P2P goes financial, confounds SEC

A debate has began in Washington DC about if SEC has the ability to regulate peer-to-peer lender Prosper. A relatively new business model, P2P lending is a type of lending that cuts banks out. The SEC calls these businesses investment companies, which means the SEC could regulate them. Prosper, however, believes that this is not a correct ruling.

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

The way peer to peer lending does investing

Peer to peer lending is a business model that is not entirely unheard of. By letting the lender choose exactly who and just how much they invest money with, it gives the lenders control. A borrower can make a plea for money on the website, 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. In addition to the charity micro lending site Kiva.com, prosper.com and lendingclub.com offer these peer to peer lending programs. On average, these companies claim that investors make around 9 percent on their investments.

The regulation question for peer to peer lenders

The Securities and Exchange commission currently claims the right to regulate the p2p lending. The argument the SEC uses is that these online lenders are investment firms selling bonds – and therefore fall under the purview of the SEC. To regulate their business, Prosper is asking for the CFPA to have the rights to their business.

Bonds and loans – what is the difference?

Corporations generally use bonds as a type of capital-raising investment. A bond is essentially a promise to pay a certain amount of money later in exchange for an amount of cash til payday loan. Financial markets generally accept bonds as a market item to trade. In comparison to other loans, bonds generally have very low interest rates. Loans, instead, are a contract for future payment in exchange for current investment – but cannot be traded as easily as bonds. Essentially, a loan is sold to an individual by a bank, while corporations "sell" bonds to individuals.