Peer-to-peer lender Prosper has began a debate over the right of the SEC to regulate – or not – their industry. Banks are generally effectively cut out of lending with the peer to peer lending business model – usually used for charity purposes. The SEC calls these companies investment companies, which means the SEC could regulate them. Prosper is taking action to change this ruling, though.
The way peer 2 peer lending operates
Peer to peer lending is a business model that is not entirely unheard of. By letting the lender choose exactly who and how much they invest money with, it gives the lenders control. Borrowers posts their info, including credit score and desired loan amount. For as little as $ 25, a lender can contribute to one of these borrowers. Thus far, the two largest U.S. based p2p lenders are lendingclub.com and prosper.com. On average, these companies claim that investors make around 9 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. Prosper, however, is asking for the new Consumer Financial Protection Agency to regulate their business.
The real differences 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 essentially a promise to pay a certain amount of money later in exchange for an amount of easy cash loans. Bonds are traded, insured, and exchanged on open financial markets. Because of this liquidity, a bond generally has a very low rate of interest – 5 percent or lower. Loans, instead, are a contract for future payment in exchange for current investment – but cannot be traded as very easily as bonds. Basically, a loan is sold to an individual by a bank, when corporations “sell” bonds to individuals.
