ABA Banking Journal 5/08 - (Page 7) briefing Online lending circles hit circuit breaker What will possible SEC regulation mean for p-to-p lenders, a rising bank competitor—and potential partner? ebsites that help individuals make loans to other individuals online suddenly have been stopped in their meteoric rise, calling into question whether such sites are the easy antidote to the current credit crisis. Collectively, site operators such as Prosper, Zopa, Virgin Money, GlobeFunder, and Lending Club tend to be termed “pto-p lenders,” for person-to-person lending. However, some reject that label, partly, it seems, to distance themselves from “subprime,” and now a regulatory tarnish coming over the pto-p lending niche. “Micro lending” is another term for the practice, although that term has more often been used in reference to loans made to the poor in developing countries. We know what happened to peer-to-peer music sites, like Napster, which enjoyed explosive growth at the start of this decade: Lawmakers shut them down. While p-to-p lenders may not be facing something so drastic, April’s announcement by Lending Club that it was ceasing to take lender applications pending “a process to register with the appropriate securities authorities” begs the question what the future of p-to-p lending will be. With the music sites, record INSIDE BRIEFING Snapshot: Efficiency ratios take a hit. . . . . . p. 8 “Then & Now,” a yearlong review of banking history during ABA Banking Journal’s 100th Anniversary. This month: “The Code” & FDIC p. 12 Letters: “Excessive fees make us all look bad” p. 10 ABA Resources p. 15 W companies were hemorrhaging revenues from songs that would have been sold, instead being shared for free online. By contrast, with p-to-p loans, the upstarts have taken maybe just $250 million of the $400 billion now funded by credit cards. However, with the initial p-to-p defaults running in one case near 20% in a market generally jittery about bad loans; with unsophisticated financial players (consumers) involved; and with uncertainty about where the buck stops, greater scrutiny now is not too surprising. By Orla O’Sullivan, contributing editor A “regulatory minefield” At the heart of the regulatory knot is whether p-to-p sites issue loans or securities. Typically, loans made on these sites are subdivided between many parties, so the $20,000 a borrower gets has been advanced by ten individual lenders, each with a $2,000 stake. The subdividing or syndication makes it less like simple loan and more like a structured debt instrument, or security. “The U.S. securities law is very clear on this: if you have a segment of a consumer loan, then it is a security,” says Doug Dolton, chief executive of Zopa, which operates differently in the U.S. than in the U.K., precisely for that reason. “The whole world of p-to-p lending, we’re finding, is not simple,” Dolton ABA BANKING JOURNAL/MAY 2008 7 Subscribe at www.ababj.com http://www.virginmoneyus.com http://www.prosper.com https://us.zopa.com http://www.virginmoneyus.com http://www.globefunder.com http://www.lendingclub.com http://www.lendingclub.com https://us.zopa.com http://www.ababj.com
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