Profit v. Predatory Practices
When we think of predators, a T. Rex comes to mind as a good example. And, unfortunately, our images for the good guys are associated with the meek and helpless - the prey for T. Rex. Since no-one wants to be eaten by a T. Rex, most people try to be the T. Rex and not one of the eaten.
The modern world of banking isn't much different. Many have the motto of "eat or be eaten," even if it isn't spoken out loud. In short, it is all about being the winner and not the loser.
Taking a win-or-lose view of the world may not be such a good idea. While being a winner is fun and being a loser is not fun, there are, in fact, other options. But when we focus on winning or losing, we fail to see those other options. Sometimes the other options are where the real winning lies.
Take the current concerns with predatory lending. Lending to make maximum profit at the expense of the prey is a classic T. Rex action. And, as with the hunter and the hunted, the prey is good for just one meal. The next meal has to come from new prey. And that's the problem.
In the struggle to limit predatory lending, the question of safety and soundness looms just as large as consumer protection and fairness.
We are familiar with the consumer protection concerns. Predatory lending isn't nice and it isn't fair. It offends our ethics that profit is made not simply at the expense of the customer but potentially with the destruction of the customer's financial well-being. This is where laws such as Truth in Lending, RESPA, ECOA and the FTC Act come in.
Of late, the regulatory agencies have raised concerns that go beyond consumer protection. The objections raised to predatory lending include safety and soundness concerns. This is not just a ploy to grab attention. It is a very real concern. It is the issue of survival.
Predatory lending, like the T. Rex, is short-sighted. It focuses on short term profit just as the T. Rex focuses on today's meal. However, the regulators want you to plan ahead for tomorrow - and still being in business. And that's what predatory lending puts at risk.
When a lender takes unfair advantage of a customer, the customer is harmed. Many victims of predatory lenders are no longer qualified borrowers. They may be too deeply in debt to qualify for a new loan, or they may have lost their assets. As a profitable customer, they are all used up. Now what? T. Rex has to hope there's another meal on the other side of the hill. Banking doesn't work that way.
Banking is based on long term relationships with customers. Today's new, perhaps marginal, customer is the next decade's prime customer. In banking, we support each customer's development. And our secret hope is that some will be as successful as Bill Gates. Success in banking is based on long-term relationships and providing multiple products to each customer. Predatory lending destroys that possibility and that's why regulators are concerned.
Treating customers as eat-and-run has safety and soundness ramifications as well as ethical problems. If ethical concerns don't persuade bank managers, perhaps safety and soundness concerns will. The other option is to accept a slower road to profit or a lesser amount of profit while preserving and developing the source of the profit - your customers.
Whether you subscribe to the big boom theory or some other as the cause of the end of dinosaurs, the fact is that T. Rex was not the last species to survive. It was Triceratops, a well constructed, well defended, non-predatory type, but most definitely a survivor type. Triceratops was in it for much more than the fast meal - Triceratops was in it for the long haul. And Triceratops won.
Copyright © 2005 Compliance Action. Originally appeared in Compliance Action, Vol. 10, No. 4, 4/05
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