If a tree falls in the forest and no one hears it, did it make a sound? This is the same approach financial institutions are taking in regard to subprime lending. If a loan is given to the weakest borrowers and the lender no longer holds that loan, are they responsible for the default and the fall out that weakens our economy?
Financial institutions all claim to practice corporate social responsibility. Given this claim, should they also be promoting subprime lending? The answer is yes. Subprime lending is necessary to promote economic growth. However, in light of questionable ethics, a company could exploit the advantages of subprime lending in order to create greater commissions, which, per the Wall Street Journal were .04% higher on average than a conventional loan. As such, brokers could use aggressive sales tactics to sell subprime loans to borrowers who would otherwise qualify for conventional loans. The journal reported that between 2000 and 2007, more than 55% of the subprime loans went to people who could qualify for conventional loans. During this period there was clearly a gap in the mortgage brokers ethical compass.
With an eye on creating profits while eliminating risk, financial institutions adopted the “originate to distribute” model for loan products—basically loans are originated, then sold off as securities to investors (Gilbert, John 2011). Knowing that the total risk of the subprime loan would be transferred led to banks loosening their lending criteria. In contrast, Gilbert also points out that when the bundled securities were sold off, the investors were unaware of which loans were at risk creating an environment where the best answer is to say no to the investment. Ultimately this led the collapse of the subprime market in the last decade.
As banks eye other commerce markets for their subprime products, such as the auto loan industry, there needs to be a review of these lending institution’s published values in regard to their corporate social responsibilities. The need for socially responsible lending institutions is paramount to keeping us from plunging into another banking crisis. As borrowers scramble to fix their credit standing, subprime loans are again a sought after option. Without due diligence and strict oversight, the potential to further damage the economy looms in the balance.