GAO: Burgeoning peer-to-peer lending could require new regs

Jul 8, 2011 @ 2:41 pm

By Liz Skinner

The peer-to-peer lending industry could require additional regulations if it grows dramatically or introduces new products and services, the Government Accountability Office said in a new report.

Online loan matchmaking, also called person-to-person or P2P lending, makes loans available to individuals and small businesses, and offers investors above-average returns on their money. The sector has grown in recent years as conventional loans have become more expensive and more difficult to get.

As of March, two for-profit firms — Prosper Marketplace Inc. and Lending Club Corp. — had facilitated $469 million in loans. The main non-profit P2P platform, Kiva Microfunds, had arranged $200 million to microfinance groups, which gave loans to individual entrepreneurs in developing countries, the report said.

Research firm Gartner Inc. has estimated that by 2013, $5 billion could be handed out by P2P sources around the world.

The report examines the bifurcated regulatory approach to the industry, in which the Securities and Exchange Commission and state securities regulators protect lenders on the for-profit platforms and borrowers are protected by the Federal Deposit Insurance Corp. and Utah's Department of Financial Institutions.

The Consumer Financial Protection Bureau, which is still being developed as part of the Dodd-Frank financial reform bill, also will have a role. Its duties will include collecting and analyzing complaints, said the report, which was mandated by the Dodd-Frank legislation.

The report also considered whether peer lending should be consolidated under one regulator for lenders and borrowers. Its conclusion: Not right now, at least.

“Regardless of the option selected, new regulatory challenges could emerge as the industry continues to evolve or if it were to grow dramatically, particularly if that growth was primarily due to the increased participation of institutional versus individual investors,” the report said.

Officials from Prosper and LendingClub told the GAO that while lenders are predominately individuals, a growing number of institutional investors are participating.

The report also mentions that additional regulatory issues could arise as more services are introduced. For instance, LC Advisors LLC, a subsidiary of LendingClub, has registered with the SEC and state securities regulators as an investment adviser that will offer and manage separately managed accounts for high-net-worth and institutional clients to invest through LendingClub, the report said.

In a letter to the GAO after reading the report, SEC Chairman Mary Schapiro said her staff has actively worked with Prosper and LendingClub for several years. She added that investors in securities offered by the two are being provided with the information they need to make informed investment decisions.

"As indicated in your report, the person-to-person lending industry is a relatively new market, and innovation is occurring at a rapid pace, which could pose new regulatory challenges,” she wrote in the July 1 letter.

In January, the North American Securities Administrators Association Inc. issued an investor warning about peer lending over the Internet.

0
Comments

What do you think?

View comments

Most watched

INTV

How advisers can be a gamechanger for women investors

Why women defer to men when it comes to finances and how advisers can combat this phenomenon and make a difference for female investors, according to Heather Ettinger, founder and CEO Luma Wealth Advisors.

Events

MassMutual's LaPianna: Creating better conversations with your clients

What's the secret to building better client relationships? MassMutual's Paul LaPianna says it all begins with great conversations.

Latest news & opinion

Schorsch, AR Capital to pay $60 million to settle SEC charges

The former REIT czar and his firm wrongfully obtained millions linked to REIT mergers.

CFP Board postpones enforcement of its revised fiduciary standard

Board's new Code of Ethics and Standards to be enforced next June, in line with the SEC's Reg BI

Charles Schwab reportedly in talks to buy USAA brokerage, wealth management business

The deal would net Schwab roughly $100 billion in new assets.

Advisers scramble to help retirees navigate looming Fed rate cut

The Fed's first interest-rate cut in a decade has advisers warning against chasing the bait of risk over safety.

X

Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting investmentnews.com? It'll help us continue to serve you.

Yes, show me how to whitelist investmentnews.com

Ad blocker detected. Please whitelist us or give premium a try.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print