Class Action 41639-12-17 Shif: bond-anchored mortgages

Decision details

Date	March 7, 2023
Court	Central District Court (Lod)
Case	Class Action 41639-12-17 (Moshe Shif v. Mizrahi Tefahot Bank)
Type of decision	Settlement approvalClass action
Amount	NIS 26,200,000
Topic	Mortgage: variable interest, bond anchor protection mechanism
Source	Full text

Background: class action over the "emergency protection mechanism" in Mizrahi Tefahot mortgages

Class Action 41639-12-17 was filed in the Central District Court (Lod) by Moshe Shif against Mizrahi Tefahot Bank. The claim concerned variable-rate housing loans that the bank gave on the basis of a bond anchor. The loan agreements set an "emergency protection mechanism", which changes the way the interest is calculated upon the occurrence of an "extreme event".

According to the applicant, setting two anchors for calculating interest on a housing loan is prohibited under Proper Conduct of Banking Business Directive 451. It was also alleged that the bank did not disclose the mechanism in the approval in principle given before signing, and that the conditions for activating it are vague and cannot be checked by the customer.

The class in the motion for certification was defined as customers who took a variable-rate housing loan in the seven years before the claim was filed, and whose agreement set the mechanism. The bank asked to keep the number of class members confidential, and the court refused. According to the judgment, the mechanism was activated on 100,779 loans.

The parties' arguments

The applicant alleged breach of the loan agreement, a depriving term in a standard contract, breach of fiduciary and disclosure duties, misleading under the Banking (Customer Service) Law, and unjust enrichment. He asked for a declaration that the mechanism is void, an order for the bank to recalculate the interest according to the original mechanism, and compensation to customers for the difference.

The bank denied the claims. According to the bank, the mechanism is not an additional anchor but protection against an extreme rise in its funding costs. The bank argued that the approval in principle does not replace the loan agreement, and that it received the approval of the Banking Supervision Department both for using the mechanism and for the way it was disclosed. In its words, the mechanism was activated in coordination with the Supervision Department.

The Attorney General objected to the first version of the settlement agreement. Among other things, she referred to the letter of the Supervisor of Banks of September 13, 2022, which cancelled an approval given to the bank in 2011, and argued that the mechanism gives the bank an unfair advantage. Following the objection, the agreement was amended.

What the court decided in the Mizrahi Tefahot settlement

The parties held mediation before retired Judge Yitzhak Inbar. On March 7, 2023, Judge Yehezkel Kiner approved the settlement agreement, in a version that had been amended twice. The parties stressed that the agreement contains no admission by either of them of the other side's claims.

Refund for the past

The bank will refund each class member the difference between the actual monthly charge under the mechanism and the charge under a "reduced interest rate". Put simply, 22.5% of the difference between the interest set under the mechanism and the interest under the bond anchor is deducted from the interest set under the mechanism. The bank estimated the refund at NIS 26.2 million.

Future discount and undertaking for the future

Customers whose loan is active and whose interest period has not yet ended will be given an interest discount at the same rate, until the end of the interest period. The benefit was estimated at about NIS 18.5 million. The bank undertook not to activate the mechanism in future interest updates and not to include it in new agreements. The undertaking also applies to customers who are not class members.

According to the parties' reply to the court, the versions of the loan agreements were updated on the night between September 13 and 14, 2022, as part of the preparations for the uniform mortgage baskets reform, and the mechanism clause was removed.

Reasons for approval

The judge noted that the refund and the discount are relatively low. However, he took into account the bank's defense arguments, the risks, the expected length of the proceeding and the ending of the use of the mechanism. He found that the automatic refund to customers' accounts is an efficient mechanism. The question of disclosure in the approval in principle was not decided.

Award, legal fees and a supervisor of implementation

The parties recommended an award and legal fees totaling NIS 8,570,000. The court reduced them: an award of 1% to the applicant, and legal fees of 13.5% of the refund and 12% of the benefit, plus VAT. According to the bank's estimates, this is an award of NIS 447,000 and legal fees of NIS 5,757,000 plus VAT.

The amount saved, about NIS 2,366,000, will be added to the refund and the discount, and the 22.5% rate in the formula will be increased accordingly. The court appointed accountant Arie Rappaport to supervise implementation of the agreement, and his fee is borne by the bank. Monies that do not reach class members will be transferred to the fund for managing and distributing monies awarded as relief, to assist first-time home buyers and those upgrading their housing.

Quotes from the decision

This is a settlement agreement in a class action, which by the very nature of the claim should be published in full, including relevant data and without confidential data.

Paragraph 16 of the judgment, page 6 (translated from Hebrew).

Indeed, the Attorney General's view was different, and I too believe there is difficulty with at least some of the defense arguments, but we are dealing with a settlement agreement

Paragraph 62 of the judgment, page 17 (translated from Hebrew).

This is a relatively low refund and discount (although in absolute terms they amount to tens of millions of shekels, as detailed above), and it may be that there was room to increase the rate of the refund and the discount

Paragraph 65 of the judgment, page 18 (translated from Hebrew).

Who is eligible for a refund and how it is made

The class: customers who received from the bank a variable-rate housing loan based on a bond anchor, from seven years before the motion for certification was filed until the agreements were updated, where the loan agreement included the mechanism and the bank activated it before the settlement agreement was approved.

Active loan paid by standing order: an automatic credit to the account linked to the order. An amount smaller than NIS 2 will be offset against the monthly payment.
Active loan paid by vouchers: a notice by text message and by mail, and you must contact the bank within 30 days with account details.
Loan that has ended: a transfer to the account from which the last payment was made. If the account is not known and the amount exceeds NIS 50, a notice will be sent and you must contact the bank within 30 days.
A debt in arrears in the loan file: the bank may first apply the refund to repaying the debt.

According to a report in Calcalist of February 20, 2024, the bank began refunding about NIS 45 million to about 87 thousand mortgage customers.

What it means for Mizrahi Tefahot customers

The judgment documents that on bond-anchored mortgages the bank activated a mechanism that changed the calculation of the interest, and that in the settlement a refund of part of the difference was agreed. The court did not decide whether the mechanism was lawful.

A borrower who had such a mortgage can check the account statements to see whether a credit was received, and check the reduced interest rate in the bank's notice. Further proceedings against the bank are collected on the class actions page and in the rulings database.

Sources

More court rulings against Mizrahi Tefahot on mortgages and housing loans

All 39 decisions in the database ›

Questions and answers

What is the "emergency protection mechanism" in a Mizrahi Tefahot mortgage?

According to the judgment in Class Action 41639-12-17, it is a mechanism set in agreements for variable-rate housing loans based on a bond anchor. Upon the occurrence of an "extreme event" the mechanism changes the way the interest is calculated. The bank argued that it was intended to protect it against an extreme rise in its funding costs.

How much money will be refunded to borrowers under the settlement?

The bank estimated the refund for the past at NIS 26.2 million, and the future interest discount at about NIS 18.5 million. The court ordered about NIS 2,366,000 saved from reducing the award and legal fees to be added to them.

Do I need to contact the bank to receive the refund?

Those who paid by standing order receive an automatic credit to the account. Those who paid by vouchers, or whose account is not known to the bank, should receive a notice and contact the bank within 30 days with account details.

Did the bank admit that the mechanism was unlawful?

No. The parties stressed that the agreement contains no admission, and the court did not decide the question of the mechanism's lawfulness. The bank undertook not to activate it in the future and not to include it in new agreements.

Did Mizrahi Tefahot Bank admit a violation?

No. The decision approves a settlement, and in such a settlement the bank usually does not admit a violation. The court examines whether the settlement is fair and reasonable for the class members.

Where can I read the full text?

The full text is available through the "Full text" link on this page.

Class Action 41639-12-17 Shif: Mizrahi Tefahot will refund interest differences to variable-rate mortgage borrowers and grant a future discount