Subprime Loans: Leadership Decision-Making

     Leaders have the ability to put their foot down and determine whether or not they will give borrowers a hard time. According to Joseph Gilbert (2011), “An organization does not make decisions; its function is to provide a framework, based upon established criteria, within which decisions can be fashioned in an orderly manner. Individuals make the decisions and take responsibility for them.” These words were written over 40 years ago by Alfred Sloan, the legendary chief executive officer of General Motors. If we think about their meaning, we can take the first step toward establishing who is to blame for the subprime lending mess. Mortgage loans are made by an institution, not by an individual. However, the authority to decide whether or not to make a loan is vested not in the institution as a whole but in a credit or loan officer or committee”. Leadership skills come from the top, and trickle on down to the bottom.

     If leaders took the initiative, and started lowering interest rates, and slowly extending larger amounts of credits to borrowers who have bad credit, the subprime loan industry will decrease. In addition to the subprime loan industry decreasing, other major lenders would potentially follow in suit. Just as an example, Fingerhut.com is worth over 1.7 billion dollars. Its estimated website traffic alone is worth $534,820. Back in 2002, the owner of Fingerhut.com was on the brinks of going bankrupt. He was thinking about either closing or selling the company. Then, Fingerhut.com improved its website, and started extending lines of credit to people who had imperfect credit. They started out giving the people very small lines of credit… anywhere from $50 to $150 dollars.

     Every time the borrower paid off their balance, the line of credit increased. According to Watkins (2011), “The Goldman Rule rests on the assumption that increases in profitable opportunities increase the opportunity cost of ethical behavior. Ethical behavior refers to self-imposed actions to avoid taking advantage of others that result in lower profits. The Goldman Rule suggests that financial institutions are less likely to engage in ethical behavior where the opportunity cost of such behavior is high”. It’s apparent that Fingerhut.com decided to follow the practices of the Goldman Rule. Not only did this built a relationship with Fingerhut and its borrowers, but it also improved and strengthened the credit score of the borrowers. And, yes, Fingerhut.com did have higher interest rates for people they extended lines of credit too. But, the interest did not start to occur until the borrower ran late on their minimum payment being owed. It’s this type of initiative that shows not everyone is out to make money. Leaders have the ability to make decisions that help to improve the subprime loan crisis, just as the owner of Fingerhut.com did. And, it truly is the leaders decision on whether or not they participate in ethically assisting a borrower in both taking out a line of credit, improving their credit score, and paying back said loan.