While the idea of peer-to-peer lending can be traced back to ancient Mesopotamia, where clay tablets held simple record of loans and interest rates, web-based technologies in the 21st century have taken the peer lending concept mainstream while at the same time increasing the level of sophistication and financial complexity of the lending mechanisms and models — and in the process peer lending has become a $647 million industry in a matter of only a few years. Currently the industry is in the middle of a steady — if not accelerating – growth trend. Today, individuals and businesses in need of funding, especially short-term funding, have unprecedented access to potential investors worldwide allowing them to bypass banks and formal lending institutions.
It’s little wonder then that the Securities and Exchange Commission (SEC) made its position on peer lending known on November 23, 2008 when it issued a cease and-desist order against one of the larger peer to peer companies at the time in order to bring the industry as a whole under existing securities regulation while at the same time expanding those regulations.
Carl E. Smith, a business attorney in private practice in New York City, argues, in an American University Law College article titled “If It’s Not Broke, Don’t Fix It,” that the government has stepped in too quickly to regulate a lending mechanism that has not only been around since the dawn of time but has also been “remarkably successful” in providing capital to individuals without access to more traditional sources of loans (see Lan Cao, “Looking at Communities and Markets,” 74, Notre Dame Law Rev. 841, 879–80 (1999)).
Peer to Peer Lending Regulation | A Case Of Bad Timing?
Consider that the SEC’s decision to intervene in peer-to-peer lending markets occurred during the start of the recession in 2008, at a time when traditional banks had all but shut down lending. Worse, the passage of the $700 billion Troubled Asset Relief Program (TARP) did little to open up lending to consumers and businesses. This alone calls into question the economic wisdom of hampering an industry where the vast majority of peer-to-peer loans are under $25,000 and the entire peer-to-peer lending market remains small in size even before SEC regulations. Since the peer-to-peer market is modest in size, provides competitive interest rates, has very few cases of misuse and enables worthy projects that would otherwise have gone unfunded, Smith argues the SEC could have better spent its time and resources in other ways.
Consider too that 21st century-based peer-to-peer lending is an innovative industry with relatively few players. Smith makes the valid point that the SEC erected significant barriers of entry to new market players that are desperately needed in a time of the greatest restriction of lending since the great depression. Additionally, regulation risks stifling innovation — the last thing a new industry needs.
Despite these regulatory headwinds, Peerform.com, one of the newer peer lending platforms, has found new ways to successfully help not only the traditional beneficiaries of peer-lending (i.e., individual and small business borrowers) but also existing financial institutions to help build their business:
‘There is a real need for financial institutions for this asset class. We are bringing institutions to help us start but eventually, our goal is to become a real peer to peer lending platform where private investors are able to invest directly.’ ~ Peerform.com CEO Mikael Rapaport, Peerform Offers an Institutional Approach to Peer-to-Peer Lending.
We see Peerform.com filling a valuable need and niche not only in lending markets but also in financial investment markets and we are striving to be a leader in providing innovative solutions to both markets.