Question

can someone please put the expert answer in FIRAC format.

Ethics Factual Scenario

Consumer Lending Corp. is a national consumer loan company whose shares are traded on the NYSE. It conducts business through local loan offices throughout the nation. It borrows the funds it uses to lend to consumers by selling commercial paper (in the form of promissory notes secured by the underlying consumer loans) to large institutional investors. The cost of acquiring these funds is substantially affected by the delinquency rate of the underlying consumer loans. Corporate management has determined that corporate profits are maximized by a low delinquency rate, and has made that a primary goal of the company. A consumer loan is deemed delinquent if no payment is made within any 90-day period. Any such payment, even a partial payment no matter how small qualifies to keep the loan off the delinquency list.

Local office managers can earn up to a 20% end-of-year bonus based on the total aggregate amount of loans generated by the office, and based on the delinquency rate. State and regional managers also receive bonuses based on these criteria. Many office managers, as a result of this bonus structure, require their loan officers to pressure customers to borrow more money than they need or can reasonably repay on a timely basis.

Further, when these loans become 60 days delinquent, managers instruct their collection staff to use aggressive (albeit legal) collection techniques to pressure debtors to make at least a partial minimum payment before the 90 day delinquency date. Collection tactics frequently include initiating legal action at a cost to the company far in excess of the loan payments that are generated by the litigation. Simply put, managers do not care how much the collection activity costs the company so long as an account is kept off the delinquency list. Corporate management does not penalize managers for the high cost of collection because of the savings in costs of borrowing money in the commercial paper market.

The national consumer finance industry has recently been criticized for aggressive lending and collection practices. Several states and the United States Congress are actively considering passing legislation to implement more regulation of the industry to prevent the more onerous lending and collection tactics. The company has initiated a review of its lending and collection practices, and invited comment and participation from all levels of management.

Direction

You are a local manager that directly reports to a state manager. Your state manager has asked you to prepare an analysis of current practices. Discuss who the stakeholders are. Discuss whether the current practices should continue as is using the Ethical Leader’s Decision Tree presented in the text. Discuss the ethical school you chose to determine if the current practices are ethical. Discuss whether long term benefits of reforming the current practices would be better for shareholders than the short-term profits of continuing the current practices.

Answer 1

Consumer Lending Corp., operates local offices across the United States, providing financial services in the form of consumer loans. The company has adopted emission focused upon maximizing profits by aligning all processes within the company to the achievement of this goal with absolute disregard for ethical considerations or maintaining basic social sensitivity. The cost of capital acquisition for funding the loans the company provides is largely dependent upon the delinquency rate of the loans presently provided by the company. A consumer loan is considered delinquent if there is no payment made towards the loan for a continuous period of 90 days. As profits are maximized by keeping the lending rates low all managers are instructed to ensure delinquent loan are minimized by extracting payments, however small they may be, at least once in 90 days from non-performing loans. This results in presenting delinquent loans as collectible leading to the company obtaining lower interest rates from lenders. Managers are encouraged to achieve this goal by linking performance incentive and bonus with the fulfillment of the criteria of maintaining minimum delinquency rate. Adequate monitoring and control of the means and methods adopted for extracting payments from individuals unable to do so are not provided consideration and no guidelines implemented for alignment with existing laws. Managers often resort to initiating legal action to achieve this goal which is costlier than writing off the loan for the company. There is no adoption of analytical Framework with strict guidelines being adopted exhibiting adequate social responsibility and sensitivity by the company in setting company goals other processes for achieving these goals.

Every organization needs to implement a strong ethical Framework as an important part of corporate social responsibility as every business is not an isolated entity but involved in constant interaction with individuals and society having a major impact on all stakeholders. Maintaining basic values of honesty, integrity, discipline, diligence, patriotism, and compassion which are common to most cultures, on the personal front is quite easy and simple. However, in a business environment within a global organization, the very perception of certain values can differ greatly. Due to this variance in perception all values and ago certain modification with honesty as you have known it no longer having the same meaning and being open to suitable modifications and alterations which may prove beneficial to the organization. Many values may be similarly modifiable, thereby taking on a definition different from the one we are habituated to. It may not be entirely immoral or wrongful acts but simply in the interest of the organization. It would be impossible for an organization to survive without such tweaking in the current environment. The question which is relevant for society is that, how far and how much is acceptable or pardonable in the pursuance of maximization of profits.

Adherence to an ethical stance over profiteering being stressed upon by the tone at the top can lead to ethics being inculcated within the organization and at every level of management by adopting the required established approach as a guiding framework. Implementation of a code of ethics within the organization with the adoption of the suitable ethical standards provides a guiding framework to every individual connected to the organization on the mode of behavior as well as the approach to be adopted within decision making involved in every business process. The company needs to adopt the common good approach which involves consideration of all common conditions which are essential for the welfare of everyone within society with all decisions being based upon respect and compassion for all especially the vulnerable are the requirements of such reasoning.

The stakeholders within the situation are the capital investor providing funds to the company who could suffer financial damage from inaccurate decisions being made due to misrepresentation of facts within the reports provided by the company wrongly representing delinquent loans as much lower than the actual figure. The company itself who suffers from vilification of its brand image as being a company lacking in social sensitivity and empathy, harming the long-term prospects of sustenance and growth. The consumer's unable to repay the consumer loans deserve empathy and compassion to understand the financial constraints and provide adequate support by offering the most feasible payback options or writing off the loan where payback is not possible. When the company initiates legal action it puts extensive stress upon an individual already harassed by a negative financial condition which could result in serious outcome for the individual and the other dependants.

The existing practices of initiating legal action needs to be discouraged by adopting a socially responsible and sensitive policy Framework by the company which shall promote the long term growth while providing dual benefits in the form of increased market share as a result of adopting a compassionate attitude towards loan defaulters. We need to control delinquent loans by adopting a more stringent procedure for issue of the loan to accurately verify whether an individual is capable of repaying the loan. Offering a bonus for adopting unethical practices and maximizing sales without adequate background checks establishing financial capability can harm the company in the long run. Bonus should be offered for maximizing loans which are successfully repaid to encourage accurate verification. The company also needs to establish financial advisory services tourist people in better financial Management to control delinquent loans and improve repayment as the cost would be much lower than resorting to legal action and benefit all stakeholders the company, the lenders, and the end borrower.