged; (4) The absence of the obligation to effect insurance for loans up to NIS 30,000, or whose balance does not exceed this amount, including the option to cancel these insurances, if they exist; (5) Reasonable time before the expiration of the validity of life insurance effected through the banking institution, the banking institution shall send a notice to the customer.

11a. Insurance through a Controlled Insurance Agent Entity (a) A banking institution may market life insurance incidental to the granting of a housing loan through an insurance agent entity controlled by or under the control of the banking institution - hereinafter: "Insurance Agent" - by placing sales stations in its branches, provided that the sales stations staffed by the Insurance Agent are clearly separated from the other occupations of the banking institution.

(b) The banking institution shall not receive, directly or indirectly, any benefit, service, or otherwise, from the insurer, except for the insurance commission paid to the insurance agent.

(c) The banking institution shall ensure that the insurance agent uses information only for the purpose of incidental insurance in the granting of a housing loan as specified in this section, and shall not use the information, directly or indirectly, to refer customers to other entities, including correspondence with the borrower regarding the insurance, and the collection of premiums, shall be done by the insurance agent itself.

(d) For the purpose of this section, "use of information" - as defined in Section 11(b)(2) of the Banking (Service to the Customer) Law, 1981.

12. Date of Credit to Borrower for Periodic Payment
    In case of payment in shekels, the banking institution shall credit the borrower's account on the "Value Date" of the loan, subject to the instructions of the Banking (Service to the Customer) Law, 1990, regarding the manner of calculating interest, and in accordance with the actual periodic payment performed.

13. Arrears and Warning Before Initiating Proceedings
    (a) In a housing loan, as defined in the Housing Loans Law, 1992 - hereinafter: "the Housing Loans Law" - the notice to the borrower regarding the possibility of submitting a request to the Committee for Assistance shall be sent in a notice regarding arrears in payments. The notice shall include an explanation of the following matters:
    (1) The existence of the Special Committee;
    (2) The purpose of the Special Committee;
    (3) The composition of the Special Committee, as specified in Section 5(a)(g) of the Housing Loans Law; (4) The borrower's right to apply to the Special Committee for assistance; (5) The manner in which the borrower may submit a request for assistance to the Special Committee, and the documents that must be attached to it; (6) The relevant deadlines under Sections 5(a) and 5(b) of the Housing Loans Law.

(b) A notice by a banking institution regarding arrears in payments to a borrower shall include, among other things, the manner of contact with the banking institution, and the identity of the authorized body to which the borrower may refer, so that the borrower knows whom to contact regarding any matter related to the debt in arrears.

(c) In circumstances in which the banking institution is obligated to transfer information to the borrower in accordance with the instructions, it shall include in the notice to the borrower its intention to initiate proceedings for the collection of the debt, as specified in Section 16(a)(5) of the Credit Data Service Law, 2002.

(d) A banking institution shall take appropriate measures to ensure that any request by the borrower to arrange the debt of arrears is examined by a person authorized to act on behalf of the banking institution.

(e) A banking institution shall notify the borrower, in reasonable time in advance, of its intention to open proceedings for implementation.

14. Allocation of Payments
    (a) If the borrower received loans from different sources and under different conditions, the banking institution shall allocate the payments received from the borrower in accordance with the repayment schedule of the loan, unless otherwise instructed by the borrower. In the absence of the borrower's instruction, the banking institution shall use the funds received from the borrower to repay the loan that is most expensive for the borrower, for example, in the absence of a clear preference, in a situation where the loans have different bases for linkage, the allocation of payments to the different loans shall be made in proportion to their balance on the day of deposit of the payment.

(b) The obligation of the banking institution to allocate payments in accordance with paragraph (a) above shall not apply in cases where the banking institution operates under a binding agreement with the Ministry of Finance, or in cases where the banking institution considers that allocating payments in accordance with paragraph (a) above may harm the guarantor.

15. Partial Early Repayment
    (a) In case of partial early repayment of the loan, the borrower may, with the consent of the banking institution, reduce the term of the loan. The reduced period shall be considered as the term of the loan, and the matter is subject to the loan.

(b) The term of the loan shall be shortened, as mentioned.

Information Required from a Borrower Requesting Suitability Assessment

11. A banking institution shall provide, in writing, the information necessary for the borrower to assess the suitability of the loan, whether through the institution itself or through intermediaries, prior to the disbursement of the loan. The following details shall be provided for each component of the loan:

(1) The original loan amount;
(2) The remaining balance for repayment according to its different components (interest, indexation, principal); (3) The type of loan (subsidy, conditional eligibility, supplementary, etc.); (4) The date of loan issuance; (5) The date of the first payment for the loan; (6) The expected date of the final payment for the loan; (7) The loan repayment method (balloon, equal principal, Shafir, etc.); (8) The indexation basis; (9) The base index in terms of the last base determined by the Central Bureau of Statistics; (10) The exchange rate basis for loans linked to foreign currency; (11) The interest rate type (fixed, variable); (12) For loans with fixed interest rates: the adjusted interest rate – the basis for determining the interest rate; For loans with variable interest rates: the interest rate adjustment frequency, the interest rate adjustment timing, the percentage of the increase or decrease, as stated in the borrower's request, and the proximity of the adjustment. (13) The amount of early repayment fees, as stated in the borrower's request.

(a) The information specified in this section shall be provided to the borrower in person at the branch, by mail, or by fax, within two business days from the date of the request.
(b) The banking institution shall not charge the customer a fee for providing the information under this section more than twice in a calendar year.

15b. In addition to the provisions of the Banking (Early Repayment Fees) Order, 2002, a banking institution shall provide the borrower, in writing, the following details upon request to execute early repayment:

(a) A detailed breakdown of the loan balance according to its different components, as per Sections 15c(b) and (c); (b) Confirmation that the banking institution will remove the encumbrance on the property pledged as security for the loan after full repayment of the loan, in accordance with the form of letter in the Third Schedule.

(c) Upon the borrower's request to repay the loan through another banking institution, the banking institution shall provide the borrower with its consent to the registration of a second-ranking encumbrance, in accordance with the form of letter in the Third Schedule. (d) The customer shall not be required to pay a fee under Sections 15b(a) and (b) more than twice in a calendar year. (e) The banking institution shall provide the information specified in Sections 15c(b) and (c) within three business days from the date of the customer's request.

15c. After executing the early repayment as stated, the banking institution shall provide the borrower with confirmation thereof. Following partial or final repayment of the loan, the banking institution shall also indicate whether an insurance policy is still required, whether the encumbrance can be cancelled from its perspective, and notify the borrower that the policy is for his benefit.

(a) After executing full repayment of the loan, the banking institution shall provide the borrower with a discharge confirmation, stating that the borrower has paid the full loan amount, that the banking institution has no interest in the encumbered property, and that the banking institution is obligated to cancel the encumbrances on the loan within the periods specified in Section 19 of the Banking (Service to Customers) Law, 1981. This period may be extended to six business days for loans denominated in foreign currency or via a check. (b) Without prejudice to the generality of subsection (a), if the borrower makes payment by cash or bank transfer, the banking institution shall provide the borrower with a receipt confirming the payment, no later than two business days from the date of providing the discharge confirmation.

16. Monthly Repayment Dates

(a) As a general rule, a banking institution shall execute the loan requested by the borrower on the requested date.
(b) In loans linked to an index, the indexation basis shall be determined according to the index specified in the Second Schedule, unless otherwise stated.
(c) The borrower shall be entitled to choose, at the time of loan issuance, one of the following three dates for fixed repayment dates: the 10th, the 15th, or the 25th of the month. The banking institution may offer the customer additional dates to choose from, in addition to these fixed dates. The provisions of Section 17 and 18 shall apply to additional dates chosen by the borrower.

16a. Determination of Interest Rate

(a) This section applies to loans where the interest rate is not fixed and is not known throughout the loan term, including variable-rate loans where the borrower has the right to fix the interest rate. The banking institution shall act as follows regarding loans transferred to another track or loans executed in parts:

(1) The basis for determining the interest rate in the loan shall be an external objective benchmark, meaning it will not have a direct influence on the determination of the interest rate by the institution, such as the average prime rate or LIBOR rate, as defined in the Banking (Early Repayment Fees) Order, 2002.

Detailed information on the aforementioned basis shall be provided to the borrower before the execution of the loan and shall appear in the loan agreement.

(2) At the time of interest rate change, the same addition or deduction shall apply to the loan. This subsection shall not prevent the granting of a smaller addition or larger deduction than the interest rate determination basis specified in subsection (a), provided it does not result in a lower interest rate than the basis.

(b) Even with regard to variable-rate loans where the basis is LIBOR rate, the banking institution may determine a mechanism for change or addition, provided that all the following conditions are met:

(1) The mechanism shall be external and objective; (2) The mechanism shall be quantifiable; (3) The mechanism shall be symmetric, both for increasing and decreasing the interest rate; (4) The banking institution shall provide full and adequate disclosure in the loan agreement regarding the mechanism, including disclosure regarding the manner of its variation in the past.

(c) A banking institution shall notify the borrower at least 14 days before the interest rate change date. If possible, the notification shall also include the expected interest rate on the loan.

This section shall not apply to variable-rate loans where the basis is LIBOR rate or prime rate, where the interest rate change frequency is lower than once a year, nor to loans executed in parts regarding those parts that have not yet been executed.

16b. Transitional Provisions to Section 16a

(a) During the term of a fixed-rate housing loan, at each interest rate renewal, the interest rate shall be determined according to the lower of the following two: including the date of conversion from variable to fixed rate, for a variable-rate loan that was executed before 1.11.00 on a basis that is not external and objective (such as the institution's prevailing interest rate or tariff rate).

(1) The interest rate resulting from the calculation determined in the agreement between the institution, which would have been the interest rate had the bank determined it; (2) The interest rate determined at the first renewal date after 31.8.01.

For loans intended for the purchase of residential property, the interest rate resulting from the calculation mechanism shall refer to them, while maintaining the distinction between them and other loans. This distinction shall be maintained.

(b) At the renewal date after the external objective basis interest rate - other:

The change in the known average addition shall be determined as it was determined at the first renewal date (see paragraph (a)(2) above).

Example:
If the first renewal date fell on 1.9.01, and the bank executed a variable-rate housing loan in July 2001 based on the average interest rate published by the Bank of Israel with an addition of 0.35%, when the known average interest rate published by the Bank of Israel is 6.5%, the renewal rate shall be 6.85% (0.35% addition).

At each subsequent renewal, the last known average interest rate shall be added.

If the second renewal date falls on 1.9.02, and the known average interest rate for the first half of August is 6.4%, the renewal rate shall be 6.75% (6.4% basis + 0.35% addition), as determined at the first renewal date.

(1) If the banking institution executed the interest rate change for new variable-rate loans in the month preceding the renewal date, the interest rate shall be determined based on the last known average interest rate published by the Bank of Israel.

(2) If the banking institution executed the interest rate change in the month preceding the renewal date, the banking institution shall use a number of interest bases for variable-rate loans, and the interest rate shall be determined based on the highest of the bases specified in paragraph (a)(2) above.

(c) Immediately after the interest rate update date, the banking institution shall notify the borrower of the new interest rate. The notification shall indicate if there is an existing interest rate cap for the type of loan. The banking institution shall indicate the external objective basis prevailing at that institution and specify the interest rates according to subsection (a) above.

(d) This transitional provision shall not prejudice any benefit or right received by the borrower under the loan agreement.

(1) This section shall also apply to the conversion of a loan from variable to fixed rate on a basis, if the customer is entitled to do so, within an agreement with the bank, including the appropriate changes.

(2) A banking institution that believes the method of determining the interest rate renewal was determined before 1.11.00 on a basis other than an external objective basis, may act pursuant to subsection (a) upon submitting a detailed, reasoned written request to the Supervisor. If the Supervisor approves the request, the banking institution may:

(1) Allow the borrower, upon agreement with the bank, to transfer the loan from a variable-rate track to a fixed-rate track, at an interest rate resulting from the calculation determined in the agreement between the institution and the borrower, or at the prevailing fixed interest rate for that type of borrower at that bank. This transfer shall be executed without fees, according to the borrower's choice.

(2) Allow borrowers subject to subsection (a) to switch to a dual-track method, pursuant to the interest calculation mechanism determined for new variable-rate loans executed by the banking institution in the month preceding the change, while maintaining the distinction between loans for the purchase of residential property and other loans.

(3) Notify borrowers of the options provided under paragraphs (1) and (2) above, no later than 1.10.01, close to the first renewal date. The notification shall be adequate regarding the determination method and the basis of interest. This transition is not subject to fees.

17. Determination of Repayment Schedule for Loan Execution Date

The determination of the repayment schedule for index-linked loans shall be as follows:

(a) If the loan repayment date is set for the 1st of the month:

(1) If the loan was executed between the 15th of the previous month and the 1st of the current month, the loan shall be deemed executed on the 1st of that month, and the first payment date shall be the 1st of that month; thereafter, the loan shall be for the 1st of the month.

(2) If the loan was executed between the 2nd of the current month and the end of the month, the loan shall be deemed executed on the 1st of the following month, and the first payment date shall be the 1st of the following month; thereafter, the loan shall be for the 1st of the month.

(b) If the loan repayment date is set for the 10th of the month:

(1) If the loan was executed between the 15th of the previous month and the 1st of the current month, the loan shall be deemed executed on the 10th of that month, and the first payment date shall be the 10th of that month; thereafter, the loan shall be for the 10th of the month.

(2) If the loan was executed between the 2nd of the current month and the end of the month, the loan shall be deemed executed on the 10th of the following month, and the first payment date shall be the 10th of the following month; thereafter, the loan shall be for the 10th of the month.

(c) If the loan repayment date is set for the 15th of the month:

(1) If the loan was executed between the 15th of the previous month and the 1st of the current month, the loan shall be deemed executed on the 15th of that month, and the first payment date shall be the 15th of that month; thereafter, the loan shall be for the 15th of the month.

(2) If the loan was executed between the 2nd of the current month and the end of the month, the loan shall be deemed executed on the 15th of the following month, and the first payment date shall be the 15th of the following month; thereafter, the loan shall be for the 15th of the month.

18. Interim Period Settlement

(a) When the uniform repayment day of the loan falls on a day that does not coincide with the day of the month, the banking institution shall conduct settlement with the borrower for the number of days between the actual loan execution date and the execution date determined for the purpose of the repayment schedule (hereinafter: the interim period).

(b) When the actual execution date is earlier than the execution date determined for the purpose of the repayment schedule, the banking institution shall charge the borrower interest for the interim period. When the actual execution date is later than the execution date determined for the purpose of the repayment schedule, the interest for the interim period shall be credited within the framework of the settlement. The interest shall be calculated according to the contractual interest rate of the loan.

(c) For index-linked loans, the settlement regarding indexation differences shall be determined by the known index on the day of the known first repayment, compared to the index on the loan execution date. The number of days in the interim period shall be determined by the number of days in the known month.

(See Appendix 2)

19. Borrower's Credit Balance

(a) A banking institution shall return any credit balance created in the borrower's account as soon as possible. When the loan is repaid, the credit in the bank account shall be made by reducing the next monthly payment, by authorization, or by issuing a check to the borrower for the balance amount.

(b) The banking institution shall pay the borrower interest on the credit balance according to law and indexation from the day the credit was created in the account until the date of repayment. It is clarified that this provision does not prejudice the borrower's rights to compensation for any damages incurred, according to law.

(c) The banking institution shall not be entitled to use the credit balance arising from the repayment of a specific loan for the early repayment of another loan, without the borrower's explicit written consent.

19a. Second-Ranking Encumbrance on Property

A banking institution shall not unreasonably refuse a borrower's request to consent to encumbering property, except for a second-ranking encumbrance in favor of another party. Confirmation of such consent shall be provided to the borrower within seven days, unless the loan is being repaid through another banking institution or insurer, in which case the confirmation shall be provided as part of the confirmation issued under Section 15b(c).

20. Mortgage Substitution

A banking institution shall not refuse a borrower's request to encumber an alternative property in place of the encumbered property, unless the existing loan terms are changed (hereinafter: mortgage substitution). The institution shall notify the borrower of the reasons for the refusal, citing reasonable grounds for the refusal. The following cases shall be considered, among others, as reasonable grounds for refusing consent to mortgage substitution:

(1) If the loan in question was granted against deposits from a third party, unless the borrower has obtained the depositor's consent; (2) If the value of the collateral at the time of substitution is less than the collateral for the loan regarding the granting of loans by that banking institution.

21. Annual Account.

22. Cancelled.

Appendix 1

Section 19a

List of Urban Renewal Housing Companies

1. "Chalimish" - "The Governmental Company for Urban Renewal Housing" (Tel Aviv);
2. "Paratzet" - "The Governmental Company for Urban Housing" (Jerusalem);
3. "Shikmona" - "The Governmental Company for Urban Renewal Housing" (Haifa);
4. "Loram" - "The Company for the Development of Ramla and Lod";
5. "H.L.D" - "The Governmental Company for Urban Renewal Housing in Petah Tikva";
6. "Amidir" - "The National Company for Housing Immigrants to Israel".

Appendix 2

Section 18

Determination of Index Basis for Loan

MB: The basis index of the loan.
M0: The index known at the loan execution date.
M1: The index known at the first repayment date.
D0: The number of days in the interim period.
D1: The number of days in the month.

• When the gap between the loan execution date and the first repayment date is greater than one month:

MB = M0 + (M1 - M0) * (D0 / D1)

• When the gap between the loan execution date and the first repayment date is less than one month:

MB = M0 * (M1 / M0) ^ (D0 / D1)

Appendix 3

Section 15b(c)

Form of Letter of Intent

To Whom It May Concern,

1. This letter serves to confirm that the total amount of the outstanding balance of the loans listed below, including early repayment fees (actual repayment on DD/MM/YYYY), has been paid in full. The properties pledged as security for these loans are as follows: [Property Details]. Pursuant to the letter dated DD/MM/YYYY issued last month, the encumbrance has been cancelled (the unnecessary encumbrance has been removed) on the 11th day of the same month, within the exact number of days required under Section 19 of the Banking (Service to Customers) Law, 1981. This is our obligation under the said Law.

2. The total amount of the outstanding balance of the loans listed above, which is pledged as security for the property, is paid in full as of today, including early repayment fees: ___________.

3. It is clarified that the outstanding balance of the loans listed above in Section 1 is affected by various factors, such as changes in the current repayment of the loan, changes in the interest rate, changes in the consumer price index (as applicable to index-linked loans), changes in the exchange rate (as applicable to foreign currency-linked or denominated loans). We request you to transfer the exact amount for the purpose of Section 1 above to the account: ___________ (Bank Name, Account Number).

4. The next scheduled payment for the loan on DD/MM/YYYY is to be paid in the amount of _______ (detailed breakdown required for each loan separately).

5. We agree to the registration of a second-ranking (equal) encumbrance on the property [Property Details] in favor of [Financial Institution Name] for the purpose of loan discharge. The unnecessary encumbrance shall be removed.

6. We request you to bring to your attention that the purpose of this letter is to enable the banking institution to hold this document for the exact balance on the day of loan repayment, and to hold the exact amount as stated above.

Note: Section 5 shall only be filled out if the situation specified in Section 15b(c) exists.

Appendix

Questions and Answers regarding the Implementation of Guideline 451 (Guidelines for the Provision of Housing Loans)

1. Section 4a:
   (a) In the case of a loan granted in parts, where the first tranche is at a fixed interest rate, is there an obligation to maintain the stated interest rate or the mechanism determined for the remaining tranches?
   Answer:
   The banking institution shall maintain the stated interest rate for a period of 12 months from the first tranche. For the remaining tranches, the mechanism for determining the interest rate shall not be applied.

(b) For contracts signed before the entry into force of the directive, where the interest rate was determined for the first tranche, are the following options available for changing the interest rate for the remaining tranches: the reduction or addition specified in the contract according to Section 23(a) of Circular 2126-06, or the reduction/addition applied to the first tranche, the average reduction/addition throughout the loan term, or the reduction/addition determined in the contract for the periods after the first tranche? Answer:
In the absence of a determination in the contract (option 3), the intention is that the contractual determination of the interest rate for tranches shall apply after 31.3.04. The mechanism for changing the interest rate shall not be applied to similar loans that will be issued by the banking institution at that time.

(c) Is there a general approval for loans where the interest rate is not fixed and is not known throughout the loan term, such as loans where the borrower has the right to fix the interest rate or loans executed in parts, requiring the bank to specify under Section 16a(b)(5) that they are variable-rate loans or that they must include data to transfer to another track or fix the interest rate? Answer:
Yes, the directive refers to such loans as variable-rate loans. (See Section 16a).

2. Section 16a:
   (a) Can multiple anchors be determined for the same loan, for example, LIBOR rate for the first year and LIBOR rate for the remaining periods?
   Answer:
   Yes. Different mechanisms for reduction or addition for different periods may be determined. If determined as a function of the cost of funds, they may create different prices for the loan, which may reduce the customer's ability to compare loans with other loans.

(b) Can an alternative mechanism for determining the interest rate be added to the loan contract, in the event that a change applies to the calculation of the original interest rate basis?
Answer:
The banking institution may use an alternative anchor only for index-linked loans. It is permissible to indicate the alternative anchor in case the original anchor ceases to exist. The alternative anchor must meet the criteria set forth in Section 16a.

(c) Can construction companies that provide benefits to their customers through contractors provide interest rate benefits for a defined period for all payments for the first period, exempting these loans from the provisions of Section 16a?
Answer:
No. The general rule is that benefits in the form of participation in interest payments for customers are hidden in the price of the loan. The directive aims to prevent the concealment of the scope of the benefit and the price of the loan. There is no exemption under the directive for construction companies providing benefits to their customers through participation in interest payments throughout the loan term.

(d) Can the interest rate for loans with a grace period (postponement of payments or grace period) be different from the interest rate derived from the mechanism (i.e., a premium/interest addition for the grace period)?
Answer:
No. The determination of the mechanism may price any factor affecting the risk, including the granting of a grace period within the loan.

(e) Does Section 16a apply to the decisions of the Special Committee established under Section 5 of the Housing Loans Law, 1992?
Answer:
No. Since the loan in question is a reorganization of the loan.

(f) Can a variable-rate mortgage be offered when the loan term is replaced, with the indexation basis and the mechanism for interest rate change?
Answer:
No. Such a mortgage does not meet the provisions of Section 16a(a) and (b). However, an option exists for the borrower to change the indexation track and the mechanism for interest rate change, provided that the first track and mechanism shall be the default.

(g) Does Section 16a(a) and (b) apply generally to loans where the interest rate is not fixed and is not known throughout the loan term, or only to variable-rate loans with interest rate changes?
Answer:
This section applies to all types of loans where the interest rate is not fixed and is not known throughout the loan term. The rationale is the same in all cases. The loans specified in the preamble of Section 16a are identical.

Updates

Version	Details	Date
0	Original Circular 271/46	31/7/86
1	Update 1290	1/3/87
2	Update 1417	21/6/89
3	Update 1500	3/2/91
4	Insertion in Standard Banking Management Directives	8/91 5