The Ethics of Co-Signers

Let’s try this one as a hypothetical: Let’s suppose that somebody wants to borrow money from you. It’s not a large sum by your standards – losing it won’t bankrupt you – but if you just gave that amount away to anyone who asked for it you’d be broke in short order. Let’s also suppose that the person who is asking is a decent human being and you have no particular reason believe that they won’t pay you back, but they’re not currently working and won’t be for the foreseeable future. You might be reluctant to make the loan under those conditions, but let’s further suppose that the person asking for money finds a responsible third party (a parent, for example) who agrees to pay you back if the borrower can’t for some reason. Suppose you made that loan…

Now let’s suppose that a few months later your borrower dies in a tragic accident that is in no way his or her fault. What are you going to do? We will assume that you are neither heartless nor insensitive, but at the same time you can’t afford to just give money away at will – and your borrower’s parents co-signed on the loan, promising to pay you back if something like this happened. Would you go to the co-signer and ask them to honor the commitment they gave you and repay the loan? Does our answer change if the borrower’s parents are devastated by the loss? Does it change if they are approaching retirement age? How about if they have taken in the borrower’s (now orphaned) children and are working hard just to get by?

This sort of thing happens a lot more often that you would hope; there was a story about a case just like this that appeared this past week on CNN online. It’s not exactly a case of biased reporting, but it’s clear that both the reporter and most of the people who have written in the Comments think that it is terrible of the finance companies involved to be attempting to recover their money from these excellent grandparents who are already expending their savings and giving up any real chance of retirement in order to raise their grandchildren. The fact that the loans in question were student loans, and therefore can’t be discharged in bankruptcy or otherwise legally evaded undoubtedly make this even worse, but the basic issue remains: what are the loan companies’ ethical responsibilities in this case?

It’s easy to say that the lenders should just forgive all of the debt – reduce the loan amounts to zero, take a credit on this year’s taxes, and move on. And if this was the only such case that would ever happen I’m sure that all of the companies would just write this off. Unfortunately, there are thousands of such cases every year, and if the companies forgive all of them they will go out of business, throwing all of their employees out of work and doing potentially catastrophic damage to their stockholders – none of whom have done anything wrong either, we should probably note. It might actually be heartless to collect on debts like these, but it’s hard to imagine how it would be fair to destroy one group of innocent people in order to help another group of innocent people – especially when the group that will benefit really did bring the crisis on themselves…

Which brings me to the inevitable question: does a financial institution have an ethical responsibility to forgive loans – effectively throwing away money – because either the original borrower or their co-signer have suffered a personal or family tragedy? Does our answer change if the original borrower could easily have obtained life insurance (at a reasonable price) to cover the loan – which a healthy 27-year-old probably could have – that would have prevented the whole situation? Does our responsibility to be kindly and good people override our fiduciary responsibility to our stockholders or our professional responsibility to our employees and other stakeholders? Or should we just offer our loans and financial products at fair rates with clearly-written contracts and assume that our customers are grown adults who can make their own choices and accept the consequences of their actions?

It’s worth thinking about…