Citigroup and Subprime Lending free essay sample

Are there moral concerns associated with subprime lending? Are those moral concerns based on utilitarianism, rights, or justice considerations? Before we discuss the first question let’s get a working description of what subprime leaning is. A subprime lender is financial entity that has an inclination to lend to consumers that are not qualified for traditional loans due to their poor credit status and history of repayment difficulties. Lending to subprime candidates helped lead to secondary mortgage market issue sin 2008 (â€Å"Subprime lender,† 2011). A subprime loan is a loan with elevated fees and interest, given to someone with a lower credit score (â€Å"Subprime loan,† 2011). A major profit source for CitiFinancial and the Associates was subprime lending, this is lending to people who did not meet the customary credit requirements of banks. In the 90’s this lending had provided access to credit to many people who would not have qualified for prime loans because of their credit history. In one study the researchers found that 35 percent of the subprime borrowers were over 55 years and African Americans were twice as likely to borrow in the subprime market as in the prime market (Baron, 2010). There were a few forms of subprime lending that CitiFinancial and the Associates dealt with. One of those forms was home equity loans marketed to borrowers to consolidate their bills. Another aspect of subprime lending was single-premium life insurance sold along with a loan to pay off the principal in the case of the death of the borrower (Baron, 2010). These companies were making a lot of money on both these subprime lending activities. The question is, are there moral concerns associated with subprime lending, I would have to say yes there are moral concerns. It seems that the companies are targeting a certain demographic of consumer. By definition the target is consumers that are not qualified for traditional loans due to their poor credit status and history of repayment difficulties. An example from the text was BusinessWeek writing an article in its March 2001 edition, â€Å"Is Citi bleeding its weakest borrower? †. One of the major issues was the debt-consolidation loans, which roll credit-card and other short-term debt into a refinanced mortgage. The products leave borrowers with lower monthly payments but heavier debt loads and much longer repayment periods. The Federal Trade Commission (FTC) objects to the way Associates pitched these loans as â€Å"money saver,† claiming the company â€Å"nurtured a relationship of trust† and they played on that trust with â€Å"deceptive† practices to put customers into loans. The FTC says Associates unfairly compared a customer’s current payments with their cash on hand after obtaining the loan. CitiFinancial’s Web site advertises a debt-consolidation loan featuring a customer endorsement—â€Å"I now can afford so much more than I thought possible,† says Spencer L. of Worcester, Mass. A sample worksheet shows that Spencer can take out a $20,000 home-equity loan to consolidate his bills, pay off credit cards and reap $310. 57 in monthly savings. The fine print notes that Spencer will pay that back in 120 months at a 13. 49% interest rate. But nowhere on the Web site does it say that it would cost $36, 500 to pay off starting debts of $17,000 (Timmons, 2001). Just with this example it looks like CitiFinancial is not quite honest with their consumers. Their marketing tactics are aggressive by the subprime lenders and just from the few examples that have been given there are definite moral concerns with the business practice. Would the moral concerns be based on utilitarianism, rights or justice considerations? First let’s get some working definitions of utilitarianism, rights and justice as far as being connected with moral concerns. By definition utilitarianism is an ethical philosophy in which the happiness of the greatest number of people in the society is considered the greatest good. According to this philosophy, an action is morally right if its consequences lead to happiness (absence of pain), and wrong if it ends in unhappiness. Since the link between actions and their happy or unhappy outcomes depends on the circumstances, no moral principle is absolute or necessary in itself under utilitarianism (â€Å"Utilitarianism,† 2011). Utilitarianism can also be considered a consequentialist system. In a consequentialist system, an action is moral if it produces better consequences than any other alternative. Utilitarianism is a consequentialist system with two particular features. First, consequences are to be evaluated in terms of preferences of individuals, and second, those preferences are to be aggregated. Aggregation is required because an action may make some individuals better off and others worse off. The standard of human well-being and the need to consider the consequences for all persons correspond to fundamental ethical intuitions (Baron, 2010). By using utilitarianism the greater good in CitiFinancial, however, since the consumer really doesn’t understand what they are signing up for, maybe they could be considered the greater good. Let’s see what rights and justice has to do with moral concerns. Where consequential ethics systems such as utilitarianism focus on the good and evaluate the good in terms of individuals’ preferences for consequences, rights established under a consequentialist system are instrumental. Their justification is in terms of the consequences they yield. Some moral philosophies hold that there are certain rights and liberties justified by considerations independent of their consequences. Basic liberties such as freedom of speech and rights such as equal opportunity are fundamental concepts that express consideration of freedom, autonomy and basic equality. Rights may be derived from moral principles or may be established through political choice. Rights are often categorized as positive or negative (Baron, 2010). In this case I would say that some basic rights of the consumers may have been violated by CitiFinancial because they were not completely up front about the small print that told the true story about the consolidation loans. Other moral philosophies emphasize justice, which requires comparisons of situations of individuals. Justice theories are concerned with how different individuals stand relative to each other on dimensions including, but not limited to, rights, liberties and consequences. The three principal categories of justice theories are distributive, compensatory and retributive. Distributive justice is concerned with providing incentives to contribute to well-being in society and with providing a fair and just distribution of the rewards of those contributions.