The Securities and Exchange Commission has been in an extended debate with Prosper, one of the two largest peer to peer lending companies. 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. Prosper is taking action to change this ruling, though.
The way peer to peer lending does investing
Peer to peer lending is not entirely unknown – it has been used for microloans to charities within the past. By letting the lender choose exactly who and how much they invest money with, it gives the lenders control. Borrowers posts their details, including credit score and desired loan amount. For as little as $ 25, a lender can contribute to one of these borrowers. In addition to the charity micro lending site Kiva.com, prosper.com and lendingclub.com offer these peer to peer lending programs. 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 currently regulates the lending and investing that occurs on these peer to peer lending sites. The SEC claims that these lenders sell bonds, not loans. 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.
How bonds and loans differ
A bond, usually known as a corporate bond, is a type of investment usually used by corporations and companies. A bond is basically a promise to pay a certain amount of money later in exchange for an amount of extra cash. Financial markets typically accept bonds as a market item to trade. In comparison to other loans, bonds usually have very low interest rates. 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.
