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.