Chapter 15, Problem 1EA

You are a loan officer with a financial company that specializes in auto loans. The senior vice president in charge of your area sets new loan quotas for your group and suggests that courting more subprime make the quotas easier to meet. He reminds you that the company can justifiably charge higher interest rates, loan fees, servicing costs for these higher-risk loans. He also points out that the loans will earn you and your team larger commissions as well. "Everyone wins," he tells you. "We help people who might otherwise be able to get the financing they need, the company make money, and so do you.

But you are uneasy about the company's focus on subprime borrowers, low-income applicants with poor limited credit histories, many of whom are also minorities. You suspect the company's tactics could be considered "predatory lending" or "reverse redlining." You are also convinced that the cost of the company's subprime loansaren't tied to the risk factor at all, but to how profit the an squeeze from a group of unsophisticated borrowers with few other options.

Using a web search tool, locate articles topic of subprime auto loans, and then write responses to the following questions. Be sure to support your arguments and cite your sources.

Ethical Dilemma: Should you seek out subprime loans, knowing that youwill have to charge borrowers the high fees your company demands, while believing they may not be totally justified?

Sources: Adam Tempkin. "Deep' Subprime Car Loans Hit Crisis-Era Milestone,"Bloomberg Markets, https://www.bloomberg.com, August 15, 2017; ShannaraJohnson, "Subprime Auto Loans Up, Car sales Down: Why This Could Be for Gold, Forbes,https://www.forbes.com, July 13, 2017: Mark Huffman, "Santander Settles Subprime Auto Loan Suit with Massachussetts," Consumer Affairs, https//www.consumeraffairs.com, March 31, 2017; Michael Corkery and Jessica Silver-Greenberg. "Prosecutors Scrutinize Minority Auto Loans."The New York Times, https://www.nyrimes.com. March 30, 2015.

Summary Introduction

To determine:

Whether to seek out subprime loans.

Introduction:

Subprime loan is a loan which is offered to individuals who are not qualified for prime rate and they receive a rate above the prime rate. Subprime borrowers are often turned down by other lenders as they receive a low credit ratings. When people are out of money, they tend to borrow from banks, other institutions and so on.

Explanation of Solution

Subprime loans are usually lent to people who cannot or do not have a stable payment schedule such as the unemployed, hence seeking out subprime loans is not a good idea as they might take longer period to re-pay or might keep delaying their payments. Usually when lending loans to subprime loan borrowers, charging higher interest rate is unlikely, thus this cannot be justified. Like mentioned in the case, subprime loans could increase the risk factors, as, when the company starts lending subprime loans, it will have to charge the borrowers a high fees according to the company's demands and if people cannot pay fees according to that, it will be a risky factor that the company will have to face.