Do Banks and Lenders Have an Obligation to be Responsible?

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 21^st 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?

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      1. Educate BorrowersThe first thing that needs to happen is better education. Lenders need to publish more content like this resource from Auto.Loan, which helps people understand the concept of refinancing and how it affects their financial situation, or this article from The Motley Fool, which tells people how much house they can really afford. Educating borrowers doesn’t mean turning away business – it means setting them up for success which means the loan is more likely to be paid back in full.
      
      
      2. Promote Individual AccountabilityThere has to be more individual accountability within banks and lending organizations. Until people are held responsible for unethically preying on borrowers, no real change will take place. On the flip side, ethical behavior should be rewarded so that lenders are encouraged to do the right thing. Over time, this will correct erroneous behavior.
      
      
      3. Take Confidentiality SeriouslyFinally, confidentiality has to be taken seriously. Lenders are privy to vast amounts of personal information – information that, in the wrong hands, could prove destructive. In addition to legally protecting this information, lenders have to do a better job of only using it for the purpose for which it is intended. Confidential information is not to be used inappropriately for leverage.

Open for Interpretation

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