In the past year, I’ve made several trips across North Dakota on I-94. I usually drive past a particular interstate exit to a small town on the western side of the state. There are no businesses on this exit. This exit, in this small town, was a proposed location for a hotel. At the time this hotel was proposed, it only made sense to do because of the oil boom in western North Dakota. While I didn’t question that the hotel could be profitable in the short-run, I seriously questioned the continued feasibility in a downturn. At this time, the price of oil still remained above $80 a barrel, but this town played no central role in providing oil related services. Any demand for a hotel would only come fromthe overflow of the housing shortage.
The proposed hotel project had an adequate down payment. The guarantor had ample financial strength to make the loan payments if the hotel project flopped. Yet, I declined to pursue the loan, because the hotel was sure to flop in the long-run. Hotels were being used as temporary housing, and it would only be a matter of time before permanent housing caught up to demand. And in the short-run, the project was still susceptible to any downturn in oil prices.
An aggressive lender could have argued that this was a bankable loan. If the guarantor could make the payments regardless of what happened to the hotel, why not give it the green light? In this situation, we would just be giving the borrower a rope to hang himself with. While our focus as lenders is rightly squared on getting repaid, there is clearly more that should be considered than just repayment. Is it wrong to give someone a loan if they will use it to fund a project that we know will be a failure? I would argue there is an ethical problem with this. In a fairly clear way, you are helping this borrower lose money. And while it may be in our best business interest to do the loan to earn interest income and fees, it is clearly not in the borrower’s best interest that the loan be made.
I know we wade into murky waters when we start talking about what are right and wrong loans to do ethically. But, I feel when the facts are relatively straightforward, it is appropriate to throw up the ethics flag. It is like when an alcoholic is hitting you up for spare change in front of the liquor store. Sure, there is an outside chance he isn’t going to buy a drink, but we can reasonably assume we are fueling his destructive habit.
It feels strange to feel good when I drive by this interstate exit and see there is nothing there. It makes me feel good that nobody else gave the borrower the loan to do this project. It makes me feel especially good this late in 2016 that the hotel doesn’t exist, because it would surely be losing money, and causing stress and heartache for the owner. Luckily, it never got built and the interstate exit remains barren and boring.