Peer-to-peer lender Prosper has started a debate over the right of the SEC to regulate – or not – their industry. A relatively new business model, P2P lending is a type of lending that cuts banks out. The SEC calls these companies investment companies, which means the SEC could regulate them. However, one of the two largest p2p lenders is fighting that ruling.
How peer to peer lending works
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 post requests for loans on the website, including details like their credit score. For as little as $ 25, a lender can contribute to one of these borrowers. 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 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.
How bonds and loans differ
A bond, typically known as a corporate bond, is a type of investment typically used by corporations and companies. Bonds are a contract that promises payment later as well as quick cash loans. A bond can be traded, exchanged, insured and typically moved around financial markets without much trouble. The interest rates on bonds are usually relatively low. Loans are a contract for money now that cannot be traded as effortlessly. Individuals are “sold” loans by banks, when corporations sell banks bonds.
