Last week, Alex Brill, a fellow at the American Enterprise Institute (AEI) published a report detailing the regulatory challenges that have faced the peer to peer (p2p) lending industry. The report was prompted by the new financial regulatory reform law that was enacted this past summer called the Dodd-Frank Wall Street Reform and Consumer Protection Act.
Apparently this new law contained some very important provisions that could have a huge impact on the p2p lending industry. The gist of it is this. The law requires the Government Accountability Office (GAO) to conduct a study of P2P lending and offer recommendations on how federal regulation of the industry should be structured in the future. This study needs to be presented to congress by July 21, 2011.
Here is Brill’s take on what might come of all this:
The provision in the Dodd-Frank bill that mandates the GAO report is drafted in a manner that will likely draw GAO to find in favor of some regulatory or legislative change with regard to oversight of the P2P industry.
He goes on to provide some advice to the GAO:
In attempting to ensure that future regulation does not stifle innovation, GAO should be addressing two issues in its report. First, are P2P loans like other products (i.e., consumer products or securities) and should be regulated as such? Second, is the SEC doing a good job–are the compliance, regulatory, and legal burdens appropriate for the industry, and are those industry burdens exceeded by the consumer (borrower and lender) benefits from the information being provided?
Of course, having the GAO recommend changes in the laws regulating the p2p lending does not mean changes are imminent or even likely. But it is a step in the right direction. The regulatory environment in this country is no doubt stifling innovation and competition in p2p lending. In my recent post discussing emerging companies in p2p lending I spoke with several CEOs of emerging companies and they all cited the regulatory environment as being a major hurdle in getting their businesses established. In the AEI report, Brill cites the withdrawal of Zopa from the US market as an example of the negative impact of the current regulations.
While this report doesn’t guarantee any changes will happen, it does provide a ray of hope for emerging and established companies. Even right now, almost five years after being established p2p lending is only open to investors in roughly half the states in this country. Despite this p2p lending has grown into an industry that will see over $150 million of new loans being funded this year. With an easing of the regulatory burden the floodgates could really open up and we could see this number go up five or tenfold within a couple of years.
