The Major Person-to- Person Lending Platforms Serve as Intermediaries and Facilitate Loans Generally for Consumer Lending and Microfinance

		Two Major For-Profit Platforms Connect Borrowers Seeking Mostly Consumer Loans with Lenders Seeking a Return on Their Investment

Prosper and LendingClub provide two major Internet-based platforms  currently operating in the United States that allow lenders to select and  fund loans to borrowers for consumer and business purposes. Borrowers use person-to-person lending as an alternative source of  credit. Rather, lenders purchase payment-dependent notes that correspond to  the selected borrower loans. As part of its  efforts to alleviate poverty by connecting people through lending, Kiva  facilitates the collection and transfer of capital for interest-free loans,  funded by its lenders, to approximately 130 microfinance institutions  around the world to fund interest-bearing loans to entrepreneurs in their  communities. As of March 31, 2011, about  570,000 Kiva lenders had funded approximately $200 million for 273,000  microloans across 59 countries. Although Person-to- Person Lending Offers Potential Benefits to Lenders and Borrowers, It Also Poses Risks Currently Overseen by a Complex Regulatory Structure

Person-to-person lending offers lenders the potential to earn relatively  high returns and may provide borrowers with broader access to credit  than they would otherwise have. In return, lenders face the risk of losing  their principal and the expected interest on their investments on for-profit  platforms. For the major for-profit  platforms, SEC and state securities regulators enforce lender protections,  mostly through disclosures required under securities laws, and FDIC and  state regulators enforce borrower protections. The Internal Revenue  Service (IRS) and California attorney general have authority to enforce  reporting and other requirements for Kiva as a charitable organization,  while Kiva’s microfinance partners are subject to varying consumer  financial protection requirements that apply in the jurisdictions where they  lend. Person-to-Person Lending Poses Risks to Lenders That Have Been Subject to Securities Regulation

The major for-profit, person-to-person lending companies (Prosper and  LendingClub) offer lenders the potential to earn higher returns than they  might through conventional savings vehicles, as the examples of the  companies’ Web sites show (figs. Options for Regulating Person-to- Person Lending Have Advantages and Disadvantages Related to Borrower and Lender Protection, Flexibility, and Efficiency

We identified two primary options for regulating person-to-person lending  that differ primarily in their approach to lender protection: (1) continuing  with the current bifurcated federal system—that is, protecting lenders  through securities regulators and borrowers primarily through financial  services regulators, which will include the newly formed CFPB—or (2)  consolidating borrower and lender protection under a single federal  regulator, such as CFPB. The current regulatory system offers borrowers and lenders on  the major for-profit platforms protections consistent with those for other  borrowers and investors, but some industry observers suggested that  using securities regulation to protect lenders on person-to-person lending  platforms lacked flexibility and imposed burdens on companies that  hampered efficiency. Under a consolidated regulatory approach,  borrowers on person-to-person lending platforms would likely continue to  receive the same kinds of protections as other borrowers, and, depending  on how implemented, lender protections could be expanded. Officials from NASAA and some of  the industry observers we contacted favored the current regulatory  system. We assessed the advantages and disadvantages of these two regulatory  options in relation to our previously developed framework for evaluating  proposals for financial regulatory reform. The flexibility, efficiency, and effectiveness of creating a new regulatory  regime under a new agency are uncertain. Finally, FSOC could come to play a role in monitoring the  industry if person-to-person lending were to grow dramatically. Appendix I: Objectives, Scope, and Methodology

Our report objectives were to address (1) how the major person-to-person  lending platforms operate and how consumers use them; (2) the key  benefits, risks, and concerns that person-to-person lending poses for  consumers and how the risks are currently regulated; and (3) advantages  and disadvantages of the current and alternative approaches to regulating  person-to-person lending. We interviewed executives from the three major U.S. firms  operating person-to-person lending platforms—two for-profit companies  (Prosper Marketplace, Inc. (Prosper) and LendingClub Corporation  (LendingClub) and one nonprofit organization (Kiva Microfunds (Kiva))— and the bank (WebBank) that partners with Prosper and LendingClub to  disburse loans made through their platforms. We assessed the reliability of these data by reviewing relevant  documents, including the for-profit companies’ audited financial  statements filed with the Securities and Exchange Commission (SEC),  and interviewing company officials. Second,  we focused on the possibility for a consolidated regulatory approach  under CFPB because it is assuming a role in supervising nondepository  lenders and because the version of the Dodd-Frank Wall Street Reform  and Consumer Protection Act (Dodd-Frank Act) passed by the House of  Representatives included a provision that would have exempted person- to-person lending from federal securities regulatory requirements and  vested primary jurisdiction for regulating person-to-person lending  platforms and their lending activities in the new consumer financial  protection agency, now known as CFPB.
Why GAO Did This Study

Over the last decade, Internet-based platforms have emerged that allow individuals to lend money to other individuals in what has become known as person-to-person lending. These online platforms present a new source of credit for borrowers and a potential investment opportunity for those with capital to lend. Both for-profit and nonprofit options exist, allowing for income-generating and philanthropic lending to a variety of people and groups around the world. The Dodd- Frank Wall Street Reform and Consumer Protection Act directed GAO to conduct a study of person-toperson lending. This report addresses (1) how the major person-to-person lending platforms operate and how lenders and borrowers use them; (2) the key benefits and risks to borrowers and lenders and the current system for overseeing these risks; and (3) the advantages and disadvantages of the current and alternative regulatory approaches. To do this work, GAO reviewed relevant literature, analyzed regulatory proceedings and filings, and interviewed federal and state officials and representatives of the three major person-to-person lending platforms currently operating in the United States. GAO assessed options for regulating person-to-person lending using a framework previously developed for evaluating proposals for financial regulatory reform. The Bureau of Consumer Financial Protection, Federal Deposit Insurance Corporation, and Securities and Exchange Commission provided written comments on the report, and they all noted the need to continue to monitor the development of the industry.

What GAO Found

The three major U.S. person-to-person lending platforms facilitate lending by allowing individuals acting as lenders to invest in loans to individual borrowers. Prosper Marketplace, Inc. (Prosper) and LendingClub Corporation (LendingClub), the two major for-profit platforms, screen and rate the creditworthiness of potential borrowers. Individual lenders (and a growing number of institutional investors) browse the approved loan requests on the companies' Web sites and purchase notes issued by the company that correspond to their selections. Kiva Microfunds (Kiva), the major nonprofit platform, allows individual lenders to indirectly fund loans to entrepreneurs around the world by funding interest-free loans to microfinance institutions. The three platforms have grown rapidly and, as of March 2011, Prosper and LendingClub had made about 63,000 loans totaling approximately $475 million, and Kiva about 273,000 loans totaling about $200 million. The for-profit companies said that borrowers were often consolidating or paying off debts or were seeking alternate sources of credit, while lenders were seeking attractive returns. Kiva said that its lenders were not seeking to generate income and were motivated mostly by charitable interests. Person-to-person lending platforms offer lenders the potential to earn higher returns than traditional savings vehicles and may offer borrowers broader access to credit. Individual lenders and borrowers face risks that are currently overseen by a complex regulatory structure. For example, lenders risk losing their principal and, on the for-profit platforms, the interest on their investments. Borrowers face risks typical of consumer lending, such as unfair lending and collection practices. Currently, the Securities and Exchange Commission and state securities regulators enforce lender protections, mostly through required disclosures. The Federal Deposit Insurance Corporation and state regulators enforce protections for borrowers on the major for-profit platforms, and the newly formed Bureau of Consumer Financial Protection will also play a role in borrower protection as it becomes operational. The Internal Revenue Service and the California attorney general enforce reporting and other requirements for Kiva as a charitable organization. Kiva's microfinance institution partners are subject to varying consumer financial protection requirements that apply where they lend. The two options that GAO identified for regulating person-to-person lending-- maintaining the status quo or consolidating borrower and lender protections under a single federal regulator--both offer advantages and disadvantages. The current system offers protections that are consistent with those for traditional borrowers and investors. Some industry observers suggested that protecting lenders through securities regulation under this system lacked flexibility and imposed inefficient burdens on firms. Under a consolidated regulatory approach, current protections for borrowers would likely continue and, depending on how implemented, lender protections could be expanded. But uncertainty exists about shifting to a new regulatory regime and about the potential benefits. Finally, regardless of the option selected, new regulatory challenges could emerge as the industry continues to evolve or if it were to grow dramatically, particularly if that growth was primarily due to the increased participation of institutional versus individual investors.