Sean Murray is the President and Chief Editor of deBanked and the founder of the Broker Fair Conference. Connect with me on LinkedIn or follow me on twitter. You can view all future deBanked events here.
Articles by Sean Murray
National Security Could Prove to be Alternative Lending’s Achilles Heel
December 11, 2015
While alternative lenders debate disclosure policies, stacking, and the cost of bad merchants, there’s a new regulatory threat taking root that no one seems to be able to slow down, national security. Ever since it was revealed that one of the two terrorists in the San Bernardino attack received a $28,500 loan from the Prosper Marketplace, government officials and the public at large are pointing fingers at online lenders.
House Financial Services Chair Jeb Hensarling said on Thursday that, “clearly the financing link to terrorism is a critical one.” As quoted by Politico, “everything’s on the table,” he said when asked about further scrutiny of online lenders.
His sentiment echoes other responses, some of which are clearly emotionally charged and accusatory. LendAcademy’s Peter Renton for example wrote, “I have had to answer such ridiculous questions as, is P2P lending going to become the new way for terrorists to get funding?”
With so much misinformation now floating around out there about online lenders, conspiracy theorists are even claiming that it would be impossible for someone earning $53,000 a year (As Syed Farook did) to get an unsecured loan for $28,000, the implication being that there is something more sinister going on. Of course those that work in the alternative lending industry, including myself personally as someone who invests on the Prosper Marketplace, know that’s not true.
But before the experts can be called on to answer the questions, those motivated to protect this country at all costs (with noble intentions) are rallying around swift and immediate consequences for online lenders such as Prosper.
“The issue may end up being whether marketplace lenders are too easy of a source of cash to finance terrorist attacks,” said Guggenheim Partners analyst Jaret Seiberg in a research letter.
In an article published by The Street, writer Ross Kenneth Urken basically likened Prosper Marketplace to Silk Road where bitcoins were used to buy drugs, weapons, and killers for hire.
Breitbart News, a right-wing news website, led in with an even bigger headline, San Bernardino: Has Islamic State Hijacked Consumer Loans?. It quickly sums up the story by insinuating that online lenders will become the funding tool of choice for ISIS. “The San Bernardino terrorists, Syed Rizwan Farook and his wife Tashfeen Malik, funded their killing spree with a debt consolidation loan, raising questions about whether terrorists might use popular consumer loans to fund their activities,” Breitbart wrote.
And the International Business Times argued that Utah industrial banks are aiding terrorism. “Meanwhile, industrial banks in Utah are taking full advantage of the lack of regulation in the peer-to-peer lending market while they still can, aiding potential terrorists along the way,” author Erin Banco concluded.
According to the WSJ, the House Financial Services Committee will examine whether new legislation is needed in online lending. They’ve also made inquiries to the Treasury Department about existing online lending regulations. Treasury Counselor Antonio Weiss’s previous remarks hinted that the Treasury up until recently was concerned about discriminatory lending practices more than anything else, but stressed that they were not a regulator in this area. Terror financing was not something they even addressed.
According to many sources, lawmakers are drafting up legislation on terrorism financing and expect to have something ready early next year. As for how that will impact online lenders is unknown. Right now, everyone’s still trying to figure out what just happened. Hopefully whatever is ultimately done is done intelligently.
CFPB Track Record on Anti-Discrimination Analyses Show Malfeasance
December 11, 2015Congressman David Scott (D), the same congressman that said, “God Bless the online lenders” back in October had some choice words for the Consumer Financial Protection Bureau recently after learning they manipulated data to falsely support evidence of racial bias in lending. According to the Wall Street Journal, Scott called their data “shamefully flawed.”
As explained by the WSJ:
The bureau has been guessing the race and ethnicity of car-loan borrowers based on their last names and addresses—and then suing banks whenever it looks like the people the government guesses are white seem to be getting a better deal than the people it guesses are minorities. This largely fact-free prosecutorial method is the reason a bipartisan House supermajority recently voted to roll back the bureau’s auto-loan rules.
The House of Representatives responded on November 18th by voting 332-96 in favor of stripping some powers away from the CFPB. In a bill, that hopes to be known as the Reforming CFPB Indirect Auto Financing Guidance Act if it is also passed in the Senate and signed by the President, attacks the CFPB’s guidance of the Equal Credit Opportunity Act as it applies to auto lending.
“Bulletin 2013-02 of the Bureau of Consumer Financial Protection (published March 21, 2013) shall have no force or effect,” the bill states outright.
Bulletin 2013-02 addressed the auto lending industry by saying, “the ECOA makes it illegal for a ‘creditor’ to discriminate in any aspect of a credit transaction because of race, color, religion, national origin, sex, marital status, age, receipt of income from any public assistance program, or the exercise, in good faith, of a right under the Consumer Credit Protection Act.”
The CFPB reviewed loan data as expected to see if there were racial disparities but disturbingly did not actually know the race of the borrowers in many cases. So they guessed, according to the WSJ, by reviewing the last names and addresses of the borrowers. When being shown the results of their guesses against a sample of data for which they actually had racial background data, the CFPB only successfully guessed correctly 54% of the time. Despite being aware of this, the CFPB sued Honda, Fifth Third Bank, and others for discriminatory lending practices. Honda was pressured into settling for $24 million and Fifth Third for $18 million even though the CFPB’s data and methodology were false.
The House bill also requires that the CFPB publicly disclose the methodologies and analyses used to assess discrimination in auto financing, lest they continue to manufacture their own data, draw conclusions based on that, and then extort corporations for tens of millions of dollars through lawsuits, investigations and public shaming.
88 Democrats in the House joined their Republican colleagues in passing this bill.
This kind of blatant malfeasance is especially alarming considering the CFPB is already licking their chops to collect data on small business lending so that they can test it for racial and gender disparities as well.
As small business underwriting is markedly different from the commoditized world of consumer lending, it would be near impossible for a pious, law-abiding, and even omnipotent CFPB to make meaningful determinations. Considering that the CFPB we have acts in a manner as described above, small business lenders have a lot to worry about over the implementation of Dodd Frank’s Section 1071.
Dan DeMeo is deBanked’s November/December Magazine Cover
December 10, 2015Meet Dan DeMeo, his story, and the rise of CAN Capital in this November/December issue of deBanked. Researched and written by Ed McKinley, we’ve got the scoop you haven’t read anywhere else. If you’re not already subscribed to the magazine, you can SIGN UP HERE.
The web-based version will be up on December 11th.
Prosper Loan Linked to Terror – A Preliminary Assessment
December 9, 2015By now you have probably heard that one of the San Bernardino terrorists received a $28,500 deposit from WebBank.com two weeks prior to committing the attack. After Fox News broke that story, I may have been the first to publicly connect it to an alternative lender which was later revealed to be marketplace lender Prosper about 12 hours later.
As a Prosper investor myself, here are some things you should know:
The $28,500 deposit (if that was the exact true amount) would have been net of the origination fees. In all likelihood this was a loan for around $30,000 and the borrower only netted $28,500.
Those that have speculated that it would be impossible for someone making $53,000 a year (as Syed Farook did) to qualify for an unsecured loan of this amount are wrong. There are loans on the platform right now that fit these parameters. Online Lenders like Prosper and Lending Club are pretty aggressive with their lending.
The notion that Prosper somehow could’ve detected what the borrower planned to do two weeks later just isn’t possible. In lending, this is known as the asshole factor, meaning that even if the applicant meets all the criteria, they could just decide to be an asshole, and there’s no way to predict that.
There are strict laws in place to prevent all kinds of discrimination, meaning that even if Prosper had formed some kind of suspicion about the borrower, it may have been illegal to act on that suspicion. Such is the hypocritical paradigm of fair lending where factors that are measurable predictors of negative performance (or worse) cannot be legally used. Federal laws have purposely tried to create an environment where lenders make decisions on an objective basis they consider to be fair. In business lending for example, there is a law within Dodd-Frank that has not been implemented yet, but seeks to prevent loan officers from knowing the gender or even the name of the prospective borrower to protect them from subconscious discrimination.
Investigators have publicly announced that the terrorists were not on any watch lists and therefore there are no systems or checks that Prosper could’ve plugged into to have gotten the information.
Prosper and other alternative lenders already have Anti-Money Laundering Policies. I know this because I complained about Lending Club’s over a year ago.
The Wall Street Journal stated, “Only some nonbank financial institutions, such as mortgage lenders, are subject to Treasury rules requiring lenders to report suspicious activity to the government under the Financial Crimes Enforcement Network.” Maybe that’s true, but there is nothing suspicious about someone applying for a loan online who is not on any watch lists. I can’t think of anything that could’ve been suspicious unless they submitted fake pay stubs or forged documents.
“There’s no due diligence that’s done into how these loans are actually going to be used,” said Brian Korn, a partner at the law firm Manatt, Phelps & Phillips, LLP in the WSJ. This is true and at the same time related to anti-discrimination laws. Judging a loan applicant by their detailed monetary plans could potentially induce gender or ethnicity bias, even if subconscious.
There will be plenty of questions in the coming days from Americans, the media, and government officials about what alternative lenders are doing to make sure they’re not funding terrorists. Part of what they may learn is that for all the data that alternative lenders have at their disposal to make intelligent decisions on an automated basis, some of them cannot be legally used. They’ll also find out that there’s only so much that predictive analytics can actually predict.
It’s very unlikely that Prosper could’ve handled anything differently…
Alternative Lender Likely to Be Questioned in San Bernardino Terror Tragedy
December 7, 2015Fox News has reported that terrorist Syed Farook received a $28,500 deposit two weeks before committing the terrorist act with his wife. The source of the money? WebBank.com, an FDIC-insured, state-chartered industrial bank based in Salt Lake City, Utah. Perhaps more notably, it’s the bank that originates loans for dozens of alternative lenders including Lending Club, Prosper, and Avant.
WebBank.com is reportedly refusing to comment but in all likelihood we are probably going to learn that the loan was made by an alternative lender.
As written on Fox News:
The loan and large cash withdrawal were described to Fox News by the source as “significant evidence of pre-meditation,” and further undercut the premise that an argument at the Christmas party on Dec. 2 led to the shooting.
If the loan was indeed originated on a marketplace lending platform like Lending Club or Prosper, hundreds of Americans could potentially face the horror of having bought shares in the loan and made it possible.
For now, all we know is that Farook got $28,500 through a WebBank.com deposit. I’ll post more as the story develops.
Fundry’s Isaac Stern Hosts Successful Fundraiser for Hatzalah of Union County
December 6, 2015
‘Tis the season of giving for Fundry’s Isaac Stern and the dozens of folks that attended the December 5th winter fundraiser at his home in Hillside, New Jersey. The event, which served up 550 pounds of barbecue and included a Scotch taste testing bar hosted by representatives of Glenfiddich, raised over $60,000 for Hatzalah of Union County, a local non-profit all-volunteer emergency medical service organization.
Founded in 2004, Hatzalah EMS provides basic life support in medical emergency situations. They cover Union County NJ including the towns of Elizabeth, Hillside, Union, Roselle and Linden. Today, Hatzalah is staffed with 3 ambulances, 24 EMTs and 18 dispatchers all under the medical direction of a physician and two paramedics.
Hatzalah Chief Yudi Abraham told deBanked that Yellowstone Capital (a Fundry subsidiary) has been a long-time supporter of their organization. A few years ago, when the squad was undergoing a transition of directors, Chief Abraham reached out to Isaac Stern for financial help. At the time, Hatzalah was in serious need of replacing an older ambulance as well as covering monthly operating expenses. “Isaac didn’t waste any time and sprang right into action,” says Chief Abraham. “He immediately convened his employees and his associates and came through for us in a huge way.” Yellowstone Capital raised the funds in under two days for Hatzalah to buy a fairly used ambulance. Ever since then, Stern and Chief Abraham have been working closely together to ensure that other expenses were covered. Over the years, Yellowstone Capital has helped donate the funds to purchase two additional ambulances that currently make up Hatzalah’s fleet. The Yellowstone Capital name appears on the side of each of them.
The most recent event kicked off with a $10,000 personal donation from Stern, prompting others to give too while enjoying the festivities.
“With the help of Yellowstone Capital we are able to maintain our level of service and continue providing the best possible emergency care for our patients,” said Chief Chaim Cillo. “We at Hatzalah will forever be most appreciative for such an incredible company that cares and gives back to the community in such a large way.”
Stern and Yellowstone were also presented an award for their continued generosity.
Chief Yudi Abraham (left) and Fundry CEO Isaac Stern (right)In attendance at the event were Fundry employees, friends, family members, and others from the non-bank finance industry.
From left to right: Andrew Hernandez of Central Diligence Group, Sean Murray of deBanked, and Andy McDonald of Yellowstone Capital/Fundry
Michael Samuels (left) and Steve Weinrib (right) both of Yellowstone Capital/FundryHatzalah means “rescue” or “relief” in Hebrew and for many guests the event fell on the eve of the Hanukkah holiday. The volunteer EMS crew of course helps all people in need of care.
“Our pay,” said Chief Abraham, “is helping our patients and saving lives.”
Lending Club Borrower Exceeded 5 Credit Inquiries | Investors Raise Eyebrows
December 5, 2015
Unblinking investors on the Lending Club marketplace called attention to an anomaly through the LendAcademy forum two weeks ago. At issue was a borrower whose profile reportedly had 9 recent credit inquiries, which exceeded Lending Club’s maximum eligibility to even be listed. As the prospectus of each loan stipulates “5 or fewer inquiries (or recently opened accounts) in the last 6 months,” investors wondered how somebody with 9 had slipped through the cracks.
But it wasn’t just one, user Fred revealed that this was a very common occurrence. “In my database of LC loans collected so far, I saw 1000+ loans with 6+ inquiries in the last 6 months,” he wrote.
Concerned, somebody reached out to Lending Club to find out what the deal was.
The response they got back was that auto or mortgage inquiries do not count as inquiries in their underwriting. However, their system had glitched and was inadvertently including them. That meant the borrower showing 9 inquiries did indeed have 9 but 4 of them were auto and mortgage related and therefore weren’t subject to the cap of 5.
While car loans and mortgages might not be as relevant to unsecured consumer debt activities, it is interesting that these inquiries are supposed to be glossed over in the total inquiries revealed to potential investors.
For instance, in this case, a borrower with approximately 720 credit earning $73,000 a year has 11 inquiries but for all points and purposes, Lending Club is only counting up to 5 of them. They were seeking a $29,175 personal loan for “business purposes.” The loan was eventually removed for reasons unknown.
For those buying these notes, as always, buyer beware.
Google Serves Low Blow to Merchant Cash Advance Seekers
December 2, 2015
Almost eighteen months ago, I explored whether or not Google was rigging the search results to benefit two lending companies they had equity investments in, Lending Club and OnDeck. At the time, both companies ranked at the top for highly coveted keywords even if they weren’t directly related to the user’s search query.
Now that those two companies are public, a company called Credit Karma seems to have inherited the top spots. And wouldn’t you know it, Google has also invested in them.
Google: loans
Google: personal loan
But that’s not the worst of it. Thanks (or no thanks rather!) to a relatively new search result feature called “People Also Ask,” one keyword recently started serving up results with a different kind of hidden agenda.
While my captured results may not be identical for everyone, I have conducted tests with other people on other devices and from other areas and it was present each time. With this box, Google is subtly planting the negative seed that payday loans and merchant cash advances are basically so identical that other people just like you are wondering what the difference between the two are. But here’s the rub, the two have nothing to do with each other and it’s unlikely so many people are asking that.
Pay no mind to the fact that the box makes reference to a “cash advance” not a “merchant cash advance.” The painstaking mishap could be innocently chalked up to an algorithmic error if only googling just cash advance revealed the same box in the results. But it doesn’t. Only merchant cash advance brings this up.
Comparing merchant cash advances to payday loans is straight out of the anti-merchant cash advance propaganda playbook. At least one Google-owned business lending company is actively lobbying against short term business lending and merchant cash advances in Washington so the placement and comparison of the People Also Ask box in their results is highly suspicious.
It’s no secret that Google is also directly lobbying in the online lending space too. One month ago, right before Google magically started to suggest to searchers that merchant cash advances and payday loans were related, Google formed a lobbying organization called Financial Innovation Now with Amazon and Apple. On their main agenda is online lending.
Given the suspicious search rankings for companies they have an equity stake in, I would not doubt for a second that something like this was manually inserted. I admit that my evidence and my case are weak, but given the circumstances, it’s quite possible there’s something deliberate happening here.
What do you think? Do you see this when you google merchant cash advance?
