Question

Case 8.3: Banking: Truth Telling or Compassion? You work for a major bank that extends commercial lines of credit to auto, RV, and marine (boat) dealerships for the purpose of stocking their inventory to be sold on a retail basis. The inventory that is purchased by a dealer is financed through the credit line and serves as collateral to the loan. The loan is paid off immediately following the sale of the unit, allowing room on the credit line for additional orders. A line of credit like this is the life-source of a dealership, for without it, business failure is almost certain. You manage and underwrite a portfolio of loans serving dealers primarily based in the Midwest. Your job is to evaluate both the risks and mitigating factors on each account and draft a write-up with a recommendation to continue, terminate, and/or adjust the terms of a credit line. The recommendation gets approved by at least two levels above you in the bank's corporate offices. It is common for you to come into contact with most dealers numerous times a month — sometimes on a daily basis. Recently, a small RV dealership was due for a standard annual review in order to determine if credit would be continued or terminated. This dealer was one of the many RV dealerships severely affected by the economic recession in 2008 (as well as 2009 for many RV dealers). The dealer had taken a loss the previous year, which had weakened the balance sheet. In a conversation with the dealer, he revealed to you that he was using personal credit cards to help fund the business but had already significantly reduced the credit card balance in the last six months, when his credit bureau report showed he had racked up $60,000 in credit card debt to fund the business. Another two or three quarters of losses could very well put the dealer in an insolvent position, requiring the bank to pick up the inventory and potentially take a loss on the auction sale of the inventory. Despite the recession, the dealer had been doing the right things to get back on the right track and had verbally reported that in the current year, numbers were doing much better. Numerous measures were taken by the dealer to cut costs, including laying off additional employees and reducing his personal salary to minimal levels. The most promising mitigating factor, however, was that the dealer had owned real estate property adjacent to the dealership that had been vacant for numerous years but was recently leased on a two-year contract that would bring him new $2000 monthly cash flow. After evaluating all factors, you conclude that the dealer would make it through the difficult season and that the bank could be confident that no losses would occur. Furthermore, you believed the majority of higher management would agree, except for Amanda, who held the highest level of approval authority, and who would automatically elect to terminate the account simply because the owner used personal credit card debt to fund the business. You are wondering whether to omit the information about the owner's credit card debt on your recommendation and write-up. It is standard practice to put down every detail and lay out all risks, yet you also know that Amanda is likely to lose all objectivity and rationality after learning the business was partly funded on credit card debt for a season. Both the bank's capital as well your job could be at risk if the bank took a loss. The owner had done everything the bank had asked him, and he had already seen recovery. Furthermore, a decision to close the credit line would likely force the dealership out of business.

Answer 1

Answer 1) It is not ethically appropriate to omit the information about the owner's credit card debt on credit assessment for the sake of the dealer's survival as a business. Since I work for the bank and my job responsibility includes to evaluate both risks and mitigating factors, I would perform my duty with complete professional ethics and would not omit the information about the credit card debt on credit assessment.

There are probable chances that the dealership account shall be closed by the bank after knowing that the dealer has used his personal credit card to fund up business. But this possiblity is reduced majorly because of the following reasons:

a) The dealer's business has been doing well before recession. If recession had not come, the dealer would have made all the sales and would have repaid the credit taken from bank on time.

b) To survive during the period of recession, he has used his personal credit card. The recession is a force majure, that is unforceable and unpredictable circumstance therefore, the dealer had no other option to survive his business.

c) The dealer has taken numerous steps reduced all additional costs including laying off additional employees.

d) The dealer has leased out a real estate property for the term of 2 years at the rate of $2000 per month which guarantees cash flow for upcoming 2 months.

Since the risks are low as compared to factors of revival of the dealer's business there are more chances that the higher authority at bank may consider the report prepared by me and would not terminate the dealership account . as the loss to the dealer has been made during the period of recession and not during the normal course of business. Hence, many related jobs could be saved. Whereas, if this information is omitted and later on if the higher authority gets to know about the information omitted, it might end in terminating the dealership account as well as I might also loose my job. Thus, it would be my professional ethics to disclose all risks and mitigating factors to the highter authority at the bank.

Answer 2) There are many obligations which an employee has towards his employer. In present scenario the utmost obligations I would have towards my employer, that is bank would be to be honest and be true in discosing the facts and figures of the dealership. Even if the highter authorities in bank would not be convinced with my report I shall not indulge in their final decisions.

To make balance in my mind in between the compassion for dealer and covenant obligation to my employer, I would try to convince my employer thorugh my report to not terminate the dealership account as there are fair possible chances of revival of the dealer's business. If I had not even tried to convince my employer it would be difficult to maintain the balance in my mind. But I have to remember that the final decision is to be taken by the Bank, that is my employer and my professional obligations stand tall against my compassion with the dealer.

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