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 SEC claims that these lenders sell bonds, not loans. To regulate their business, Prosper is asking for the CFPA to have the rights to their business.
The difference between bonds and loans
Corporations generally use bonds as a type of capital-raising investment. Bonds are a contract that promises payment later as well as quick cash. Financial markets typically accept bonds as a market item to trade. Because of this liquidity, a bond typically has a very low rate of interest – 5 percent or lower. A loan, on the other hand, is a contract between a borrower and a lender that cannot be easily exchanged or traded. Generally, loans are “sold” by individuals to a bank, when bonds are “sold” by corporations to individuals.
