Peer-to-peer lender Prosper has started a debate over the right of the SEC to regulate – or not – their industry. 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 wants to regulate these businesses as investment businesses. 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 just a little money directly with the borrower. Borrowers post requests for loans on the website, including information like their credit score. 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 – prosper.com and lendingclub.com. These two companies report that, on average, investors get a return of 6 to 16 percent on their investments.
Regulations for peer to peer lenders
The lending on peer to peer loan sites are at the moment regulated by the SEC. The Securities and Exchange Commission says that these “loan servicers” provide bonds, not loans. 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.
Bonds and loans – what is the main difference?
Corporations typically use bonds as a type of capital-raising investment. Bonds are promises to pay money back later, as well as getting money now. Financial markets typically accept bonds as a market item to trade. The interest rates on bonds are usually relatively low. A loan, on the other hand, is a contract between a borrower and a lender that cannot be very easily exchanged or traded. Generally, loans are “sold” by individuals to a bank, when bonds are “sold” by corporations to individuals.
