Recently it has come to light that Prosper issued a loan through their online marketplace to the husband of the husband/wife team that were the San Bernardino shooters. I was asked to comment and help clarify some issues for a story on the excellent financial news site TheStreet.com. In the process of helping with this article, I realized that clarification is needed for the broader public about what these lending sites do and what they don't do.
Just a friendly reminder, spoons and forks don't make us fat because we use them to eat cake and ice cream. And use of an online lending platform to use the funds for nefarious purposes doesn't make online lending a bad thing.
To help clarify I thought I would go over the general borrowing requirements to see if anything aligns with a sinister use of funds like we saw in San Bernardino.
US Citizen or Green Card Holder
To borrow on Prosper, you need to be a US citizen or a green card holder with a SSN. A SSN number is required as the first thing the site does is a soft pull of the borrower's personal credit.
Have a Social Security Number
The only way to verify credit history through one of the big 3 credit bureaus (Equifax, Experian, or TransUnion) is to have a SSN. There is one more verification required to be sure that the right credit report for the correct John Smith is pulled. And that verification is...
Have a US Home Address
A US home address is needed along with the SSN to show we have the right person's credit report. After all, there's lots of John Smiths out there and we need to know we have the right one.
Have Verifiable Income
One of the biggest factors that both Prosper and Lending Club use to determine approval and the final rate the borrower pays is the Debt to Income ratio. I talk about this in some detail in this post from a couple years ago. The only way the platform can calculate this important ratio is to know debt levels and income for the borrower. Employment through pay stubs, W-2 or even tax returns are used to verify the Income side of this equation.
Have Good Credit
Both Prosper and LC target prime consumer borrowers, generally considered the best credits. Both still decline most borrowers who apply so having good credit is only the beginning of what's needed. Both generally still decline 8 out of 10 who apply.
Have a US Bank Account
In order to receive the loan proceeds and make payments the borrowers need a US bank account. Why? Because funds are drafted in through ACH and payments are taken out each month also through ACH. It's a requirement on these loans on both platforms so a US bank account is needed to make the draft for loan repayment.
So far, it seems pretty simple right?
A verified US address, income, bank account, SSN, and citizenship or legal residency are what is needed.
Sadly, the shooter had all these things. A good paying steady job as a county employee, a home, bank account and he was a US citizen so he was able to borrow from these platforms the same way anyone else could who credit qualifies and agrees to the rates and fees.
It's important not to confuse the sinister use of funds with the completely not sinister way in which those funds were acquired. We never look at credit cards this way and they are used for all kinds of things including buying bomb making materials all the time.
Now some of you may argue that it was a sinister acquisition of funds due to the loan being fraudulent. The fact that the shooter never intended to repay and most certainly listed a purpose different than what the funds were used for is a good argument. In fact, I hope the extent to which this can be prosecuted by Prosper and WebBank against the estate is done to pay back those that lent on this loan and show that our industry is not going to take this lying down.
Lastly, the time it takes for someone to build up all this verifiable information and good credit is much, much longer than most that want to do harm to us will take just to use these online lending platforms as sources of funds. We should all still be diligent but understand that the likely risk of this being a regular occurrence is very, very small.