In California, the noose has tightened around online lending industries since the epidemic of terrorist attacks that took place on American soil largely starting with 2001. Local government came up with new regulations and scrutiny that more recently (Dec. 2015) included the California Department of Business Oversight. Some observers are concerned that California’s hard money lenders may unknowingly fund terrorist activity. This article shows how such fears are ungrounded.
Towards the end of 2015, a series of events indicated that at least one online US-based private lending company had unknowingly abetted terrorism. Sources close to the investigation said there are no known indications that the terrorist activities in question were connected with any foreign terrorist organization such as ISIS.
Nonetheless, terrorist experts say that the anonymity of these online private lending institutions makes it theoretically possible to use them to send funds to specific individuals. The borrower’s identity is protected and investors can’t search for a particular loan applicant by name.
The government was also concerned to find that loans issued through online lenders have increased rapidly over the past year, calling into question whether the industry needs to be regulated more heavily. According to Morgan Stanley, online lenders issued $14 billion worth of loans in 2014.
In an earlier investigation, the California Department of Business Oversight found that some business owners and consumers do not fully understand the terms of the loans they receive by these online lending companies. This can result in, what is called, “predatory lending”. Another study conducted by the Federal Reserve Board and the Federal Reserve Bank of Cleveland in August 2015 found that small-business owners have difficulty comparing credit products offered online by alternative lenders. Some lenders, for instance, only cite amount to be repaid daily whilst others cite an annualized interest rate.
Under California state law, the Department of Business Oversight (DBO) requires that loan rates be stated “fully and clearly” to borrowers. State licensing laws also require that the lender verifies the ability of the borrower to afford the repayment before the lender proceeds with the transaction.
Failure to comply with these requirements, together with their connections to terrorist funding, set a DBO inquiry into motion.
California has more than 500 private hard money lending companies. Some of them are concerned that the state inquiry has put the industry in a harsh spotlight and that there could be a regulatory overreaction.
There’s reason for concern.
A lot of Californians worry that these companies – so readily touting their no-credit-check backgrounds – may unwittingly provide terrorists with ammunition or other arsenal.
Private lenders 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 over-the-counter loan from any of the hard money companies can amount to as much as $35,000 – and borrowers can get their money in days, not weeks.
Easy credit makes funding terrorism easy. But here’s why hard money lenders are likely to be exempt.
Hard money lenders have been indicted for various felonies in the past, mostly for snapping naive people into bankruptcy. But that’s where it stops.
Hard money lenders have to be certified by their particular states therefore they cannot work in the anonymous or quasi-anonymous fashion that many online agencies choose to operate in. Online, some of the most disreputable companies can choose to duck under and over under anonymous names. In some foreign countries, few are held accountable. The bottom line is money and if an online lending business can do a nice deal some tend to turn a blind eye to anything else. So hard money lenders conduct their business on hard earth terrain and are less easily conned.
Hard money lenders, too – or at least reputable hard money lenders – have put certain checks in motion. While these do not run the gauntlet of the banks, hard money lenders still make borrowers sign certain forms and reveal aspects of their working and credit history. More and more hard money lenders are intensifying their background checks and becoming more careful whom they lend money too.
Thirdly, hard money lenders have to be certified by state. Each state has its regulations, conditions, and lending environment which impels lenders to confine themselves to, at most, two or three states in order to succeed. Lenders are closely hemmed in by the state’s regulations and scrutiny. They need to provide records of their transactions. There are also rules built into the financial system that aim to prevent money laundering and to keep money out of the hands of terrorists and other criminals. Private lenders have to run customers’ names through a federal database of known terrorists and other criminals. Financial institutions must report suspicious activity to the Treasury Department’s Financial Crimes Enforcement Network, or FinCEN. All of this makes it unlikely that reputable offline commercial hard money lenders will end up loaning their money to terrorists. moneylender singapore