Ever wondered how p2p lending is regulated in the US in detail? The new GAO report ‘Person-To-Person Lending: New Regulatory Challenges Could Emerge as the Industry Grows‘ has all the details and covers the situation of Prosper, Lending Club and Kiva. It also reviews possible regulatory changes.
A petition (‘Petition for Rulemaking: Exempt securities offerings up to 100,000 with 100 maximum per investor from registration‘) submitted last July by the Sustainable Economies Law Center to the SEC, aims to exempt securities offerings of up to 100,000 US$ with a limit of 100 US$ per investor. If a new rule granting exemption would be issued by the SEC, this could substantially lower the hurdles for peer-to-peer equity platforms in the US.
The petition 4-605 is online here.
Comments and supporters that joined after the filing are listed here.
The House of Representatives yesterday passed a bill that will move regulation of p2p lending services from the SEC to the newly created Consumer Financial Protection Agency (CFPA) in Spring 2010, provided the Senate and President Obama approve the new legislation.
Oversight by the SEC meant that Prosper, Lending Club and other p2p lending companies in the US had to go through an arduous registration process in the past, which forced them to close for new business for several months. Zopa even decided to exit the US market.
Prosper CEO Chris Larsen welcomed this development, saying: “In terms of how the Bill relates to peer-to-peer lending, we’ve always believed that the industry should be regulated as a bank-like sector by a strong, holistic regulator focused on providing robust protections for both lenders and borrowers…”.
Loanio has filed a S-1 registration with the SEC. P2P lending service Loanio had been briefly active in October and November last year before voluntarily closing to new users in order to seek SEC registration approval.
In the new SEC filing Loanio wants approval for offering 50 million US$ in notes based on peer to peer loans via their website Loanio.com. The filing includes the outlook for a secondary market (loan trading platform via a broker) and the plan that Loanio might partner with a “national financial institution”. Should that be achieved, borrower loans could be originated through this lending institution and then sold and assigned to Loanio. This would allow Loanio to offer loans to borrowers in more than the 22 states it has individual state lending licenses for now, and would eliminate (some) state interest caps.
The filing also gives insights into the company structure and expenses since foundation. Founder Michael Solomon hold 97% of the company shares.
Under the requirement to file with the SEC, starting a peer-to-peer lending company in the US market takes an unusual long pre-launch phase compared to other internet based business models.
IOU Central, headquartered in Kennesaw, Georgia, Wednesday submitted an SEC S-1 Registration filing in order to launch in the US. IOU Central did launch a p2p lending service in Canada in Feb. 2008 for a brief period of time before it was closed due to regulation constraints.
Barry Coleman, VP Marketing at IOU Central, told P2P-Banking.com earlier this year:
… we are getting ready to release an online marketplace that will revolutionize peer-to-peer lending. Our platform will give borrowers the benefit of a true marketplace that allows for better interest rates. The platform will also give lenders freedom in lending with our real-time bidding system. We have taken a lot of the good from the original IOU Central platform and added features that make it much better for both borrowers and lenders.
The registration filing shows the minimum requirements IOU Central will apply to borrowers (Equifax Vantage score of at least 670 and others) and the validation process (most borrower income, employment and occupation information will be self-reported and not verified). The interest rate is set by the IOU Central loan marketplace based on several borrower related criteria. There will be auction bidding by lenders (like at Prosper) and an auto-fund option. Furthermore lenders can set auto-bidding parameters.
IOU Central will charge lenders a servicing fee of 1% of the remaining principal balance. Borrowers pay a 2% loan origination fee.
Terms of the loans will be 1, 2 or 3 years.
The website currently displays the following message:
Prosper is Currently in a Quiet Period
We have been overwhelmed by the outcry from potential investors around the country who want to participate in peer-to-peer lending. Thank you for your support and your letters to us.
After much consideration we have decided to voluntarily shut down our operation in order to complete our SEC approval for a nationwide peer-to-peer lending platform. As a result, due to regulatory concerns, and in the interest of working toward getting our registration statement effective as soon as possible, we are discontinuing our California intrastate offering at this time.
If you’re an existing lender, your current lender agreements will be unaffected; your existing loans will continue to be serviced; you’ll be able to track and monitor your loans; and you’ll be able to withdraw funds from your Prosper account.
If you are a borrower with an existing loan, you will continue with your current borrower agreement and be unaffected by the registration process.
We want to assure you that Prosper is looking forward to being able to offer a transparent, durable and participatory lending institution very soon.
As a result of this decision, we will not be accepting new lender or borrower registrations or loans, or new commitments from existing lenders effective immediately. Until this process is complete, we are required to be in a quiet period and will be unable to respond to press, blogger or other inquiries related to our SEC registration process, even though we would like to.
We sincerely apologize to the Prosper community members for this inconvenience or disappointment our decision may have caused. We want to thank those of you who demonstrated your support through your active participation whether by investing with us again or referring friends to our site.
Thank you in advance for your understanding, support and patience once more. We look forward to serving the needs of the community in the hopefully not too distant future.
What a mess.
Prosper chief executive Chris Larsen said the California Department of Corporations has authorized the company to resume raising money in California and then lending it out under a system that lets borrowers and lenders use bids to set the interest rates on loans. “I hope this leads to wider acceptance of peer-to-peer lending,” said Commissioner of Corporations Preston DuFauchard. He said the state’s experience with Prosper, prior to the SEC intervention, made it “comfortable” that its bidding system gives lenders the information they need to invest in loans wisely.
Prosper hopes to reopen for lenders from other states but it remains uncertain when Prosper will be allowed to do so.
Prosper raises the minimum credit score required to 640 (Grade C under the old rating). This applies only to new borrowers. Borrowers registered before the quiet period that have lower credit grades can still apply for second loans (example: loan listing of a HR borrower).
Besides “direct” p2p loan listings, Prosper offers “Open Market Listings“, which are described as following:
Open Market loans are existing loans that were underwritten by financial institutions that are credit experts in areas such as auto loans, small business loans or social impact loans. The loan seller describes the loan in an Open Market listing, and then sells and assigns the loan to Prosper.
Open Market loans may include existing consumer loans or retail installment sale contracts. They can be secured or unsecured loans, and may include small business loans, where the borrower is a business entity, not an individual.
Open Market listings describe the existing Open Market loan, owned by the loan seller, which is offered for sale on the Prosper marketplace. Each listing displays information to assist the lender in making an informed bidding decision. Lenders can review the sale price for the Open Market loan, the yield percentage that corresponds to the sales price, the remaining principal balance of the loan and the interest rate the borrower is obligated to pay on the loan.
In some instances on auto loans, you can even see the factory where the car was built. This is all part of the transparency Prosper brings to the marketplace so that you can make informed decisions on how to invest your money.
Prosper plans a secondary market which in future will allow lenders to trade notes.
(Sources: Prosper, San Francisco Chronicle)
Prosper.com, which is still in quiet period and not allowing new loans, made a new SEC filing yesterday. In this third amendment to the S-1 filing makes several amendments, most notably introducing securitization for initial offerings of loans.
Prosper plans “Open market loans”, which apparently are loans issued by traditional lenders which being securitized and resold to Prosper lenders. I am somewhat sceptical how many Prosper lenders will like the “open market loans” offer. To me this seems a far excursion from the peer to peer lending idea.
In the filing Prosper states that FolioFn will be the operator of the Prosper secondary market (named “Folio Investing Note Trader Platform”). FolioFn already operates the Note Trading Platform of Lending Club.
More changes in the new filing are in a review in this blog post at P2PLendingNews.