Lenders have been unregulated and able to issue subprime mortgages to high-risk homebuyers with little oversight (Petroff, n.d.). Even now, after the subprime crisis, control of lending practices is weak.

Understandably, the risk is higher when lending to poorly qualified borrowers because they have an increased probability of becoming delinquent and defaulting on their loan. It makes sense that lenders would charge a higher interest rate when they are taking a significantly higher risk.

But, this type of lending should not be the norm, especially not with borrowers who would not reasonably be able to pay off the loan. But, that is exactly what often happens.

So, how did leaders within the lending and banking industries allow this behavior to run rampant for so long if it comes with such a high risk?

Perhaps leaders were more focused on short-term profits as suggested by Watkins (2011). It is also possible that leaders were ignorant of the ethical issues associated with the practice of subprime lending or simply did not care because they have a weaker ethical code (Thiel, Bagdasarov, Harkrider, Johnson, & Mumford, 2012).

Studies support the theory that there has been a progressive decrease in ethical standards among youth in American society (Brooks, 2010). These kids then grow up to be leaders across almost every industry, bringing with them the decreased moral values and weaker ethical decision-making skills. In critical industries like banking, having leaders with lower ethical standards can be devastating.

Leaders in any field influence their teams and subordinates (Vroom & Jago, 2007). Leaders with lower ethical standards can understandably have an adverse impact on their employees, especially those with already weak moral values.

Leaders at various levels in the industry chose to engage in or support unethical lending practices. At the organizational level, if not at the industry level, many banks considered the issuance of subprime loans a chance to turn a fast profit; there was very little regard to the price borrowers might pay if they were to default on the loans (Peavler, 2016; Watkins, 2011).

While no individual borrower, loan officer, supervisor, committee, or leader in the banking (or related) industry caused the subprime mortgage crisis, the combination of the behaviors of all of these individuals and groups was ultimately responsible for the crisis that ensued (Gilbert, 2011). Had leaders been more ethically-oriented, it is less likely subordinate employees and groups would have engaged in such questionable behavior.

Perhaps the various individuals involved justified the actions as being helpful to those who wanted to purchase a home – or whatever they needed the loans for. Maybe it is easier to say “yes” than it is to tell someone “no” when they are asking for help.

But, it is up to leaders to set the example and do what is best, even if it is not what people think they want or need. This is particularly true when lenders are giving money to unqualified borrowers – money that does not belong to them, but belongs to stakeholders not involved with the decision to lend.

People do not always make the best decisions. While borrowers have the freedom to make bad decisions, lenders should have a responsibility to all stakeholders (including borrowers) to lend responsibly.



Brooks, R. (2010). The development of a code of ethics: an online classroom approach to making connections between ethical foundations and the challenges presented by information technology. American Journal of Business Education, 3(10), 1-13. Retrieved from http://search.proquest.com.proxy1.ncu.edu/docview/757070798?accountid=28180

Gilbert, J. (2011). Moral duties in business and their societal impacts: The case of the subprime lending mess. Business & Society Review, 116(1), 87-107. http://dx.doi.org/10.1111/j.1467-8594.2011.00378.x

Peavler, R. (2016). How do we prevent another financial crisis? Retrieved March 22, 2017, from https://www.thebalance.com/how-do-we-prevent-another-financial-crisis-393151

Petroff, E. (n.d.). Who is to blame for the subprime crisis? Retrieved March 22, 2017, from http://www.investopedia.com/articles/07/subprime-blame.asp

Thiel, C. E., Bagdasarov, Z., Harkrider, L., Johnson, J. F., & Mumford, M. D. (2012). Leader ethical decision-making in organizations: Strategies for sensemaking. Journal of Business Ethics, 107(1), 49-64. http://dx.doi.org/10.1007/s10551-012-1299-1

Vroom, V. H., & Jago, A. G. (2007). The role of the situation in leadership. American Psychologist, 62(1), 17-24. http://dx.doi.org/10.1037/0003-066X.62.1.17

Watkins, J. P. (2011). Banking Ethics and the Goldman Rule. Journal of Economic Issues, XLV(2), 363-371. http://dx.doi.org/10.2753/JEI0021-3624450213