When Are State Securities Regulators Going to Get a Clue About P2P Lending?


Today, Lending Club is available to investors in 26 states on their retail platform (they do allow investors in 17 more states to participate on their trading platform). Prosper is available in 30 states (plus Washington D.C.). This leaves a large section of the country out of luck when it comes to investing in p2p lending. What is going on?

The reason for this is that both Lending Club and Prosper have to register with each state separately. And securities regulators in some states are very conservative when it comes to consideration of p2p lending. This was summarized well by a quote from Chris Naylor, Indiana Securities Commissioner, when talking about p2p lending in last week’s article in the Wall Street Journal:

I understand there is a credit crunch and these platforms are providing an alternative. But there are limitations on the financial data that is available, and a chance of default, so we need to protect investors.

This line of thinking is common among many state securities regulators. Now, Naylor did not elaborate exactly what he meant by “limitations on the financial data”. My calls to Naylor’s office have not been returned so one can only guess as to what he means here.

In an interview on CNBC’s Squawk Box last Friday, Lending Club’s CEO Renaud Laplanche was asked about the above quote from Naylor. I completely agree with his response. Lending Club is very transparent, providing detailed information on every borrower and the entire loan history is available to download for analysis by investors. But I would have also added that well-diversified investors are not losing money.

What Are Securities Regulators Protecting Investors From?

Every day I see investors who get excited about p2p lending only to be disappointed when they find out their state doesn’t allow it. I receive more emails about this one issue than any other topic.

It has been well documented on Lending Club that investors with a diversified portfolio of loans have made money. Looking at their latest charts 99.9% of investors with at least 100 loans have enjoyed a positive return. Prosper also talks about the success investors have when diversifying into at least 100 different loans.

Which begs the question: what are these securities regulators so worried about? It is quite legal for any investor to put their entire life savings into a penny stock and lose everything. Or put everything into a “sure thing” real estate deal. Or spend their life savings on Powerball tickets. In fact, there are an almost infinite number of ways in which investors can lose a great deal of money. But a diversified p2p lending portfolio isn’t one of them.

P2P Lending Is Proving Itself

We now know that p2p lending is not a scam or a pyramid scheme as some have previously suggested. Lending Club and Prosper have been regulated by the SEC for over four years now and have been filing publicly available quarterly and annual reports on the state of their business. With every major announcement they have to file an 8-K with the SEC. These companies are under far greater scrutiny than almost any other private company in financial services.

There is a 7-year track record now and no examples of investors being ripped off. However. we know that in Prosper’s early days there were many investors who suffered losses (due to lax underwriting that improved dramatically in 2009) but investors who lose money today do so because of poor diversification. This is something that can be easily avoided by doing a small amount of research on p2p lending best practices.

I scour social media and the internet every day for mentions of p2p lending. The only people who complain on a regular basis are borrowers who have been rejected for a loan. Investors are not complaining about Lending Club or Prosper. P2P lending is coming of age and proving itself month after month with investors.

A Safer Investment Than the Stock Market?

I have been investing in the stock market now for over two decades. I have seen the dot-com bubble and crash of 2000-01 and the financial crisis of 2008. One thing every investor knows today is that the stock market can go up as well as down and it can do so quickly. This is one of the reasons why there is not much excitement about the new stock market highs that have been reached recently. We have been burned before.

I look at my p2p lending accounts and I see a different picture. Every month my account totals go up – it happens consistently with remarkably small deviations. So, I ask the question again to securities regulators: what are you afraid of about p2p lending?

What to do if Your State Does Not Allow P2P Lending

The list of securities regulators for every state is provided here on the North American Securities Administrators Association website. Make your voice heard and contact your state regulator. Tell them it is ludicrous that you cannot invest in what is becoming a proven asset class. You should also call your state representatives, particularly those politicians who oversee Finance Committees in your state.

I happen to be lucky. I live in a state (Colorado) that blesses p2p lending as an investment. But if I happened to live in Ohio, Vermont or Kansas then I would have had to chose a different career. Then, of course, there are those states that “kind of allow” p2p lending. These are the states that don’t let you invest in new loans but once the loan has been issued you are free to invest in the secondary market. Don’t get me started on how illogical that situation is.

It is common knowledge that Lending Club is planning an IPO some time next year. One little known fact is the “blue sky exemption” rule which means that once they launch an IPO they will suddenly be open to investors in all 50 states. This means that state securities laws will become irrelevant for Lending Club investors then.

So, be patient. We don’t really have to wait for state securities regulators to get a clue. Soon, every investor will be able to enjoy the excellent returns provided by consumer credit. It is only a matter of time.

  • Peter Renton

    Peter Renton is the chairman and co-founder of Fintech Nexus, the world’s largest digital media company focused on fintech. Peter has been writing about fintech since 2010 and he is the author and creator of the Fintech One-on-One Podcast, the first and longest-running fintech interview series.