The Misregulation of Person-toPerson Lending
Andrew Verstein*
Amid a financial crisis and credit crunch, retail investors are lending a
billion dollars over the Internet, on an unsecured basis, to total strangers.
Technological and financial innovation allows person-to-person (“P2P”)
lending to connect lenders and borrowers in inspiring ways never before
imagined. However, all is not well with P2P lending. The SEC threatens
the entire industry by asserting jurisdiction with a fundamental
misunderstanding of P2P lending. This Article illustrates how the SEC has
transformed this industry, making P2P lending less safe and more costly,
threatening its very existence. The SEC’s misregulation of P2P lending
provides an opportunity to theorize about regulation in a rapidly
disintermediating world. The Article then proposes a preferable regulatory
scheme designed to preserve and discipline P2P lending’s innovative mix of
social finance, microlending, and disintermediation. This proposal consists
of regulation by the new Consumer Financial Protection Bureau.
TABLE OF CONTENTS
INTRODUCTION ................................................................................... 447
I. PERSON-TO-PERSON LENDING .................................................. 451
A. The Heartland of Person-to-Person Lending ....................... 451
B. Core Benefits and Efficiencies of P2P Lending .................... 457
C. Risks: Lender’s Money, Borrower’s Privacy ........................ 466
II. P2P LENDING AND PROBLEMS WITH THE SEC ........................... 475
A. Regulatory Overreach ........................................................ 478
* Copyright © 2011 Andrew Verstein. Associate Research Scholar in Law and
John R. Raben/Sullivan & Cromwell Executive Director, Yale Law School Center for
the Study of Corporate Law, Yale Law School. I would like to thank Ian Ayres, Steven
Bradford, Eric Chaffee, Steven M. Davidoff, Kevin Davis, Anna Gelpern, Matthew...