P2P Lending: Navigating the Legal Jargon

​The regulatory environment around P2P lending can be quite perplexing and can serve as a deterrent to many trying to enter the industry and launch a successful lending platform. Through this piece, we hope to clear some of the legal mist and provide clarity on the regulations that need to be adhered to.

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.

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.

(Source: P2P Lending Basics)

State Licensing Requirements:
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• 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.​\

(Source: State Licensing Requirements)

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: 

http://www.mofo.com/~/media/Files/UserGuide/2015/150129P2PLendingBasics.pdf

Read more read terms, regulation guidelines and the whole article on Crowd Valley News.

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.