Introduction
Predatory practices are admittedly and notoriously unethical as they are harmful to the borrowers and potentially for a country’s economy. While the wrongness of the predictors’ actions cannot be denied, it is not uncommon for victims to be blamed as well. In order to define the guilty party, it could be useful to examine the issue more extensively.
Predatory Practices: Definition
Predatory practices involve “imposing unfair and abusive loan terms on borrowers, often through aggressive sales tactics, or loans that contain terms and conditions that ultimately harm borrowers” (Agarwal, Amromin, Ben-David, Chomsisengphet, & Evanoff, 2014, p. 29). Even though occasionally it is difficult to define what business ethics means, it is evident that predatory practices are cannot be called ethical since they bound to cause problems for the borrower.
At the same time, apart from harming the borrowers, predatory lending contributes to the process of creating and maintaining the housing bubble and, when widely practiced, is dangerous for a country’s economy and its taxpayers (Agarwal et al., 2014).
For instance, it is the predatory practices that are blamed for the subprime mortgage crisis in the US (Agarwal et al., 2014; Bostic et al., 2012). As a result, a number of US states have adopted anti-predatory laws which appear to have changed the situation through the restriction of loans that possess particular characteristics resembling those of predatory loans (Bostic et al., 2012).
Examples of Predatory Practices
Predatory Practices Features
The main features of predatory practices include aggressiveness and deceptiveness. In order to convince the victim, predators offer fast and convenient loans and act polite and attentive; however, in case the victim realizes the difficulty of the situation, the predators refuse to admit the wrongness of their actions and blame the victims instead (Hill & Kozup, 2007).
Another important feature of a predatory practice is the “lack of concern for the borrower’s ability to pay” (Hill & Kozup, 2007, p. 29). It would be fairer to imply that the victims are most often unable to pay, especially the excessively high interest rates suggested by the predators. However, the aggressiveness of the predators does not allow their victims time to realize this fact.
The unequal amount of information possessed by the lender and the borrower is another feature of predatory practices (Agarwal et al., 2014). While the lenders fully understand the fact that the suggested terms are harmful to the borrower, they do not share this information. Similarly, the borrower may be tricked into accepting unnecessary and useless provisions (for example, ingle-premium credit life insurance) through deceptive marketing (Hill & Kozup, 2007).
Apart from that, it is not uncommon for predatory loans to define large prepayment penalties (Hill & Kozup, 2007). And in case the victim does not realize the severity of the situation, another example of predatory practice may be introduced: the “flipping” which presupposes “refinancing an existing loan with little additional money advanced to the consumer while charging additional points and fees” (Hill & Kozup, 2007, p.30). In such a way, predators ensure the possibility of feeding on the victim for as long as possible.
Although predatory practices are unethical, this fact appears to be outweighed by the profit that lenders may gain from their victims. Apart from that, the competition between lenders may encourage one or both of them to take up predatory strategies (Bond et al., 2009). Either way, the loaner’s participation in a predatory practice is completely voluntary, which cannot be said about the victim.
Predatory Practices Victim
It is obvious that a the logical choice for a borrower is to decline predatory loans. The fact that predatory practices do flourish is mostly explained by their deceptive marketing (Bond et al., 2009). In other words, while realizing that the customer is going to be harmed in the result of the agreement, predators do not share this knowledge.
Moreover, they misinterpret the terms of an agreement, emphasizing the points of the loan that may attract the customer and withholding those that are not so appealing. Apart from that, it is not uncommon for predators to regard the elderly and legally illiterate people as their targets (Hill & Kozup, 2007).
At the same time, it should be pointed out that as the experience of predatory loans accumulates, people become less trustful and more mindful of their loans terms (Bond et al., 2009). This tendency may change the situation in future. However, there is another potential victim group which includes the people in distress and in financial strife (Bond et al., 2009).
In this case it is especially apparent that the customer cannot afford a predatory loan; however, as it has been mentioned, this does not stop predators from making their offers. Having little or no other options, the victims accept, and, as a result, their financial situation is bound to worsen.
Conclusions
From the information presented above it could be concluded that the people who agree to a loan that would inevitably harm them can be held at least partially responsible for the result. However, it should be pointed out that predatory practices are only possible when the victim is vulnerable in some way: when the borrower lacks information or is in a state of distress.
It is true that business ethics is a rather vague phenomenon, and egoism is a trait that can be helpful in many ways. Still, healthy egoism should be distinguished from cruelty. Thankfully, the anti-predatory laws that are being introduced by the US states may be able to help businessmen in making the difficult choice between easy money and ethical behavior in this particular respect.
References
Agarwal, S., Amromin, G., Ben-David, I., Chomsisengphet, S., & Evanoff, D. (2014). Predatory Lending and the Subprime Crisis. Journal of Financial Economics, 113(1), 29-52. doi:10.1016/j.jfineco.2014.02.008
Bond, P., Musto, D., & Yilmaz, B. (2009). Predatory Mortgage Lending. Journal of Financial Economics, 94(3), 412-427. doi:10.1016/j.jfineco.2008.09.011
Bostic, R., Chomsisengphet, S., Engel, K., McCoy, P., Pennington-Cross, A., & Wachter, S. (2012). Mortgage Product Substitution and State Anti-predatory Lending Laws: Better Loans and Better Borrowers? Atlantic Economic Journal, 40(3), 273-294. doi:10.1007/s11293-012-9325-3
Hill, R., & Kozup, J. (2007). Consumer Experiences with Predatory Lending Practices. Journal of Consumer Affairs, 41(1), 29-46. doi:10.1111/j.1745-6606.2006.00067.x