Most of the regulatory talk in Washington today centers on the impact of Dodd-Frank on the finance markets in general and the banks in particular, especially the small banks.

Former House Speaker Newt Gingrich has been an outspoken critic of Dodd-Frank especially when it comes to small banks:

“The game is rigged against small banks at two levels,” Gingrich said in an interview at his Washington office. “One is that the aggregated marginal advantage of borrowing money that is set up here by the Fed is profitable if you are a very, very large bank. It’s not nearly as profitable if you are a small bank. You have that disadvantage.” (American Banker. “Meet Newt Gingrich: The Community Banking Candidate“).

Case in point is Main Street Bank of Kingwood Texas.  Main Street has announced that will close its four branches & sell them to another local bank. The reason?  Main Street’s chairman, Thomas Depping, cites the increasingly tight regulatory noose that he says is beginning to strangle smaller banks:

“The regulatory environment makes it very difficult to do what we do,” says Mr. Depping, who last summer saw his bank hit with an enforcement order from the Federal Deposit Insurance Corp. (WSJ. “Fed Up: A Texas Bank Is Calling It Quits“).

Mr. Depping plans to stay in the lending business. Main Street Bank had specialized in small-business lending at the time when the economic recovery needed such loans, and because its portfolio was mostly comprised of small businessloans, it avoided the mortgage loan based troubles that brought hundreds of banks to their knees over the last few years. Instead, Mr. Depping will set up a new company, called Ascentium Capital, that will operate largely outside the current banking regulations – because it won’t be a bank.  But still it’ll be able to lend to and fund whatever opportunities it sees fit, including small business.

Where Do P2P Lenders Fit in Dodd-Frank?

Currently the SEC considers P2P loans to be investment securities (or contacts). Critics of the SEC regulation content that P2P personal loans should be regulated more like bonds, which have less of a regulatory burden.

While the P2P industry hopes that Dodd-Frank will re-asses the SEC’s position, this appears unlikely to happen.

One reason why Dodd-Frank is likely to increase rather than decrease P2P regulation is the current surge in peer-to-peer lending, but paradoxically, regulation could be a contributing factor in the surge: Gingrich has accused Washington “bureaucrats” of micromanaging the small banks to the brink of extinction, but P2P lenders, so far, are not under the same regulatory burden of small banks.

Moreover, while Gingrich doesn’t explicitly mention P2P lenders, his proscription for the ailing banking system is to “get back to a community-based, small-business based, local entrepreneurial system.” Gingrich has said: “the whole base of the American model is local citizens with local resources providing local leadership.”

This perfectly describes P2P lenders. If “a community-based, small-business based, local entrepreneurial system” is what’s needed to get lending back on its feet, P2P lenders seem to be naturally evolving to answer the call.

Could P2P lenders Overtake Small Banks in the Future?

“We had a crisis in 2008 because there were banks that were too big to fail,” Gingrich said. “They are now bigger. How could the United States adopt a reaction to banks being too big to fail by making them bigger? They have a larger market share today, which is the opposite of rational behavior.”

This suggests the smaller banks will have a harder, not easier, time going forward – but the P2P industry?  Well, the peer lending industry is right there — ready to pick up the slack.


Autor: Christopher Skyi

Christopher Skyi is one of’s blog writers. He writes on topics concerning personal finance, banking, and peer-to-peer lending.