I had planned to write this month’s piece about JP Morgan’s entry into the peer-to-peer space and what it means. Instead, I am going to try and tackle a much more difficult subject – finance and morality. Writing about the fact that the San Bernardino terrorists took out a Prosper loan is something that is difficult to do – but that makes it essential to address. There is no silver lining. Nothing that anyone can say will change what happened and there are no winners. I only hope that a few short thoughts can highlight that the exchange of money is always fraught with moral hazard and that in this particular case, best practices were followed.
I’d lay out my broad thoughts in three main points:
1) US citizens who are employed with a steady income are generally able to have credit cards, mortgages and other personal loans.
2) Such a person will have access to money, and that money will always be at risk for inappropriate use – it doesn’t matter if the money comes in the form of W2 income, investment income, or loan products.
3) All employers, investment firms, banks and other lending institutions should do all that they can to know their customer and follow anti-money laundering laws, but this will not stop all negative outcomes.
Marketplace lending is a new and evolving space. There are very few industry standards, and certain parts of the industry believe they should be unregulated. This incident should stop those players in their tracks. One of Blue Elephant’s rules when doing due diligence on lenders is to make sure that they are going above and beyond in terms of knowing their customer and being able to survive scrutiny from regulators. We are on record with the US Treasury’s RFI on marketplace lending with this exact view.
This event will bring more regulatory scrutiny, which should make the system stronger. Certainly no one would want regulation to be brought into the spotlight this way. That it happened despite the use of best practices highlights the importance of doing things right. Before we ever get into understanding a lender’s model, Blue Elephant needs to understand their business practices. We will not partner with a lender who does not know their customers, even if it means having a lower return. You’d be surprised to learn that not everyone feels the same way.
I’m sure if Prosper, Bank of America, JP Morgan or any other serious lending entity figure out ways to be even better at screening applicants, they will follow that path. Unfortunately, there will always be ways for seemingly legitimate borrowers to act inappropriately. It just as easily could have been Visa, Citigroup or another large institution who made this loan.
Is this a “moment” for marketplace lending? Yes and no. For those who are pro-regulation, this will expedite a process already underway. Any lender trying to play on the edge of the rules will indeed see it as a moment. No system will be perfect, but we can all try and be better.
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