I wrote about peer-to-peer lending, also known as P2P lending, in early 2007.
I didn’t think it was worthwhile as an investment because there was too much credit risk. In April 2008, the SEC started requiring these companies to register with the SEC. During the registration period, these companies had to stop accepting new loan offers. Lending Club went first. It finished its registration after six months and reopened in October 2008. Prosper entered the process in October. It hasn’t come out yet. Then a third P2P lending company, Loanio, followed suit in November 2008.
In NPR’s Planet Money podcast on January 12, 2009 (fast forward to 05:40), the guest Clay Shirky, New Media professor at New York University, said that the SEC was wrong in shutting down peer-to-peer lending sites and requiring them to register before they can open for business again. Last December, Netbanker published an open letter to the SEC, urging them to “leave peer-to-peer lending alone.” Was SEC wrong in shutting down P2P lending sites and requiring them to register?
I think the SEC did it right. These companies are basically selling loan syndication to the general public. It’s not much different from mortgage securitization, albeit on a smaller scale. The SEC’s formal reasoning is quite convincing. Besides that, after seeing the alleged Ponzi scheme run by Agape World, we cannot afford not to regulate peer-to-peer lending companies.
Agape World said it offered bridge loans to construction businesses. Investors were told they were providing funding to each specific loan. Agape World paid investors high interest rates. It used multi-level marketing to attract $400 million from investors. It was not registered with the SEC. Like in all Ponzi schemes, some investors received good returns. P2P lending companies offer loans to individual borrowers. They advertise high interest rates. They pay bloggers as affiliates for lender sign-ups. Perhaps the current P2P lending companies are legit, but without proper regulation, how do we prevent the next company from running a Ponzi scheme under P2P lending? How do we prevent a legit P2P lending company from turning into a Ponzi scheme?