It recently emerged that online lender Prosper made a $28,500 collateral-free loan to Syed Rizwan Farook in mid-November, just a few weeks before he and his wife massacred guests at an office holiday party in San Bernardino, with Federal Officials speculating that the loan may have helped the shooters pay for ammunition, pipe-bomb components, target practice at local gun ranges and a rented SUV they used during the attack.
The consequences for Prosper’s reputation and for regulatory discussion have been dramatic. In the anxious and vigilant climate we are currently in, this first ever instance of a fast-growing Fintech lending marketplace being publicly linked with financing terrorists deserves close examination by other FinTech firms.
The Blame Game on Prosper’s mistake
The concerning point to bear in mind is that there is very little basis for arguing that Prosper actually failed to spot any red flags. Checking the names of loan applicants against government watch lists would not have secured a better outcome because Farook was not on any such list. His application for the Prosper loan was clean, and he claimed he would use the funds to consolidate debt.
Critics have pointed out that the loan Prosper facilitated looks very large for someone with a salary of just $52,000, but on closer examination this forms no secure basis for criticism of the lender. Granted, the percentage of Prosper’s loans originated in the last six years that have defaulted is higher (by 1.9%) than bank consumer loans, but this difference is not significant. In recent years, Prosper has even been moving away from riskier loans and targeting borrowers with higher credit ratings. When he sought the Prosper loan, Farook had been employed by San Bernando county for five years and held a bank account.
As the FT put it, “In a rational climate, concerns over where the suspects got the funds might be overshadowed by where they got the guns… We are not in one”. Now the bipartisan task force established in March by the House Financial Services Committee to broadly investigate terrorist financing expects to look at whether any new laws or regulations are needed after the San Bernardino shootings. Committee spokesman Jeff Emerson stated that the idea is to improve the US’ ability “to starve terrorists of the money they need to carry out their attacks”. The California Department of Business Oversight sent requests to 14 companies last Thursday for details about their lending practices, investors and business models. Alongside Prosper, firms it contacted include Kabbage, Avant, On Deck Capital and Social Finance.
Meanwhile, Financial Services Committee Chairman, Jeb Hensarling, claims he has been working up a bill on terrorism financing that may need to be adjusted to reflect any issue raised by the shootings – and that “everything’s on the table” regarding increasing scrutiny of online lending platforms. Analyst comment has also been alarming. One example: Richard Bove at Rafferty Capital Markets who stated that Farook’s use of an online lender could end up being a “game changer” as regulators make decisions on how to proceed.
Learning From What Could Have Been
Perhaps the most important take-away from FinTech’s first public tarring with terrorist activity comes out of a counterfactual. If this is the response when Prosper acted blamelessly, what if Prosper had failed to spot a red flag?The week before this story broke, JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon said during a panel discussion: “We do move $6 trillion a day…and I am terrified if, you know, if $100 goes to the wrong place, what the punishment’s going to be.” We now know just how well-founded that fear is.