San Bernardino loan drawer scrutinizes online lending industry

A single bad loan would be of little concern to most lenders, but not if the recipient is a suspected terrorist who killed 14 Americans.

This is the awkward position Prosper Marketplace found itself in this week after it was revealed that San Bernardino shooter Syed Rizwan Farook had borrowed $ 28,500 from the San Francisco online lender just weeks before the rampage. December 2.

Federal officials told The Times that the loan may have helped shooters pay for ammunition, homemade bomb components and training fire at local ranges.

Today, this unique loan has sparked further regulatory scrutiny in the rapidly growing online lending business.

A bipartisan task force established in March by the House Financial Services Committee to broadly investigate terrorist financing plans to determine whether new regulations are needed after the San Bernardino shooting, committee spokesman Jeff said. Emerson.

The idea is to improve the nation’s ability “to deprive terrorists of the money they need to carry out their attacks,” he said.

Financial Services Committee Chairman Jeb Hensarling (R-Texas) said this week that he had already drafted a terrorist financing bill that may need to be adjusted to reflect issues raised by the San Bernardino shootout. He said that “everything is on the table” regarding the scrutiny of online lenders, according to Bloomberg.

Then, on Friday, the California Department of Business Oversight announced that it was conducting an investigation into the industry. It requires 14 lenders to provide detailed information about their lending activities in California and across the country.

The ministry did not name the lenders under investigation, but Prosper admitted receiving an investigation.

The Lending Club of San Francisco, Prosper’s main rival, declined to comment, but sources said he was also part of the investigation.

State regulators have requested information on loan volumes, interest rates, and loan financing by investors.

Tom Dresslar, a spokesperson for the department, said the investigation into growing multibillion-dollar online lending activity had been underway for months.

But the shooting suddenly put the industry in the spotlight – and raised concerns among lenders that there could be regulatory overreaction.

Online loans allow customers to quickly access large sums of money. While credit cards can take weeks to arrive and offer an average line of credit of around $ 5,000, an online loan from Prosper can be up to $ 35,000 – and borrowers can get their money’s worth in a matter of minutes. days, not weeks.

Some online loans may offer significantly lower rates than credit cards, but others may have rates over 100%.

The easy credit available from lenders has raised concerns among some consumer advocates that borrowers could find themselves trapped in unaffordable loans taken out in desperation.

The US Treasury Department has solicited comments from lenders and the public this summer as part of a preliminary study of the industry, which could be a first step towards new regulations.

Meanwhile, the state’s investigation began with a request for documents from personal and small business lenders, including Avant, Social Finance and Kabbage, who confirmed their involvement. Commercial lender OnDeck Capital and payment companies PayPal and Square, both of which offer small business loans, have also reportedly received applications but have not commented.

Industry experts are worried about the investigation as it appears the loan to Farook – a county health inspector who earned around $ 52,000 a year – was rushed into execution.

“You have a borrower who has no known connection to terrorist organizations and who likely has a good credit history,” said Brian Korn, lawyer with the law firm Manatt Phelps & Phillips which represents online loan companies. . “I don’t think new regulations, unless they allowed outright racial or ethnic discrimination, would have resulted in a different result.”

What also seems unlikely is that ISIS or some other group could have used Prosper to funnel funds directly to Farook.

The company, like Lending Club, operates as a peer-to-peer lender, pairing borrowers with investors who wish to fund their loans. But this process is anonymous and, according to experts, would be almost impossible to manipulate. In addition, there are so many requests from investors to purchase the loans that it would not be necessary to do so.

There are also rules built into the financial system that aim to prevent money laundering and keep money out of the hands of terrorists and other criminals, rules Prosper said he already follows.

Banks and other lenders must process the names of customers in a federal database of terrorists and other known criminals. Financial institutions should also report any suspicious activity to the Treasury Department’s Financial Crimes Enforcement Network, or FinCEN.

The House Financial Services Committee has asked the Treasury Department if any suspicious activity reports have been filed regarding the financial activities of Farook or his wife, Tashfeen Malik. But it is likely that neither the loan itself nor any of Farook’s activities after receiving the loan would have been considered suspect.

Loans arranged by Prosper are paid directly to bank accounts by WebBank, a federally regulated institution in Salt Lake City.

And while a $ 28,500 deposit is a lot of money, the deposit itself would not have been suspect, said a former federal law enforcement official familiar with financial regulations.

“It could be from an insurance settlement or something else owed to them,” the former official said.

Banks are also required to file reports if customers make cash deposits or withdrawals of $ 10,000 or more, but Farook would not have needed to pay cash for the attack items.

Rep. Brad Sherman (D-Sherman Oaks), a member of the House Financial Services Committee, said he didn’t think the loan itself would have been a whistleblower.

He also believes that Farook and Malik would have found a way to carry out their attack even without Prosper’s loan.

“I never set the price for a homemade bomb, but I don’t think you need $ 28,000 to get one,” Sherman said. “They seemed determined to kill a lot of people.”

He said the committee should worry about money ending up in the hands of terrorists and consider further regulation of online lenders, but those are two separate issues.

“We shouldn’t look at consumer protection for middle-class families through the prism of the outrage and the San Bernardino tragedy,” Sherman said. | Twitter: @jrkoren | Twitter: @JimPuzzanghera


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David A. Albanese