Discussion Question

In this discussion, you will read a case study that presents an ethical problem regarding the reduction of sub-prime auto loans. This case study provides a chance to analyze the issue and voice your own opinions on the matter.

Please remember to cite the text and any outside sources used.

Human Relations Case Study 52

The Subprime Auto Loan Unit

Calvin is the director of the subprime auto loan unit of a large regional bank. He is aware the public, including politicians, do not take kindly to automobile loans issued to people with below-average credit ratings. He is also aware that Wells Fargo, one of the biggest banks in the country, has decided to reduce its exposure to subprime auto loans to 10 percent of all its auto loans. Yet Calvin also recognizes that subprime auto loans are important for many consumers. Today, he meets with a few members of his management team (Suzanne, Derek, and Gloria) to discuss his concerns.

Calvin: I am getting worried about our image. Let me tell you about some of my concerns. Our average interest rate for loans to our subprime and deep subprime loans is over 10 percent. Contrast this to rates of about 3.5 percent for our super prime and prime loans. We also know that the average interest paid for the life of the loan is about $9,000. Also, the repossession rate is climbing in recent months.

Suzanne: Calvin, you are the boss, but you are neglecting the reality of our loans. The majority of our customers would not be able to hold a job without personal transportation. If we dont lend them the money to purchase a car, they could not earn a paycheck. Our interest rates have to be high to cover our risks, but we enable many people to hold onto a job.

Derek: I, too, am concerned about our subprime and deep subprime loans. A few months after many of our customers purchase a vehicle, the loan is underwater. They owe more to us than their car is worth.

Gloria: Lets put this all in perspective. If the people who finance their vehicles through us could get low interest rates from a conventional bank or other lender, they would. We are the last resort for modest-income people with bad credit who need transportation.

Calvin: I agree that subprime and deep subprime loans do some good. But I have this uneasy feeling that we could be a little more ethical. Another problem is that the automobile dealers mark up the loans to give themselves an additional cut, so the auto buyers pay even higher interest rates and fees. Lets explore this issue a little more, later.

Questions 5.14 What ethical issues do you see in the unit of the bank in question making subprime and deep subprime loans at a much higher rate than loans granted to consumers with better credit ratings?

5.15 What recommendations can you make to Calvin so he would have less concern about issuing subprime and deep subprime loans?