Going Mainstream: P2P Lending American Style

August 10, 2011

As more Americans take to the Internet to borrow from and lend to others through online markets questions are being raised about the efficacy of regulatory oversight, presently and going forward. That's the upshot of a new report from the U.S. General Accountability Office (GAO), titled Person-to-Person Lending: New Regulatory Challenges Could Emerge as the Industry Grows.

The two leading P2P lending sites - Prosper and LendingClub - had been used to facilitate 63,000 loans totaling approximately $475 million as of March 2011. Kiva - a not-for-profit lending site that recently entered the U.S. market - had 273,000 loans (worldwide) totaling about $200 million, GAO reports.

The trio is covered under a hodgepodge of state and federal regulations. The Securities and Exchange Commission (SEC) and state securities regulators enforce lender protections, primarily through required disclosures. The Federal Deposit Insurance Corp. (FDIC) and state banking supervisors and the Federal Trade Commission (FTC) enforce borrower protections on the for-profit lenders. The newly formed Bureau of Consumer Financial Protection, meanwhile, has let it be known that it intends to enhance disclosure requirements for P2P lending.

Kiva, a registered charitable organization, is overseen by the Internal Revenue Service (IRS) and the California attorney general's office.

The GAO report, requested in the Dodd-Frank regulatory reform legislation, presents an overview of P2P lending in the U.S. - how the various models work, benefits and risks to lenders and borrowers, applicable laws and regulations - and it examines the pros and cons of current and alternative regulatory approaches to the market.

On the topic of regulatory oversight, the report warns: "uncertainty exists about shifting to a new regulatory regime and about the potential benefits."

Also, P2P lending is a nascent industry that could develop into something far different from what is available today. "[N]ew regulatory challenges could emerge if the person-to-person lending industry introduced new products or services or if it grew dramatically," the report notes.  Also, if the P2P lending markets attracts large numbers of institutional investors.

Copies of Person-to-Person Lending: New Regulatory Challenges Could Emerge as the Industry Grows (GAO-11-613) are available for download at the GAO Web site.

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