Peer to peer lending confounds the SEC


Peer-to-peer money lending is confounding the standard definitions at the SEC. Image from Flickr.

The Securities and Exchange Commission has been in an extended debate with Prosper, one of the two largest peer to peer lending businesses. A new industry, the peer to peer lending model is a Silicon Valley startup that directly connects investors with borrowers, effectively cutting banks out of the lending equation. The SEC believes that these businesses should fall under their purview of regulations. However, one of the two largest p2p lenders is fighting that ruling.

The basics of p2p lending

Peer to peer lending is a business model that is not entirely unheard of. The basic idea is that investors get the option of investing a lot or a little money directly with the borrower. Borrowers posts their information, including credit score and desired loan amount. Investors can peruse these requests, and decide exactly where they want to put their money — and they can loan as little as $25. The two largest p2p lending facilitators are both Silicon Valley startups – and These two companies report that, on average, investors get a return of 6 to 16 percent on their investments.

The regulation question for peer to peer lenders

The Securities and Exchange commission currently regulates the lending and investing that occurs on these peer to peer lending websites. The argument the SEC uses is that these online lenders are investment firms selling bonds – and therefore fall under the purview of the SEC. One lender, Prosper, is arguing that the business is instead a lender that should fall under regulation of a different agency — ideally, the new Consumer Financial Protection Agency.

The difference between bonds and loans

A bond, usually known as a corporate bond, is a type of investment usually used by corporations and companies. A bond is basically a promise to pay a certain amount of money later in exchange for an amount of money now. A bond can be traded, exchanged, insured and generally moved around financial markets without much trouble. Because of this liquidity, a bond usually has a very low interest rate – 5 percent or lower. A loan, on the other hand, is a contract between a borrower and a lender that cannot be easily exchanged or traded. Generally, loans are “sold” by individuals to a bank, while bonds are “sold” by corporations to individuals.

Where should p2p lending be categorized?

Peer to peer lending is a difficult industry to categorize. Relatively new in the financial market, these businesses offer loans directly from one individual to another. Because of this, these loans could be seen as bonds, but they could also be viewed as standard loans. Currently, the SEC regulates both the Lending Club and Prosper, though Prosper has chafed under this regulation. The company has spent a significant amount of money on lobbying for p2p lending to be categorized and separately regulated by the possible new Consumer Financial Protection Agency. At the same time, Prosper has spent over $5 million to come into compliance with SEC regulations. Either way, this is an industry that appears to only be growing – and is worth keeping an eye on.

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