SEC fighting over regulation of P2P lending

The Securities and Exchange Commission has been in an extended debate with Prosper, one of the two largest peer to peer lending businesses. 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 companies investment businesses, which means the SEC could regulate them. Prosper, nevertheless, believes that this is not a correct ruling.

Article Source: Peer to peer lending confounds the SEC

The way peer 2 peer lending operates

The peer to peer lending model is one that has been used in the past. By letting the lender choose exactly who and just how much they invest money with, it gives the lenders control. A borrower can make a plea for money on the site, including their prepared use of the money, their credit score, and personal story. 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. These two companies report that, on average, investors get a return of 6 to 16 percent on their investments.

The regulation question for peer to peer lenders

The Securities and Exchange commission presently regulates the lending and investing that occurs on these peer to peer lending sites. The SEC claims that these lenders sell bonds, not loans. 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 a contract that promises payment later as well as cash until payday. Bonds are traded, insured, and exchanged on open financial markets. 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 can’t be effortlessly exchanged or traded. Individuals are "sold" loans by banks, while corporations sell banks bonds.