Turns Out P2P Lending Might Run Afoul Of Securities Law As Well
from the oops dept
First off, a quick disclaimer. Lending Club has offices in the same building as Techdirt, and we’re actually right across the hall from them. I’m also pretty good friends with some folks who work there (since even before they worked there), but I have no additional insight into what’s going on at the company, other than that everyone I know there is very smart and capable. A few months back, we got into a discussion about attempts to take the peer-to-peer “lending” model and move it into venture funding. At the time, we pointed out that this would raise serious regulatory problems, as the public markets (regulated by the SEC) were already, effectively, a peer-to-peer venture capital system. However, at the time we didn’t think too much about the regulatory implications of peer-to-peer lending itself — and, unfortunately, it appears that Lending Club may not have either. Apparently, Lending Club has put all new lending activity on hold, as it needs to deal with certain regulatory matters.
The company won’t provide any additional information on what’s going on (even, I assume, to those of us across the hall), but the speculation is that its lending practices clearly fell on the wrong side of certain regulations, quite similar to the ones we discussed having to do with any attempt at a peer-to-peer venture offering. The Peer-Lend blog points to this analysis of the problem (though, that’s for a competitor of Lending Club). Basically, the question is who owns the loan itself, and how is it transferred. Since the loan may be owned either by the company itself or by the lenders (the “peers”) at some point the loan may be getting transferred around — meaning that it’s no longer a “loan” but a “security.” And, as we know, securities are regulated. This could get even hairier as the government is suddenly quite concerned about “securtized” loans these days since (as you might have heard) some of the financial world’s problems have something to do with such instruments. This certainly isn’t a problem that just faces Lending Club. In fact, it’s almost surprising that it happened to it first, rather than its larger competitors like Prosper and Zopa. In the meantime, though, it’s a good reminder that while web 2.0 startups can enable a lot of neat things, the folks back in Washington DC still have plenty of power over what certain businesses can and cannot do.