Subprime loan was the idea of Countrywide Financial, which would offer mortgage to borrowers with low score credit history. However, controversy arose when the company improvised a new way to withdraw a big part of its finances that were in circulation. Borrowers were expected to pay higher rates and fees than the borrowers with high score credit history so that they would compensate for the lender’s increased risk. In my opinion, the later failure of subprime loans objective was due to the tilt of the intention and CEO’s failure to execute their objectives (Ferrell 390). Since most of the lending institutions did not follow the formal prescribed ethical process, the result was the rise in predatory lending prosecutions as the subprime market increased in size. Most of the lending companies were charged for their practices that violated the Truth Lending act, Home Ownership and Equity Project Act and Equal Credit Opportunity Act (Ferrell, 391). Therefore, to my understanding, the subprime loans were ethical financial instrument that if applied as intended could have addressed the challenges in the economy. Unfortunately, this instrument was not applied properly, resulting in ethical issues.
Ferrell in his book Business Ethics has explored a number of financial misconduct that led to the downfall of Countrywide Financial. One of these ethical issues was a failure to make the right decision on how to utilize risky and intricate financial instruments. Regulatory loophole and regulators failures were utilized by the company’s employees. Corporate cultures that were meant to be built on rewards for creating value for stakeholders were instead built on reward for taking the risk. Since the employees only focused on the company’s growth, they would offer subprime loans to individuals who only qualified for traditional loans (Ferrell 390). Having the above reward system in mind, the salespeople concentrated on increasing sales volume, which could increase their reward. Little precautions were taken to investigate whether the borrower was qualified to be awarded the loan. “Liar loans” were the later development by the lender, which increased their compensation while souring the name of the subprime loan lending industry.
Similarly, the lenders could play a part in the malpractice by encouraging the borrower to give false information so that they get loans (Jennings 254). In some cases, the appraiser could use the inflated home asset in order to secure substantial loan amount. Other borrowers were asked to exaggerate their income to draw the attention of the lending institutions. The company’s CEO paid attention to the profit, ignoring the misconducts. Later directive by President Clinton on Fannie Mae and Freddie Mac, to make home mortgage available to low income people exacerbated the misconduct. The lending institutions were the mastermind behind these misconducts. Such malpractices are lapse of the top management and the irresponsible practices of the salespersons.
Countrywide was also a subject to other investigations for other ethical misconducts. According to Ferrell (2011), in March 2008 FBI investigation was initiated to look into the Countrywide Financial information. These were instigated to find out if there were any misrepresentations in its financial records. The investigation was conducted on the VIP programs. These programs contained information on the mortgage deals offered to “Friends of Angelo”. “Friends of Angelo” was a group of high profile officials who obtained mortgages from Countrywide. The mortgages were different from the other mortgages offered to ordinary customers. The fees and the discounted rates were lower than in the ordinary mortgage. These investigations focused more on individual unethical practices than the systematic ethical flairs. Therefore, it is clear that the investigation would not reveal all the errors and losses incurred during this period.
How should the Bank of America deal with potential ethical and legal misconduct discovered at countrywide?
- The first step is to identify and layoff the employees responsible for the misconduct.
Ferrell has pointed out the core reasons which led to the failure of Countrywide. Management regulatory loopholes such as failure to make the right decision on how to utilize the risky instrument was the main reason. The employees concentrated on making profits forgetting about the ethical practices. Salespersons aimed at increasing sales volume, which could increase their reward and paid little attention to the legal procedure. Employees like Mozilo who is said to have benefited from the scheme should be investigated and if established to be culpable, they should be dismissed and prosecuted (Jennings 267). These should also apply to the junior officers who gained from the management loophole.
- The bank of America should ensure that the loans such as Subprime Loan are offered to targeted borrowers only.
The main reason the subprime loan idea failed was the violation of ethical conduct to be followed when giving this loan. Due to this mistake of the CEO, salespersons would use the loophole to award loan even to borrowers who qualified for traditional loans only. Later, this led to predatory lending resulted in the persecution of the corporation. Therefore, the new owner should ensure the loans are awarded to the members of targeted groups, who qualify.
- Alternatively, the Bank of America should exit the Subprime lending market.
The reason for exiting the Subprime lending market is that clients are less likely to pay because of the lending and paying concepts associated with the loan. Lending of these loans targeted at borrowers who could not qualify for traditional loans. These borrowers are defined as high risk clients because they had a credit score of below 620, which is generally low income.
- The Company should liquidate the subprime real estate.
This could help them to compensate the complainants who had filed cases in court. This could also enable the bank to regain consistence and achieve above average shareholder return which was one of their initial targets.
- Respond to the lawsuits filed in court
The company should honor their promise to provide $ 8 billion in loan and closure relief to over 397000 homeowners, who responded with the lawsuits in court. The bank should also adjust the terms for ARMs according to income. This will help homeowners by cutting the interest rate to less than 2.5 percent. This is a response toward reversing the rates influenced by predatory lending. The customers who were charged abnormal interest should be compensated.
- Lending new loan should the ethical and legal
The new CEO and employees should stick to the ethical practices when giving loans. The practices should be legal, therefore should not infringe the Truth Lending Act, Home Ownership and Equity Project Act and Equal Credit Opportunity Act (Weiss 240).