It’s paramount to remember that P2P lending is interpreted as a sale of securities, and a broker-dealer license and the registration of the person-to-person investment contract is required for the process to be legal. The license and registration can be obtained at a securities regulatory agency such as the U.S. Securities and Exchange Commission (SEC) or the appropriate regulator in the appropriate jurisdiction. Under the Securities Act of 1933, any offering of securities in the United States must be registered and issued with a specially regulated prospectus, unless an exemption applies (See JOBS Act Title III). Public offerings (e.g., IPOs), including securities distributed to the investing public like P2P notes, must be registered. In 2016, New York State sent "warning letters" to 28 peer-to-peer lenders requiring them to obtain a license to operate unless they "immediately" complied with responses to demands to disclose their lending practices and products available in the state.
Unsure about the regulatory practices you may have to comply with in order to set up a platform for lending/investing? Look no further. Outlined here are the key federal statutes to which banks and non-bank credit providers may alike but subject to:
- Truth in Lending Act — Prescribes uniform methods for computing the cost of credit, disclosing credit terms, and resolving errors on certain types of credit accounts.
- Equal Credit Opportunity Act — Prohibits creditors from discriminating against credit applicants, establishes guidelines for gathering and evaluating credit information, and requires written notification when credit is denied.
- Fair Credit Reporting Act — Requires a permissible purpose to obtain a credit report, requires “furnishers” to report information to credit reporting agencies (i.e., credit bureaus) accurately, requires notice by creditors who take adverse action based on credit reports, and requires creditors to develop and maintain an identity theft prevention program.
- Gramm-Leach-Bliley Act — Restricts disclosure to nonaffiliated third parties of nonpublic personal information about a consumer, and requires financial institutions to notify their consumers about their information-sharing practices and inform consumers of their right to “opt out,” in certain circumstances, if they do not want their information shared with certain nonaffiliated third parties.
- Electronic Fund Transfer Act — Establishes the rights, liabilities, and responsibilities of parties in electronic funds transfers (“EFTs”), and protects consumers when they use EFT systems.
- Bank Secrecy Act — Requires financial institutions to implement anti-money laundering procedures, implement a customer identification program, and screen names against certain government watch lists.
- Fair Debt Collection Practices Act — Restricts third-party debt collectors’ conduct in connection with the collection of consumer debts.
State Licensing Requirements:
- Broker Licenses: The state will retain significant jurisdiction to regulate the Operator in connection with loan origination and servicing activities even where a Funding Bank is utilized. For example, certain states require the registration of “lenders” and/or “loan brokers” and may define “loan broker” to include any entity that, for compensation, arranges for the extension of credit for others. An Operator will fall within this broad definition and, absent an exemption, will need to comply with any associated licensing requirements.
- Lending License: Operators that do not utilize a Funding Bank are subject to lending license requirements in most states. State regulators take the position that internet lenders must be licensed by the state to make loans to residents of that state.
- Collection Licenses: States may also require Operators who undertake collection activities to be licensed as “collection agents.” Servicers who are administering and servicing Borrower Loans may also be subject to state debt collection licensing. This could apply to an entity that sells loans to a third party and retains servicing of the loans.
Licenses are granted on a state-by-state basis. In some states the licensing process is fairly simple and straightforward; in other states it is quite complex. Similarly, in some states licenses can be obtained fairly quickly while in other states (e.g. California and New York) the process can take months. In addition to filing fees, license applicants may be subject to background checks and fingerprinting and may be required to submit business plans and financial statements.
For additional details and discussion on the P2P regulatory environment, have a look at these links:
P2P Lending Basics:
State Licensing Requirements:
Online Direct Lending Laws and Regulations:
Disclaimer: The information provided in this post is not legal advice, it’s presented here for informational purposes only. You should always consult with licensed counsel if legal issues are involved.
Adit Vaddi is a business development associate with a Bachelor of Arts in Economics from Vassar College, New York. He has a background in Economics, Accounting, Political Science and Operations (Event Management). He is from Hyderabad, India. Prior to Crowd Valley, Adit has worked as a research analyst for Baring's Private Equity Partners in Mumbai and for the IdeaSpace Foundation in Manila as well as a risk analyst for Fincare in Bangalore. On the operations side, Adit has organized and run over 30 large scale events that cater primarily to a college community. He is currently based in New York City.