Peer to peer lending confounds the SEC

Peer-to-peer lender Prosper has began a debate over the right of the SEC to regulate – or not – their industry. 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 companies, which means the SEC could regulate them. However, one of the two largest p2p lenders is fighting that ruling.

Article Source: Peer to peer lending confounds the SEC By Personal Money Store

The way peer to peer lending does investing

The peer to peer lending model is one that has been used within the past. Essentially, an investor has direct choice over who they lend money to. A borrower can make a plea for money on the site, including their planned use of the money, their credit score, and personal story. Investors can peruse these requests, and determine exactly where they want to put their money — and they can loan as little as $ 25. The two largest p2p lending facilitators are both Silicon Valley startups – prosper.com and lendingclub.com. As outlined by the two web sites, these lenders typically make about eight to twelve percent back on their initial investment.

Regulations for peer to peer lenders

The Securities and Exchange commission presently claims the right to regulate the p2p lending. 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.

The real differences between bonds and loans

In order to raise money, numerous corporations will sell bonds. Bonds are promises to pay money back later, in addition to getting money now. A bond could be traded, exchanged, insured and typically moved around financial markets without much trouble. Because of this liquidity, a bond generally has a very low rate of interest – 5 percent or lower. Loans, instead, are a contract for future payment in exchange for current investment – but cannot be traded as very easily as bonds. Essentially, a loan is sold to an individual by a bank, when corporations "sell" bonds to individuals.