A single bad loan would be of little concern to most lenders — but not if the recipient is a suspected terrorist who has killed 14 Americans.
That's the uncomfortable position Prosper Marketplace found itself in this week after it was disclosed that San Bernardino shooter Syed Rizwan Farook borrowed $28,500 from the San Francisco online lender just weeks before the Dec. 2 rampage.
Federal officials told The Times that the loan may have helped the shooters pay for ammunition, pipe-bomb components and target practice at local gun ranges.
Now, that single loan has prompted closer regulatory scrutiny of the fast-growing business of online lending.
A bipartisan task force established in March by the House Financial Services Committee to broadly investigate terrorist financing expects to look at whether any new regulations are needed after the San Bernardino shootings, committee spokesman Jeff Emerson said.
The idea is to improve the nation's ability "to starve terrorists of the money they need to carry out their attacks," he said.
Financial Services Committee Chairman Jeb Hensarling (R-Texas) said this week that he already had been working up a bill on terrorism financing that may need to be adjusted to reflect issues raised by the San Bernardino shootings. He said "everything's on the table" regarding increasing scrutiny of online lenders, according to Bloomberg.
Then on Friday, the California Department of Business Oversight announced that it has been conducting an investigation of the industry. It is demanding that 14 lenders provide detailed information about their lending activity in California and nationwide.
The department would not name the lenders being investigated, but Prosper has acknowledged that it has received an inquiry.
Lending Club in San Francisco, Prosper's chief rival, has declined to comment, but sources said it is also part of the inquiry.
State regulators have asked for information about loan volume, interest rates and the funding of loans by investors.
Tom Dresslar, a department spokesman, said the investigation of the growing multibillion-dollar online lending business had been in the works for months.
But the shooting has suddenly put the industry into a harsh spotlight — and raised concerns among lenders that there could be a regulatory overreaction.
Online loans give customers quick access to large amounts of cash. While credit cards can take weeks to arrive and offer an average credit line of about $5,000, an online loan from Prosper can be for as much as $35,000 — and borrowers can get their money in days, not weeks.
Some online loans can offer rates significantly lower than credit cards, but others can come with rates topping 100%.
The easy credit available through the lenders has raised fears from some consumer advocates that borrowers could get trapped in unaffordable loans taken out in desperation.
The U.S. Treasury Department this summer invited comment from lenders and the public as part of preliminary study of the industry, which could be a first step toward new regulations.
Meanwhile, the state inquiry has started with a request for records from consumer and small business lenders, including Avant, Social Finance and Kabbage, which have confirmed their involvement. Business lender OnDeck Capital and payments companies PayPal and Square, both of which offer small business loans, also are believed to have received requests but have not commented.
Industry experts are worried about the probe given that it appears the loan to Farook — a county health inspector who made about $52,000 a year — was run of the mill.
"You have a borrower who has no known ties to any terrorist organizations and who presumably has a good credit record," said Brian Korn, an attorney with law firm Manatt Phelps & Phillips who represents online lending companies. "I don't believe any new regulations, short of allowing outright racial or ethnic discrimination, would have resulted in a different outcome."
What also seems unlikely is that Islamic State or another group might have been able to use Prosper to funnel funds directly to Farook.
The company, like Lending Club, operates as a peer-to-peer lender, matching borrowers with investors who want to fund their loans. But that process is anonymous and, experts say, would be nearly impossible to manipulate. What's more, there is so much investor demand to buy the loans, there would be no need to do so.
There also are rules built into the financial system that aim to prevent money laundering and keep money out of the hands of terrorists and other criminals, rules that Prosper said it already follows.
Banks and other lenders have to run customers' names through a federal database of known terrorists and other criminals. Financial institutions also must report suspicious activity to the Treasury Department's Financial Crimes Enforcement Network, or FinCEN.
The House Financial Services Committee has made inquires to the Treasury Department about whether any suspicious activity reports were filed about the financial activities of Farook or his wife, Tashfeen Malik. But it's likely that neither the loan itself nor any of Farook's activity after receiving the loan would have been seen as suspicious.
Loans arranged by Prosper are disbursed directly into bank accounts by WebBank, a federally regulated institution in Salt Lake City.
And though a $28,500 deposit is a lot of money, the deposit itself wouldn't have been suspicious, said a former federal law enforcement official familiar with financial regulations.
"It could have been from an insurance settlement or something else owed to them," the former official said.
Banks also must file reports if customers make cash deposits or withdrawals of $10,000 or more but Farook wouldn't have needed to pay cash for items for the attack.
Rep. Brad Sherman (D-Sherman Oaks), a member of the House Financial Services Committee, said he doesn't think the loan itself would have been a tip-off.
He also believes Farook and Malik would have found a way to carry out their attack even without the loan from Prosper.
"I've never priced a pipe bomb, but I don't think you need $28,000 to get one," Sherman said. "They seemed intent on killing a lot of people."
He said that the committee should be worried about money finding its way into terrorists' hands and consider additional regulation of online lenders, but those are two separate issues.
"We shouldn't be viewing consumer protection for middle-class families through the lens of the outrage and tragedy in San Bernardino," Sherman said.