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Socially Responsible Finance and Investing: Financial Institutions, Corporations, Investors, and Activists by John R. Nofsinger, H. Kent Baker

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CHAPTER 14

Predatory Lending and Socially Responsible Investors

CHRISTOPHER L. PETERSON

Associate Dean for Academic Affairs and Professor of Law, University of Utah

INTRODUCTION

Contemporary financiers and investors naturally place faith in the ability of markets to resolve to efficient outcomes. This self-assurance in the welfare gains from uninhibited consumer financial services has created a skeptical lens through which investors tend to view evidence of unfair, abusive, and fraudulent loans. In the default world view, every individual is expected to make self-interested decisions that collectively create the best possible policy outcomes reasonably expected. Adam Smith (1776) described the phenomenon of self-interested individual decisions creating collective welfare as “an invisible hand” guiding the allocation of resources to an optimal outcome. Firms accused of predatory lending argue that their loans provide an opportunity to smooth consumption over financial crises as well as acquire and retain assets that borrowers could not otherwise possess. Lenders, and many economists, tend to argue that their customers freely choose to borrow and that government intervention in these contracts is paternalistic and ultimately doomed to fail. And, in turn, investors in consumer lending businesses have tended to indulge themselves in the belief that, if the investment is profitable, it will also be socially responsible.

However, the collapse of the American residential mortgage market ...

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