Online Peer-to-Peer Lending Executives Split On Oversight
- By Kristina Peterson Of DOW JONES NEWSWIRES WASHINGTON -(Dow Jones)- Heads of the leading person-to-person lending Web sites are split over upcoming legislation that could refashion oversight of the industry. Websites that facilitate lending between ordinary people are relatively new and simple in concept. But a recent classification as dealing in securities can be confusing to users and forces the businesses to comply with a host of costly reporting requirements. One year after the U.S. Securities and Exchange Commission began requiring peer-to-peer lending sites to register, executives can't agree on whether it's too late to push for change. Prosper, the first peer-to-peer lending site, is spearheading an effort to move oversight of the $647 million industry away from the SEC. A bill currently being drafted by U.S. Rep. Jackie Speier (D., Calif.) would shift the sites to being regulated as banking products. Speier spokesman Mike Larsen said the bill is being written very narrowly "so other securities can't sneak in through the peer-to-peer loophole and wreak havoc." Advocates, including Prosper Chief Executive Chris Larsen, say the move would better protect borrowers' privacy and adjust requirements limiting the current pool of investors. But Renaud Laplanche, CEO of Lending Club, says switching regulatory schemes now would only confuse users and hurt the businesses. "The plane is already flying, and there are passengers on that plane," Laplanche said. Since it was founded in 2006, Prosper has originated nearly $179 million worth of loans and attracted over 837,000 users. Lending Club, founded in 2007 with stricter requirements for borrowers, has facilitated only $65 million worth of loans, but is growing 20% each month, he said. Prosper and Lending Club are the only two peer-to-peer sites to have completed registration with the SEC. The process is similar to when companies go public, and one that Prosper estimated cost it $3 million. Both companies had to shut down for a period of six to nine months. "It was brutal," Larsen said. Prosper is also fending off a class-action lawsuit brought by lenders claiming they were sold unregistered securities before the company's registration. The hurdles to entry may deter smaller companies and slow the field's growth, said industry analyst Jim Bruene, editor of the "Online Banking Report." "It certainly stifles new entrants," he said. Once registered, peer-to-peer sites must daily report detailed information about the loans they originate. Filings from Prosper this week reveal that one borrower seeking a $5,029 loan to pay off high-interest credit cards lives in Colorado and has been employed for one year and two months. The three-year loan will be funded in small increments from 124 lenders, including $25 from "PotBellyPete" and $125 from "YogaDude34." In some states, dealing in securities triggers "suitability requirements" designed to weed out investors with shaky finances. That might exclude a would-be lender from investing if his income is below $100,000, Larsen said. Lending Club imposes its own income and net worth requirements on lenders, regardless of state securities laws. "I think some minimum standards in place to make sure the investors have the financial resources to make that investment is a responsible thing to do," Laplanche said. Officials outside of the industry are starting to think of new applications for the technology. In a June speech, U.S. Federal Reserve Bank Chairman Ben Bernanke endorsed exploring peer-to-peer lending as an untraditional funding source. The Federal Reserve Bank of San Francisco suggested in a June paper that peer-to-peer lending could market community development loans to a wider audience. "This technology is a really good way of connecting community lenders to folks that have capital," said Ian Galloway, an investment associate at the San Francisco Fed. However, he noted that at this time the SEC has not approved the sites to broker the sale of securities issued by a third party, including community lenders. -By Kristina Peterson, Dow Jones Newswires; 202-862-6619; kristina.peterson@dowjones.com Click here to go to Dow Jones NewsPlus, a web front page of today's most important business and market news, analysis and commentary: http://www.djnewsplus.com/access/al?rnd=BaSS0I8sNMINSIhDKSfJYg%3D%3D. You can use this link on the day this article is published and the following day.
