Application of the South Asian Shapi'aa-Compliant Model
To examine the practical application of the South Asian model, the methods and procedures used by an American-based Islamic mortgage finance company that uses the model will be examined below. This “Islamic” mortgage finance company came to market in late 2001 and was heavily promoted as the real solution to the problem of providing “Islamic Shari'aa-compliant” financing to “Muslims and others” in the United States. In general, the procedure used by the company is based on the South Asian model described in the previous section.
The company advertises and publishes on their website a copy of the fatwa signed by the Shari'aa Board of the company, which includes (retired) Justice Taqi Usmani. The company states that the purposes of the model are to:
■ Assist Muslims and others to acquire homes in compliance with Shari'aa.
■ Help buyers to enjoy tax benefits.
■ Allow the company to securitize their ownership investment in homes.
The company explains that the financing process goes through the following steps:
1. The mortgage company forms a limited partnership as a special purpose vehicle (SPV) with the customer. They agree to purchase the property together and to record title in the name of the customer and the SPV company jointly. The cost of forming the SPV is charged to the customer (approximately $1,400 to $1,500) and its monthly maintenance cost (usually $18 to $20) is also charged to the customer. The company makes the following disclosures about the use of a “Bankruptcy — Remote Limited Liability Company” (LLC — a special-purpose vehicle) as co-owner: “. . . the LLC [has a] separate legal entity that prohibits co-owner from incurring debt other than the financing of the property.” This may be an advantage, in that it limits the customer's ability to use his home as a credit card. Despite that fact, we have seen in practice customers who have still taken a home equity line of credit on homes financed by this model — but only from that company, because it has the customer captive through its joint title ownership. In fact, the company that uses this model has been advertising to encourage members of the American Muslim community to take a home equity line of credit to finance hajj (pilgrimage). It is known that the law (Shari'aa) requires that the Muslim pays off all debts (except in many cases the mortgage necessary to live in a house) before he/she goes on hajj and not to borrow more to go on hajj. It is not clear whether the Shari'aa Board approved such an invitation to take a loan to go on hajj, which first stands opposite to the condition required by Justice Taqi Usmani and second is in violation of the law (Shari'aa). The TTC that serves as co-owner may also serve as co-owner with other consumers in up to 10 separate properties with 10 separate consumers. The TTC mortgages the property to the financier (“the company”). The company also discloses that there will be an ongoing TTC fee of $18.75 per month to be used to pay for unaffiliated third-party expenses. The company also states that it may adjust the ongoing monthly LLC fee in the future to reflect any increase to the current fee. The LLC fee is part of the financing costs.
2. The SPV would proceed to rent the property back to the customer at a rate agreed between them using the prevailing (interest) rate as the rent of the property — making it, in fact, a process of renting money and not the property. This rent is exactly the riba interest rate charged in the market. In fact, if a customer called the company representative, that representative would proceed immediately to tell the customer that the rental rate is, say, 6 percent, which happens to be the interest rate on mortgages at that time. It is well known that renting a property depends on the location of the neighborhood, the specifications of the house, and any other special features the house may have. The actual rent of the property on the market can in fact be drastically different from what the company defines as rent using the interest rate at that time. The name of the SPV company stays on title until the buyback is completed. At that time, title is transferred to the customer. This feature limits the freedom of the customer to act without the approval of the joint holder of title. In other cases, it may represent a liability to the customer, for example, if the company faces challenging times.
3. The buyer would agree to buy back shares from the partnership, representing the payback of the principal. Since the units of property will be purchased by the consumer under this arrangement at cost and without increase, the company claims that there is no element of eena in this arrangement. As stated earlier, eena is defined as a sale with a promise to buy back at a later date at a pre-agreed-upon price. According to the law (Shari'aa) the buyer should be offered these shares at the prevailing market price, and the customer should be given the choice of accepting or rejecting that sales price offer, but that is not what happens.
4. The company states that the consumer will make monthly payments composed of profit payments and acquisition payments. The acquisition payments, the company states, represent the consumer's payments for his/her acquiring the co-owner's interest in the property. It is noticed here that there is a lack of full disclosure as required by Justice Taqi Usmani. As stated earlier, the scholar makes the condition that for the model to be compliant, the company must offer its shares in the joint venture for sale at a true prevailing market price, and not just bill the customer to pay the acquisition payment (principal).
The company that uses this model discloses that this model or mortgage product conforms both to the practices of the U.S. mortgage regulation and the principles of the law (Shari'aa). Therefore, the use of the terms interest, principal, borrower, and lender are mandated by law, and the model is subject to the same disclosures as a regular mortgage loan, such as a good faith estimate (GFE), TILA disclosure, and so on.
It was also noticed that the company claims that both parties benefit and bear the risks of their respective shares in the property throughout the contractual arrangement (“term of the financing”). The customer benefits from the fact that he/she is participating in what is presented as a “Shari'aa- compliant” contract. However, in doing so, the customer has to go through a number of extra steps without reaping any economic or religious benefits — like joint venturing with an LLC, paying extra costs for the SPV, and accepting a joint title ownership with the SPV that may result in future undefined risks. One of these risks, for example, is a case in which the company — the joint owner of the title — experiences legal difficulties. The other concern that can be made about this model is the claim that this model allows both the customer and the company to bear the risks of their respective shares in the property. Upon further detailed analysis, it can be safely concluded that the risk carried by the company is even less than the risk assumed by a conventional bank or a financing entity doing a riba-based transaction. It is also concluded that this method exposes the consumer to many risks, especially the risk of getting involved in a nonstandard mortgage structure with nonstandard contracts and promissory notes that has not been tested in the U.S. courts of law yet, as compared to the standardized mortgage finance contract offered in the United States. The other risk is the unfamiliarity of judges and participants in the legal system with such contracts, let alone the extra legal expenses that would eventually be incurred by both the customer (who has much less means than those available to the company) and the company in case a lawsuit is brought to court as compared to a standard and simple administrative legal process in the case of a standard mortgage contract.
It is important to state that regardless of the objections voiced about the contract and the circumventive ruses and deceptive tricks used, it is believed that God will reward those who have made an attempt to develop it in good faith and those users who trusted these claims and were willing to pay more to avoid participating in riba because He, our Creator and the Ultimate Judge, knows that their intention is not to deceive people or to violate the Judeo-Christian-Islamic Shari'aa law.