The Bankwatch

Tracking the consumer evolution of financial services

PA Securities Commission issues a strange notice and assessment of P2P Lending

Regulators have a tough job, and while they are subject to criticism few would disagree with the need for regulators.  However when I see hints of politics based on subjectivity creeping in, then they have to be called on it.  (hat tip Social Lending Network)

The Pennsylvania Securities Commission has released an alert that I believe is misleading.  The overall intent of the release is to set out the risks associated with P2P Lending.  What is most intriguing is that the release does this by pointing out the strength of banks as something that can be relied on as a counterpoint to the ‘risky’ P2P lenders.  The notice identifies points of contention that apply solely to P2P Lending.

Lets look at some examples from the release at PA Securities Commission Helps Assess Risks of Peer-to-Peer Lending or here and compare to experience with Banks in similar contexts to assess fairness of this notice.

“Peer-to-peer lending allows individuals and small businesses to receive loans that might be difficult or costly to obtain from traditional banks in our current economic climate,” noted PSC Chairman Robert Lam “

Their opening claim in the notice essentially states that P2P Lending is for sub prime.  Where on earth would they get that idea?  In 2005 there were examples of that which no-one can deny.  In 2010 there are no examples of such lending in P2P amongst any regulated P2P Lender.  Minimum credit scores are the base level entry requirement.  This is clearly documented in the regulation documents filed with the SEC (Securities and Exchange Commission).  If someone is not willing to accept the minimum score then request those lenders increase the standard.  To my knowledge the minimum score eliminates borrowers that would be classified as sub prime.

“Banks historically build impressive edifices out of bricks and mortar to underscore how stable and reliable they are.  On the Internet, it’s much more difficult to a reputable institution from ‘castles in the sky.'”

Words fail me in this one – “castles in the sky” ?  What kind of regulatory oversight did the SEC agree to with Lending Club and Prosper – do they have a new category for ‘castles in the sky’.

What did the Penn Securities Commission think in Feb 2009 about reputation and ‘impressive edifices’ as represented in this photo when the chief edifices were grilled by Barney Frank for irresponsibility and more.  Lets not forget the CEO’s were hauled in together and held to account on serious charges of at best misleading customers and investors.


The Securities Commission alert also warned investors to be aware that the identity of the borrower is often not available to them, making it impossible to verify independently the status of the borrower’s finances and business prospects. The lending platform may not do a thorough background check of the borrower, and borrowers may incur additional debts to other lenders.

Lets compare this allegation to foreclosuregate ‘If the chain of title of the note is broken, then the borrower no longer owes any money on the loan’.  In this case Banks took depositors money and made loans that had many potential defects including identity of the borrower and of imperfect collateral.

“It takes time to fully assess the risks and rewards of financial innovations such as peer-to-peer lending,” Lam said. “Investors should proceed with caution when considering new investment vehicles like P2P.”

This is one claim I can agree with.  I would prefer to not single out P2P because the statement works for any ‘new investment’.  Nonetheless P2P is relatively new and certainly quite new in terms of seasoning credit risk while under the auspices of the SEC.

Relevance to Bankwatch:

Just as there is a need in the investment world for a fair, balanced and considered assessment of all the risks, this is equally true when issuing notices such as the Penn SC notice.  Factors such as prime vs sub prime, identity verification, stability and reliability, are all valid considerations for risk.  However the first part of risk assessment is to gather a set of facts relative to each risk and then perform the assessment.  The nature of this notice reads that the factors are based on opinion related from side conversations, gossip and out of context one-off examples and if that is the case this is no way to perform a risk assessment.

In fact I would propose that the Pennsylvania Securities Commission release the entire report that supports this notice to highlight the methodology utilised in determining the extent of the risk associated with P2P Lending.  There is a supporting report and analysis, right??

Written by Colin Henderson

December 23, 2010 at 11:20

Posted in Uncategorized

4 Responses

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  1. Colin, Great article. You certainly did a more thorough job than I did in analyzing the Penn SC notice. You point out quite rightly that it smells a bit fishy when they glorify bricks and mortar as an argument for stability. Do they also think that and eBay are not stable businesses?

    It seems that clueless regulators can get away with pretty much anything. Very glad you took them to task on this one.


    Peter Renton

    December 23, 2010 at 12:51

    • Thanks Peter, and thanks for mentioning Amazon and eBay. There is also Paypal with billions of dollars securely and safely transmitted regularly. More “Castles in the Sky” 🙂

      Colin Henderson

      December 23, 2010 at 13:14

  2. At the risk of being too cynical, I’d like to know just how much the great state of Pennsylvania invested its resident’s tax dollars in risky financial derivatives prior to the financial crisis.

    Not like PA is the shining light of fiscal responsibility these days… Harrisburg defaulting on it’s muni bond debt.

    Matt SF

    December 23, 2010 at 13:20

    • Indeed … and as you point out it is in the very state they regulate.

      Colin Henderson

      December 23, 2010 at 13:24

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