A National Tragedy With a Link to P2P Lending

sunrise in the mountains

Last week a tragedy occurred in San Bernardino, California. Since that time the media have been covering the story from every possible angle as they typically do. Then yesterday, Fox News reported that one of the shooters, Syed Farook, took out a $28,500 loan from WebBank. I thought that was curious because I know that WebBank doesn’t make consumer loans but they do originate loans for Lending Club and Prosper among others.

It soon became clear that the loan likely came from Prosper and suddenly P2P lending was dragged into the media circus. I have lost count how many interviews I have done in the past 36 hours and how many times I have had to answer such ridiculous questions as:

  1. Is P2P lending going to become the new way for terrorists to get funding?
  2. Prosper must have really low standards to allow a loan like this to be approved, right?
  3. Shouldn’t the government crack down on these unregulated lenders like Prosper?

There have been many similar questions along these same themes. I didn’t really want to write about this but with all the persistent headlines today and yesterday I felt that someone in our industry needed to say something. Prosper would not comment on the story on the record. They would not even confirm or deny the existence of such a borrower on their platform, citing privacy laws. Here is their official response:

Prosper is prohibited by law from disclosing any non-public, personally identifiable information regarding any loan originated through our platform. All loans originated through the Prosper platform are subject to all identity verification and screening procedures required by law, including US anti-terrorism and anti-money laundering laws. As part of our standard procedures, we also confirm that all loan funds are disbursed into a verified US bank account in the borrower’s name. Like all Americans, Prosper is shocked and saddened by recent events in San Bernardino.

Here is my take on this whole story around Prosper and WebBank and their connection to this tragic event. According to Reuters, Syed Farook did take out a loan on Prosper some time in mid-November. From what has been reported, he had a stable government job, a decent income and no criminal record. From what we know about his life before the shooting he was the kind of borrower that could have received a loan from any number of sources.

I have been following this industry for many years now and I have never read more misinformation about P2P lending and Prosper than I have since the news broke yesterday. Here are some important points that need to be noted by all reporters before writing a story:

  • All loans on Prosper are issued by WebBank in Utah. This bank is regulated by the FDIC and loans issued must comply with all federal lending regulations. This means that the same standards that apply to borrowers on large banks like Chase or Wells Fargo also apply to Prosper borrowers.
  • All potential borrowers are screened against the government’s Office of Financial Assets Control (OFAC) lists prior to any loan being made.
  • Borrowers identities are verified using multiple data points and credit histories along with public records are reviewed before an underwriting decision is made.
  • The loan proceeds must be deposited into a valid U.S. bank account.

Some reporters have quizzed me on loan purpose saying we should make sure that people use the proceeds of their loan for its stated purpose. But this is simply impossible to police in a free country like ours. If you take out a home equity loan from a bank and tell the loan officer it is for home improvement but you really want to pay for an engagement ring do we really want to regulate that? Besides, if you apply for a credit card you don’t have to tell the credit card company how you intend to use your available credit. Nor should you.

Having said this, I still believe that our industry has room for improvement. With all the data now available there is likely more we can do to detect potentially suspicious activity. One of the more interesting questions I received in the last day and a half was from a Wall Street Journal reporter who asked me about the speed of the application process at companies like Prosper. Given that borrowers can receive their money in just a few days are we being thorough enough in the vetting process. Is there more we could be doing? I know there are many companies in our industry very focused on identity verification and fraud prevention and these companies are only going to become more important now.

The San Bernardino shooting was a national tragedy. But the involvement of Prosper and WebBank is not the story here. So, please reporters, do more research before pointing a finger at P2P lending as the problem. We are in a highly regulated industry with strong borrower standards that continues to make the lending process more efficient and transparent. We are not perfect but we are also not part of the problem here.

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Bryce Mason
Dec. 10, 2015 10:46 am

There is the appearance of a story here, because of the speed of the deal and the anonymity of the lenders/borrowers to each other. The public needs to understand, however, that the companies and people in the middle of the transaction have full visibility to all the known facts. They have to follow all of the rules of making a loan, because at the end of the day, a bank has to originate it. If anything, this is an example that the systems in place are fair and no redlining is occurring. Loans should only be rejected when there is appropriate evidence.

One of the questions I got was whether terrorist organizations could use P2P loans to funnel money to sleeper cells in the US. It’s important to recall that lending platforms have to diligence their investors, too, so this seems an unlikely scenario for known terror organizations. Even if one did slip through the cracks and managed to get a US bank account, the deanonymized data would make it exceedingly difficult to funnel to any specific person. Even if that occurred, there’s no need to do so because if someone with good enough credit can pass all the checks and get approved by the platform, there’s going to be legitimate capital for it anyway.

The only interesting question here from my view is whether there are additional checks that could have been made (against some existing database), are not currently required, but that would have prevented the loan. I think the answer is no. But I am open to public debate about it, and perhaps the Treasury Department will consider it in their recent work.

Another possibly interesting question from an investor/corporate relations view (absolutely not from a public policy view) is, given that investor reimbursement only occurs in cases of identity fraud and that this loan was presumably well documented, will or should the platform bend its own policies and, without disclosing the reason so as not to identify the borrower, make a reimbursement as a good-will gesture? That’s a bummer of a first payment default, but the platform presumably did not make an error in its policies or procedures. It’s an interesting scruples question.

Emmanuel
Dec. 10, 2015 4:51 pm

Is there an article somewhere about the money borrowed by terrorists and gun shooters from credit cards or traditional financial institutions? Oh well, It’s probably not newsworthy…

And let’s remember than organizing the 9/11 attack required to transit $300,000 to hijackers’ accounts, all of which went through traditional banks.

Brian Korn
Dec. 11, 2015 8:23 am

It appears there may be the perception that if this were a face to face lending transaction, the loan would not have been made. But short of rules allowing for overt racial and religious discrimination, nothing would have been different. These people showed up at the airport in a face to face encounter and were allowed in the country.

Brian Korn
Dec. 11, 2015 9:17 am
Reply to  Peter Renton

Cong. Brad Sherman’s comments in today’s LA Times are encouraging that no new regulation is imminent. https://www.latimes.com/business/la-fi-prosper-regulation-20151210-story.html

Jim O'Leary
Jim O'Leary
Dec. 15, 2015 9:39 pm

I hope that the government regulators don’t overlook the important and unique advantages to crowd funding. First it provides capital when it is not available in a timely or cost effective manner for individuals and businesses . Secondly the loans are made by individuals or institutions and not by the deposits of FDIC Insured banks. When there is another financial crisis it will be helpful to have alternative sources of capital. As always, thank you Peter for your excellent updates.