Square Pegs in a Round Hole: SEC Regulation of Online Peer-to-Peer Lending and the CFPB Alternative

Abstract

Over the last decade, online person-to-person lending, also called peer-to-peer or P2P lending, emerged as an alternative form of consumer borrowing and investing. It grew throughout the recession, even as consumer credit markets faltered, and it continues to grow today. P2P lending platforms match individuals looking to borrow with individuals looking to lend in anonymous online marketplaces. They offer attractive interest rates, debt consolidation, access to liquidity, and inexpensive diversification. Despite its growth, however, the P2P lending market faces significant challenges. In 2008, the Securities and Exchange Commission ("SEC") declared that notes issued by P2P lending platforms to be unregistered securities. This forced the platforms-as web startups-to register for initial public offerings. SEC regulation now creates substantial compliance costs, barriers to entry, and risks to consumers in the P2P lending market. P2P lending should therefore be exempted from SEC regulation and placed under the Consumer Financial Protection Bureau ("CFPB').