June 30, 2011
Verstein on P2P Lending
If the recent posts here and here haven’t sated you, Andrew Verstein, the Executive Director at the Yale Law School Center for the Study of Corporate Law, has written an interesting article on peer-to-peer lending. It is available here. Here’s the abstract:
Amid a financial crisis and credit crunch, retail investors have lent a billion dollars over the Internet, on an unsecured basis, to total strangers. Technological and financial innovation has allowed person-to-person lending to connect lenders and borrowers in ways never before imagined. However, all is not well with person-to-person lending. The entire industry is threatened by the SEC, which asserted jurisdiction in a fundamental misunderstanding of person-to-person lending. This Article argues that the SEC lacked adequate basis for regulating this market. More importantly, it shows that the SEC has made this industry less safe and more costly than ever, threatening its very existence. This Article takes the SEC’s misregulation as an opportunity to theorize about regulation in a rapidly disintermediating world. A preferable regulatory scheme is then proposed, designed to preserve and discipline person-to-person lending’s innovative mix of social finance, microlending and disintermediation: regulation by the new Consumer Financial Protection Bureau.
Verstein focuses on two of the biggest P2P sites, Prosper.com and LendingClub and considers their treatment under federal securities law. In an interesting digression, he also takes the revered Kiva.com site down a notch or two.
Verstein discusses how the P2P platforms changed in response to SEC pressure and argues that those changes have actually made them less safe for investors. Verstein's analysis is very good.I disagree with a couple of minor points he makes about whether P2P investments are securities, but, in his defense, he’s merely posing possible counterarguments to the SEC’s position.
I'm not so sure about Verstein's conclusion. I can't imagine that putting things in the hands of Elizabeth Warren at the CFPB is going to make things any better for P2P sites.
Well worth reading.