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 believes that these businesses should fall under their purview of regulations. However, one of the two largest p2p lenders is fighting that ruling.
Source for this article: Peer to peer lending confounds the SEC
How peer to peer lending works
Peer to peer lending is a business model that is not entirely unheard of. The basic idea is that investors get the option of investing a lot or just a little money directly with the borrower. Borrowers posts their information, including credit score and desired loan amount. Lenders can offer as little as $ 25 to each of these borrowers. Thus far, the two largest U.S. depending p2p lenders are lendingclub.com and prosper.com. According to the two websites, these lenders usually make about eight to twelve percent back on their first investment.
The regulation question for peer to peer lenders
The lending on peer to peer loan websites are at the moment regulated by the SEC. 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.
The difference between bonds and loans
In order to raise money, numerous 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. In comparison to other loans, bonds usually have very low interest rates. Loans are a contract for money now that cannot be traded as very easily. Individuals are "sold" loans by banks, while corporations sell banks bonds.
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