Around December, my sister required funds ($67,000) for a deposit to buy a house. I said I would be willing to loan her the money until such time as she was able to pay me back. The way I got the money was by taking out a mortgage on my own house. It is hard for me to loan the funds with interest accruing, so my parents said they would reimburse me for the interest I had to pay. I was advised that it would be difficult to loan my sister the funds under a heter iska because my sister does not have a business. I ended up advancing her the funds anyhow.
I was told that based on two factors I could take the interest from my parents. The first factor is that it is a loan between family members that is not enforceable in beis din (there was no contract, etc.). The second factor is that my parents are (re)paying the interest, and not my sister. At some point, I’m not sure when, my parents appear to have taken over the debt from my sister in the sense that they began paying me the principle as well as the interest. Despite this, I continued to accept the interest. (In one instance I helped calculate the interest they owed.) I thought that I was allowed to do so based on the first factor, that it was a loan between family members that was not enforceable in beis din.
I was eventually told that even though it’s ribbis derabbanan, it is best to repay my parents the interest that they paid after they took over the loan. I’m unable to calculate the exact amount as I’m not sure when the debt changed hands. Furthermore, when I mentioned to my parents that I would repay them the interest, they got upset and said they would just give it to me again as a gift. I’m now not sure what to do. Do I estimate the amount and give it back to them and perhaps make them upset?
We clarified last time that one may not take interest on inter-family loans and that this is a Biblical violation. Second, one who receives money as an iska needs to use the money for an investment or to already have an investment. Third, buying a house, even if the intention is to live in the house, qualifies as an investment. Fourth, a third party may pay money to a lender in order to encourage him to grant an interest-free loan.
We need still to clarify whether Jewish law permits you to accept the interest payments from your parents since your parents told you before you took out the mortgage that they will reimburse you for the interest that the bank will charge you. Additionally, we need to answer your question about what to do now with the interest payments that your parents made after they assumed your sister’s debt, and thus they paid you both the principal and the interest.
The first point that needs clarification is the relationship you have with your parents as a result of having complied with their request, after they told you that they will reimburse you for the interest that you will need to pay the bank.
As we discussed last time, when you took out the mortgage on your name and gave the funds to your sister, you actually borrowed money from the bank and you then (separately) lent the amount you received from the bank to your sister. Once your parents told you that if you do so they will reimburse you for the interest payments that you will make to the bank, they became halachically liable to pay you this money. This obligation is between you and your parents and has nothing to do with your sister since she was never obligated to pay you the interest. It applies to the loan you got from the bank and not to the separate loan you made to your sister.
The source that a person becomes obligated to pay a lender who lends money to a third party at his behest is the Torah. The Gemoro (BB 173B) derives from pesukim that a cosigner (arev) on a loan is obligated to pay the lender in case the borrower does not pay. Even though the cosigner did not receive any money from the lender, he is obligated to repay the loan if the borrower fails to pay because he received from the lender the satisfaction that the lender considered him a reliable person as evidenced by his having lent the borrower money based on the word of the cosigner. Since the cosigner received a benefit from the lender at the time that he lent money, he became obligated to repay the loan if the borrower fails to pay since receiving satisfaction is like receiving money.
Similarly, in your situation when you lent the money to your sister, based on your parents’ word that they would reimburse you for the interest that you would be charged by the bank, you showed that you relied on your parents’ word and this obligated your parents to pay you the interest that the bank will charge you. In this case, your parents are not cosigners since their liability to pay is unequivocal and not dependent on your sister, since your sister was never liable for the interest that you had to pay the bank (nor for the principle). However, the important point is that from the liability of a cosigner we can derive your parents’ liability.
Thus, your precise relationship with your parents and your sister was that your sister owed you exactly the amount that you received from the bank and consequently lent to her, and she had no further liability. Your parents were liable for the interest that you needed to pay the bank but they had no liability for the principle at all. Even though the only reason your parents were obligated to pay the interest is because you lent money to your sister, this arrangement is permitted since your parents are not the borrowers but are a third party. This point is noted by Chelkas Binyomin (160, 116).
Furthermore, the amount that your parents were obligated to pay you is unaffected by your sister’s non-repayment of the money that she owed you (if that would transpire) since whether she paid you or not the bank would charge the same amount of interest. It is only if you fail to pay the bank that the interest payments will grow. We stress this point because it is very delicate and crucial. If your parents’ obligation to pay the interest was affected by your sister’s failure to pay you the principle promptly, this arrangement would not be permitted since in this case your parents would have an interest that the loan is repaid promptly, in addition to their liability for the interest. This point is stressed by the Taz (160, 6) and ruled by others (Levush, Shach (170, 7)) as well.
The above applies to the initial stage when your parents were only obligated to pay the interest but not the principle. However, you write that at some stage your parents assumed responsibility for the principle as well, and the question is whether this affects the legal status of your relationships.
As we said previously, if your parents had a halachic responsibility to you for the principle, the arrangement would be forbidden since they would be liable for both the principle and the interest. From your question, it seems that your parents just unilaterally began to pay you the principle but never formally assumed responsibility to pay you the principle. In other words, they never became liable to you for the principle and just decided to help your sister by paying back her debt to you. In this case there is no problem since they only remained responsible for the interest and your sister remained liable for the principle.
Therefore, even when your parents paid you back the principle they were allowed to keep paying you the interest and there was no problem with your helping them calculate the interest that they needed to pay you.
What is important is that your sister should not be involved in your parents’ original decision to pay you the interest. The SA rules (160, 13) that she is not allowed to persuade them to agree to pay you the interest. While many (including Shach note 18) are lenient and do allow this, nevertheless it certainly is best to avoid this problem. Furthermore, as we wrote last time, your sister should not reimburse them for the interest that they paid you. Here again there are opinions (Chavos Da’as note 6) that this is permitted since the payments are being made to your parents only after you lent the money to your sister. Nevertheless, others do not permit this and it is better to be stringent.
In conclusion: It was fully permissible for you to continue accepting the interest payments from your parents even after they began paying back the principle of your sister’s debt to you and you do not need to pay them anything.