To subprime loan or not to subprime loan?

In the 1980s, lenders started issuing subprime loans to people who had issues with their credit history. Although these loans had higher interest rates, they were a good option for a borrower, who may have a medical emergency, lost their job or went through a divorce. Lenders also found a way to mitigate loss with subprime loans through the securitization – or the act of selling multiple loans to investors (Financial Crisis Inquiry Commission, 2011).

This seemed like a win-win situation, until borrowers were unable to pay for their loans and lenders had to start foreclosing on homes. It did not just stop there. People eventually were left homeless, while their former houses were left unkempt. Also as a result, banks became more selective, making it harder for other people to get loans and led to the loss of jobs across the mortgage industry. Ultimately, this led to recession (Martinez, 2009).

When engaging in social responsibility, companies have the responsibility to ensure their actions will not harm society, their stakeholders and the future. The loan originators may have had the right intent in issuing loans or they could have been trying to keep their bank competitive. However, they should have realized the negative consequences (Steiner, Risopoulos & Mulej, 2015).

Imagine you are at a gas station and someone asks you for money. You can either spare some cash or not. However, what if you started handing out money to everyone who asked, regardless of their ability to pay you back and you continued to do so until it started affecting your finances negatively. What started off as an act of kindness has now become detrimental to you, people who depend on you and your credit. It is ok to practice social responsibility, but it cannot compromise the source. Hence the need to better educate individuals on how to be socially responsible. On the other hand, institutions that did engage in CSR performed better during the recession. Thus, social responsibility is important, as long as policies giving guidance are in place (Steiner, Risopoulos & Mulej, 2015).

 

References

Martinez, B. (2009). Subprime Loans: Turning the American Dream into a Nightmare. St. Thomas Law Review. 514-542. Retrieved from http://eds.a.ebscohost.com.proxy1.ncu.edu/eds/pdfviewer/pdfviewer?sid=e2be16e8-4a10-4b51-8382-a1589d0d4d90%40sessionmgr4006&vid=7&hid=4105

Steiner, G., Risopoulos, F., & Mulej, M. (2015). Social Responsibility and Citizen-Driven Innovation in Sustainably Mastering Global Socio-Economic Crises. Systems Research and Behavioral Science Systems Research 32. 160-167. DOI: 10.1002/sres.2255

The Financial Crisis Inquiry Commission. (2011). The Financial Crisis Inquiry Report. Washington, D.C.: U.S. Government Printing Office

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