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. Prosper, however, is asking for the new Consumer Financial Protection Agency to regulate their business.
The real differences between bonds and loans
In order to raise money, many corporations will sell bonds. Bonds are promises to pay money back later, as well as getting money now. Bonds are traded, insured, and exchanged on open financial markets. Because of this liquidity, a bond generally 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 effortlessly exchanged or traded. Basically, a loan is sold to an individual by a bank, while corporations “sell” bonds to individuals.
