Question: Consumer Lending Corp. is a national consumer loan company whose shares are traded on the NYSE. It conducts business through local loan offices throughout the nation. It borrows the funds it uses to lend to consumers by selling commercial paper (in the form of promissory notes secured by the underlying consumer loans) to large institutional investors. The cost of acquiring these funds is substantially affected by the delinquency rate of the underlying consumer loans. Corporate management has determined that corporate profits are maximized by a low delinquency rate, and has made that a primary goal of the company. A consumer loan is deemed delinquent if no payment is made within any 90-day period. Any such payment, even a partial payment no matter how small qualifies to keep the loan off the delinquency list.

Local office managers can earn up to a 20% end-of-year bonus based on the total aggregate amount of loans generated by the office, and based on the delinquency rate. State and regional managers also receive bonuses based on these criteria. Many office managers, as a result of this bonus structure, require their loan officers to pressure customers to borrow more money than they need or can reasonably repay on a timely basis.

Further, when these loans become 60 days delinquent, managers instruct their collection staff to use aggressive (albeit legal) collection techniques to pressure debtors to make at least a partial minimum payment before the 90 day delinquency date. Collection tactics frequently include initiating legal action at a cost to the company far in excess of the loan payments that are generated by the litigation. Simply put, managers do not care how much the collection activity costs the company so long as an account is kept off the delinquency list. Corporate management does not penalize managers for the high cost of collection because of the savings in costs of borrowing money in the commercial paper market.

The national consumer finance industry has recently been criticized for aggressive lending and collection practices. Several states and the United States Congress are actively considering passing legislation to implement more regulation of the industry to prevent the more onerous lending and collection tactics. The company has initiated a review of its lending and collection practices, and invited comment and participation from all levels of management.

You are a local manager that directly reports to a state manager. Your state manager has asked you to prepare an analysis of current practices. Discuss who the stakeholders are. Discuss whether the current practices should continue as is using the Ethical Leader's Decision Tree presented in the text. Discuss the ethical school you chose to determine if the current practices are ethical. Discuss whether long term benefits of reforming the current practices would be better for shareholders than the short-term profits of continuing the current practices.