By Jenna Cypress
The average American doesn’t understand personal finance very well. They assume that just because they can qualify for a loan, they can afford the loan. Sadly, this often leads to poor decision-making. Do companies have a moral obligation to keep consumers from taking on too much debt?
Ethical considerations in the lending profession
In the past, loans and mortgages were obtained from local banks. If someone wanted to buy a house, they walked into their bank and met with a banker who they probably knew on a personal basis. Because this banker knew the client and held the loan on his balance sheet, he had a vested interest in making sure that he supplied the client with a loan that would set them up for success.
At the start of the 21st century, things began to change. Mortgage brokers entered the picture and the focus turned to processing as many loans as possible. And because these brokers don’t have relationships with the borrowers – and they likely won’t ever interact or meet again – they don’t really care if the loan is something that can reasonably be handled. It’s a simple transaction – no emotions are involved.
This is part of the reason we saw a massive housing collapse at the end of last decade. Lenders started giving out loans to people who really weren’t qualified, just so they could make a quick buck. But now that we’ve fully recovered and the economy is as stable as it’s been in years, it’s time that we study the role of ethics in the lending profession.
The topic of ethical behavior is a tricky one. Technically speaking, it’s possible to be unethical and still not do anything illegal. But the growing opinion is that banks and lenders have a moral obligation to act ethically.
In the broadest sense, ethics in lending means treating everyone equally, being honest in all situations, giving full disclosure without being prompted, not taking advantage of people, and keeping good documentation. It sounds simple enough, but many lenders are finding it difficult to move past bad habits that are profitable.
How lenders can become more ethical (and profitable)
The word “ethical” is extremely popular in the world of finance right now. There are thousands of investment funds, banks, and lenders who use the word when describing their services. Unfortunately, many of these companies use ethics as a marketing slogan, not a guiding force in how they conduct business.
In order for lenders to truly become ethical, the idea that actions speak louder than words needs to be understood. As Tom Sorrell of Warwick University argues, firms that market themselves as being “ethical” are increasingly being looked on with suspicion.
“Ethical banks shouldn’t – morally shouldn’t – claim to be ethical,” he says. “Some things should be shown and not said.”
Having said that, what specific action steps can banks and lenders take to fulfill their obligation to be ethical and responsible in a fast-paced business environment that’s characterized by churning out as many loans as possible?
Technically speaking, being unethical and illegal aren’t mutually exclusive ideas. It’s possible to be unethical and still obey the law in the lending industry.
However, as more scrutiny is placed on the industry – and as corporate social responsibility takes center stage – it’s no longer smart to be an irresponsible lender. Ethical lending is not only the right thing to do – it’s also the most profitable from a long-term perspective.
Image credit: peter castleton, Flickr