Ethics

The Citigroup, Inc. took over Associates First capital Corporation, the largest publicly traded finance company with assets over 100 billion and shareholders equity of 10.4 billion. The amalgamation of two corporate giants into the CitiFinancial unit led to growth in business and eventually profits. The driving force behind this increased profit was subprime lending. It refers to giving loan to people who do not meet the credit requirements of the banks. Though it is resulting in huge profits for the company, there are various ethical concerns associated with this practice. Many people think that the penalties are very strict and the interest rates are very high as compared to the risk the company is taking by giving out loans to risky customers.  It is important to analyze the arguments based on various ethical theories and then conclude whether the practice of the company is morally right or wrong.

Utilitarianism
An ethical concept based on the satisfaction of people is utilitarianism. According to this principle, an action is morally correct if the outcome (or its utility) is beneficial for maximum number of people and not for the decision makers only. For example, if a car model is defective, the company knows its defect so morally, and keeping utilitarianism in mind, the company should roll back its operations. Although, it will cost a lot to the company but the lives of its potential user will be saved.

If we consider the practices of subprime lending, it targets the low-income segment of population, which does not meet the credit requirements of normal banks. Although it is good practice because it makes loan available to people who cannot afford it otherwise, there are numerous negative aspects of this practice, which are as follows

Pre-payment Penalties
The charges in terms of pre-payment penalties are very high and it forces the people to pay interest. This is one of the ways, which the banks use to make extra profit however, it is extremely costly for the borrower who has sufficient to pay back the entire loan. If we analyze the overall impact of this penalty on the society, we can say that the consequences can be devastating for the society because people who can use money to buy something else, are forced to pay as loan interest even if the have sufficient money to pay the principal amount back.

Marketing Approach of the Company
There has been tremendous growth in subprime lending, thanks to its aggressive marketing approach. The lenders usually rely on mass advertising and direct marketing to attract customers. Since subprime lending usually targets lower income groups, minorities, and elderly people, Critics argue that they are usually less educated and thus they fail to understand the terms and conditions of the loan. This means that the lenders are gaining at the cost of the ignorant borrowers. Again, it is against the concept of utilitarianism and many people are at a loss.

Rights
In simple terms, rights refer to a persons entitlement to something. For example, a right derived from the legal system is referred to as a legal right. If we consider the practices of the company with reference to the rights theory, we can conclude that it is an individuals right to get loan for any thing he wants to buy. Since most banks are not giving this right to people (because of their inability to meet the credit requirements), they are forced to take loan from sub prime lenders. Secondly, every individual has the right to get his desired product. For example, the sub prime lenders are forcing its customers to buy single-premium life insurance, which is very expensive for them. Usually the borrowers are from low-income group, they cannot afford to pay for the insurance. This takes away the right to loans from them.

Since there are limited restrictions on the sub prime lenders, they are taking undue advantage of the customers and are making profit out of it. High interest rates and the condition to buy an insurance policy adds on to the cost of the borrower and discourages him from borrowing. Simply put, these high charges are taking away a right of individual to life, as money is the most important thing a person needs to live.

Justice
These practices of the company cannot be justified on moral grounds because of its exploitative nature. It cannot be justified that a person who is willing and able to pay back the principal amount is forced not to pay. Similarly charging and financing excessive fee cannot be justified either. It is extremely unethical and immoral to misrepresent the terms and conditions of loans. The lenders should keep this thing in mind that a contract does not exist if the terms and conditions of the contract are misrepresented. Targeting vulnerable borrowers, including elderly, minorities, and low-income group and later harassing them is not just morally wrong but should be considered a crime and should not be justified on any cost.

Recommendations
The fact that CitiFinancial is giving loans to people who are rejected by other banks should be appreciated however, this does not give the right to the company to exploit the poor and the vulnerable. The company can take up some measures to respond to the criticism it is currently facing. For example, the company can end up its pre-payment penalty. This will not affect their net profits because when people will pay back the principal amount, the company will have sufficient funds to give out more loans. Since this process will increase the lending ability of the company, it will cover up for the revenue, which was lost because of early payments. Another measure, which the company can take, is that it should stop selling single premium life insurance. Since the company is charging high interest on loans, it should not impose additional cost on the borrowers. One of the criticisms on the company is that they are charging higher interest rate as compared to the risk associated with a particular customer. This means that the companies are already covering up for their potential losses in case of death of the customer, thus they have no right to charge any additional fee from the customers.

Conclusion
Citigroup should ensure that the sales representatives follow and abide by these recommendations and should not only focus upon sales volume. The company can conduct workshops and training sessions to train the employees about its new policies. Secondly, the employees should be given some moral education on regular intervals to instill the humanitarian beliefs and values in them. This will not only help in current situation but in future, if the Citigroup ever encounter such criticism, they can prove that their employees cannot do immoral actions because of their philanthropic training at the organization.