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[havastat]

What regulatory structure should peer-to-peer lending have?

Treating p2p lending as a kind of security clarifies and enhances the disclosures that Lending Club and Prosper to make to investors, but at the cost of inserting an ownership structure which is very disadvantageous to lenders.  Before the SEC stepped in, investors  owned the loans, which protects us in the event of bankruptcy and ensures the p2p loan companies can't borrow against the loans. Now there is no protection from either. We would frankly have been better off with the old ownership structure. And it's rather odd to have a structure so obviously to our disadvantage imposed on us by a regulatory agency whose ostensive purpose is to protect us.

Banking regulations, on the other hand, don't address investor disclosure -- the idea of investors being interested in or making decisions about individual loans doesn't make sense in that environment; the whole point of banks is to make these decisions for people.

I would tend to agree that's what's needed is a hybrid, in which Prosper, Lending Club, etc. are required to offer securities-like disclosures and a prospectus to investors, and a secondary market is permitted, but lenders are protected, either through direct ownership or through some other means, from having the loans or loan proceeds used, seized, or claimed by the P2P companies, and to ensure investors are the only ones with rights to the loans and loan proceeds in the event of bankruptcy. This does not have to involve lenders directly owning the loans, it might occur through some other legal structure such as a trust which is clearly separate from the P2P company itself. But I think it is important to have the P2P companies only service the loans and have some other entity own them, and to have that entity hold them only in trust for the benefit of investors, protected from the clutches of the P2P company or its creditors.

This does suggest there needs to be a hybrid, sui generis set of laws to address the p2p lending industry. It doesn't quite fit, at least not satisfactorily, in any existing regulatory category. Perhaps investors should become more involved in proposed p2p industry regulatory legislation, perhaps have an investors committee that makes our views known to Congress.

Suggest we put this in Lobby.

[nonattender]

The loans should be owned by the lenders - and, long term, so should the platforms = all problems solved.

Seconded.

-t

[Investar]

One Millimeter Closer to a P2P 'Pipe Dream'
SENATORS INCH FORWARD ON BANKING REFORM
From INVESTAR Lenders weekly news notes
March 23, 2010

Senate Banking Committee Chairman Christopher Dodd released his version of legislation to overhaul financial regulation last week after his hopes for a joint effort with Republican Bob Corker faded. “Our talks will continue and it is still our hope to come to agreement on a strong bill all of the Senate can be proud to support,” Dodd said. The House of Representatives passed their version of a fix back in December and sent it to the Senate. 

Dodd's bill includes elements he negotiated with Corker. One example, it scuttles the stand-alone agency that the House Bill contained, and which Corker opposed, and proposes to put the House's new consumer protection unit inside the Federal Reserve. The unit would have an independent budget, specific enforcement powers, and a director appointed by the president.

This consumer unit is the one Prosper and the Coalition for New Credit Models hopes to see created and Prosper wants to be regulated by. It would move P2P lending away from the SEC and out from under a set of rules that don't fit them very well. While Dodd and other Democrats support the new consumer unit Republicans oppose it, saying it would only create more bureaucracy and unnecessarily separate banking and consumer regulation. So we'll see. It certainly gives Podesta Group, Prosper's lobbying agent, something to work on!

[GLeaderAccountantsChoice]

I would support a government created platform that allowed all credit reporting agencies, collections agencies, lenders, and borrowers to compete/participate simultaneously.  In this case, the government ownership does away with conflict of interest and (wink wink) platform BK possibilities.

If not that, the platform would have to be lender owned to avoid a confict of interest.  A third party is too likely to be partial to borrowers when in need of (quick) revenue or irresponsible with operating funds.  Lenders would be fair to borrowers or lose their clientel, and they certainly would also be fair to themselves and their operating capital.

[Investar]

... the platform would have to be lender owned to avoid a confict of interest. A third party is too likely to be partial ...

Lender owned. Very interesting idea, particularly if the umbrella itself were set up as a non-profit. You could eliminate all temptation to stray from fairness, fund operations by charging annual membership dues on both sides of the table. Low overhead, no fancy office and no fancy officers, all salaried staff held under 100k.

[havastat]

A lender-owned company is an interesting idea, but as far as the regulatory environment is concerned I'm not sure it's the government's job to say who should be owning the company. Given that the current companies out there aren't lender-owned, there should be some regulation to ensure investors are protected both in terms of receiving accurate information about the risks and in terms of ensuring the funds don't get siphoned off if something goes wrong with the company that owns the platform. Right now the only people who seem to be talking to Congress about what that regulation should look like are lobbyists for the platforms. Shouldn't investors have a say?

[baeventures]

Given that the current companies out there aren't lender-owned

In a sense many of these large institutions are lender owned now. The government bailed them out for a stake in the company. The government being their lender, now owns them... They set the precedent, why can't we do the same? Lenders have been bailing out Prosper since day one and is still ready to go bankrupt. I don't see any reason why a bankruptcy court when it comes to that, couldn't split Prosper's assets between it's lenders, and it's VC's, aside from the fact that the SEC stepped in and took away all of our rights as lenders...

BAEVentures

[Urbi_et_Orbi]

By the way, Prosper has been very quiet lately regarding their efforts to wrestle oversight away from the SEC.

[cowdog]

P2P lending should be banned IMHO, especially after seeing the mess Prosper made of it.

It properly belongs in the domain of money lenders, i.e. banks; and at that point, interest in the loan, in the form of notes, could be sold to individuals. It just so happens that is also the view of the feds.

Funny how that works out.