The Securities and Exchange Commission has been in an extended debate with Prosper, one of the two largest peer to peer lending companies. 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 calls these businesses investment companies, which means the SEC could regulate them. However, one of the two largest p2p lenders is fighting that ruling.
The basics of p2p lending
Peer to peer lending is not entirely unknown – it has been used for microloans to charities in the past. Basically, an investor has direct choice over who they lend money to. Borrowers posts their data, including credit score and desired loan amount. Investors can peruse these requests, and choose 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. On average, these companies claim that investors make around 9 percent on their investments.
Regulations for peer to peer lenders
The Securities and Exchange commission presently claims the right to regulate the p2p lending. The Securities and Exchange Commission says that these “loan servicers” provide bonds, not loans. Prosper, however, is asking for the new Consumer Financial Protection Agency to regulate their business.
The difference between bonds and loans
Corporations typically use bonds as a type of capital-raising investment. Bonds are promises to pay money back later, in addition to getting money now. A bond can be traded, exchanged, insured and generally moved around financial markets without much trouble. In comparison to other loans, bonds typically have very low interest rates. Loans are a contract for money now that cannot be traded as effortlessly. Generally, loans are “sold” by individuals to a bank, when bonds are “sold” by corporations to individuals.
