The SEC slows down Peer to Peer Lending

Kyle Gentile
January 16, 2009 — 1,924 views  
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Peer to peer lending is a new type of lending that involves individuals lending money to each other. The SEC has made this type of business a bit tougher for those involved.

In the beginning of peer to peer lending, the industry's regulation was lax. Loans were issued for amounts ranging from $1,000 to $25,000 over a three year period. Borrowers found these loans to be ideal for the purposes of debt consolidation, small business loan, or just a small personal loan. Lenders like the return on their investment which could range from 6% to 19%. The transaction issued by the banks involved is a promissory note between lenders and borrowers. Furthermore, there is often a secondary market allowing lenders to trade notes. The banks involved are considered to be non traditional because they are purely based on the internet and allow the trading of these notes. The governing of notes was completely in the hands of the banks involved and had no governmental involvement.

In the last year, the SEC has stepped in and put a hold on all transactions for the industry. The SEC stance on the industry was the banks involved were issued unregistered securities. More specifically in accordance to the Securities Act of 1933 which bars the mere offer to sell a note without having the correct registration statement filed with the SEC. The offense is punishable by law and is in place to protect investors.

The effect for the industry was devastating. Many of the in funding loan applications had to be referred to other traditional forms of lending and represented a huge loss for all industry players. The two largest sites, Lending Club and Prosper, had to halt all lending activities. Other sites like Zopa, based in the UK, completely withdrew from the US market. The loans already issued were still honored and potential investors were turned away with little information.

Today, Lending Club seems to be the only one back up and running. They have filled all the necessary paperwork with the SEC and have been granted permission to once again issue peer to peer loans. Other sites like Proper, are still going through the process and are still on hold.

The SEC filing seems to be an almost bump in the road for the industry. Lending Club's ability to issue loans again opens the door for others sites looking to get back to business as usual. The current credit crunch has made peer to peer lending even more attractive for those struggling to get a loan. Borrowing applications continue to stream in for those issuing loans. Today sites like Lending Club have over 100 current in funding loans and total $25,000,000 already lent.

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Kyle Gentile