Online Lenders Have Ex-Regulators' Help Amid Shooting Scrutiny

  • San Bernardino shooter's Prosper loan may prompt legislation
  • Summers, Levitt advising online firms battling large banks

Planned congressional hearings spurred by a loan to one of the San Bernardino shooters weeks before the attack will put the online lending industry under new scrutiny, testing a phalanx of former regulators that many of the firms had already hired to help them navigate Washington.

Prosper Marketplace Inc., which arranged the loan for alleged shooter Syed Rizwan Farook, has Raj Date, the former deputy director of the Consumer Financial Protection Bureau, on its board. The CFPB makes and enforces lending rules.

Ex-Treasury Secretary Lawrence Summers is a director at Prosper rival LendingClub Corp. Arthur Levitt, former chairman of the Securities and Exchange Commission, is an adviser to Social Finance Inc., known as SoFi. Brayden McCarthy, a former Obama administration economic policy adviser, is head of policy and advocacy for Fundera Inc.

The industry was already getting the attention of regulators and lawmakers because of its rapid growth -- to $12 billion in loans arranged last year from $1 billion in 2010, according to Morgan Stanley -- eating into some of the business dominated by large U.S. banks such as JPMorgan Chase & Co. and Bank of America Corp.

More Scrutiny

Congressional scrutiny intensified last week when Jeb Hensarling, chairman of the House Financial Services Committee, told reporters he’s planning hearings and legislation related to Prosper’s loan to Farook. Farook and his wife, Tashfeen Malik, killed 14 people in what authorities have called a terror attack on Dec. 2. It’s not clear how he used the loan proceeds.

“We will be inspecting different ways laws may need to be improved there,” Hensarling said Dec. 10.

There is no indication that Prosper did anything wrong. Like other platforms in online lending, sometimes called peer to peer, the company arranges loans through its website, but doesn’t actually issue them.

The CFPB is considering a proposal that could make it more difficult for online lenders to arrange loans, and the Treasury Department is studying industry practices. California on Dec. 11 opened an inquiry into the activities of 14 online marketplace lenders including Prosper, SoFi, LendingClub and Kabbage Inc.

Daily Presence

Online platforms “had matured to the size that they need a presence on the ground in D.C. day in and day out,” said Brandon Barford, a partner at consulting firm Beacon Policy Advisors in Washington who follows the industry. “It’s not enough to hire Larry Summers and think all the issues will just go away.”

The firms need to master so-called know-your-customer rules to combat money laundering, and regulations like the Equal Credit Opportunity Act prohibiting credit discrimination, Barford said. He added that they also have to explain how they operate to lawmakers and their staffs.

Some online lending platforms bypass big banks and match people who need a loan with investors. Others are strictly middlemen, relying on banks, high-net-worth individuals and hedge funds to fund the loans they facilitate. Prosper’s loans, ranging from $2,000 to $35,000, are originated by Salt Lake City-based WebBank, which is owned by Steel Partners Holdings LP.

Board to Bureau

Date, the former CFPB official, has a long history with Prosper. He was a board member before going to the consumer bureau, then rejoined the board in 2013. Date worked alongside Elizabeth Warren in standing up the CFPB in 2010 and 2011, and led it before Richard Cordray was appointed its first director. He now runs Washington-based investment firm Fenway Summer LLC.

“Raj Date is a valued member of our board,” Sarah Cain, a Prosper spokeswoman, said in an e-mail. “We consult with all of our board members, including Raj, with respect to matters pertaining to corporate strategy, corporate finance and development, risk management and compliance and regulation.” A Fenway Summer spokeswoman said Date was unavailable to comment. McCarthy, of Fundera, and Summers, of LendingClub, declined to comment.

‘Regulatory Barriers’

“Smart companies would welcome regulation as a good housekeeping seal of approval,” said Levitt, who advises SoFi on board practices, regulatory matters, marketing and strategy. He is also a director at Bloomberg LP, the parent company of Bloomberg News.

Online lending platforms face “lots of regulatory barriers because these companies are competing with major banks that have teams of lobbyists working for them that are not particularly friendly to the interests of online lenders,” Levitt said.

The relationship between banks and financial technology firms is complex. In some cases banks compete with online firms for customers, and in others they seek to partner with them or act as investors to fund their loans. For example, Citigroup Inc. purchased Prosper’s $28,500 loan to Farook as part of an arrangement to buy hundreds of millions of dollars worth of similar loans and package them into securities, the Wall Street Journal reported last week. Prosper has since repurchased the loan.

Oversight Sought

At the same time, the biggest banks have also pushed regulators to focus on alternative banking systems that they say have faced too few restrictions as they’ve grown. In August, a lobbying group for Wall Street banks published a report asking the CFPB and the Federal Trade Commission, among others, to crack down on alternative payment providers, which offer consumers new ways to pay for purchases or transfer funds online. These companies “face dramatically less regulatory oversight of their data security and privacy practices than do banks, with real consequences for their customers,” according to the report by the group, called the Clearing House.

The Treasury received more than 100 responses to a request for public information about online lenders in July. In a comment letter, LendingClub, whose board members include former Morgan Stanley Chief Executive Officer John Mack in addition to Summers, defended its business model and said its borrowers report significant cost savings.

In part to address the threat from Wall Street, technology companies have formed a lobbying group to argue for tech-friendly financial reform. Financial Innovation Now, whose members include Apple Inc., PayPal Holdings Inc., and Intuit Inc., plans to focus on regulatory issues and promoting innovation.

“Marketplace lenders need to engage regulators in a very specific and thoughtful way to let them know where they need to be flexible and to understand their models,” said Obrea Poindexter, a partner and co-chair of the financial technology practice at Morrison & Foerster. “Regulators aren’t necessarily trying to shut down these products, but they don’t always understand them.”

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