Please Explain the following issues: 1. Was it unethical for MegaLender to make
ID: 1150050 • Letter: P
Question
Please Explain the following issues:
1. Was it unethical for MegaLender to make loans to consumers without verifying their income?
2. Was it unethical for MegaLender to make loans to consumers without disclosing that their loans features "teaser rates" that made initial payments artificially low?
Case Scenario: In 2007, MegaLender was the largest provider of home mortgage loans in the world. MegaLender specialized in so-called subprime mortgage loans that allowed homebuyers ty to qualify for a mortgage by paying a higher interest rate along with a monthly premium to insure the loan in case of a default. One of Megalender's mortgages featured "teaser rates" that made initial payments artificially low. Nearly 50 percent of Megalender's customers ended up defaulting within one year of when the teaser rate adjusted upward. Several customers filed complaints with regulatory authorities contending that Megalender never disclosed that the payments would increase so dramatically and applicants relied on Megalender's judgment that they could afford the loan.Explanation / Answer
1) Sub prime mortgages were the sole reason of the asset bubble burst during the lehman brother collapse. As per the rules and guidelines of lending it is mandatory to ensure credit scoring before lending money to the borrowers which reduces the chances of default payments. In this case it was unethical to lend loans without verifying credit and income score of the lenders.
2) Teaser rates were unfair on the intial lending rates , considering cheaper rates people got attracted to borrowing more which later became teaser rate increasing upwards . Higher rates were unethical and became another reason for credit default because returning loan became expensive than the initial value of return.