Financial Services Background and Resources
Peer-to-Peer Lending | Dodd-Frank and other regulation
Capitalism’s Creative Destruction
Originally coined by Joseph Schumpeter to describe the “process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one” (Source: Schumpeter, Joseph A. Capitalism, Socialism and Democracy
Peer to Peer Lending
Peer-to-peer lending (aka P2PL and non-bank lending) is not new, having been common practice for hundreds of years. What is new is the social media and Internet tools that are making it a dramatic new competitor in the financial services industry where closed groups of like-minded individuals are in touch with each other (social media), using the immense reach of the worldwide ubiquity of the Internet. Examples of companies that have amassed considerable loan portfolios are:
- Zopa (first company to offer P2PL in the world, February 2005, located in the UK),
- Funding Circle (first company to offer P2BL (peer-to-business lending) in 2010, in the UK), and
- Prosper and Lending Club (first U.S. P2PLs and both offering peer-to-business loans, operating out of San Francisco starting February 2006)
P2PL companies do not lend money but act as brokers connecting borrower and lender and servicing the loans. These companies initially operated outside the regulatory framework but in 2008 the SEC in the U.S. required compliance with the Securities Act of 1933 temporarily shutting down the fledgling industry.
This is where the expertise at CFOs2GO can be brought to bear as we advise companies on governance and regulatory structures, quickly getting you back in business. Peer-to-peer and peer-to-business lending was initially unsecured but non-bank lenders have added secured loans including online asset based loans against receivables and other collateral assets. The impact of these new players has been dramatic but there are strategies the established banks and credit unions can employ to compete on a level playing field. We have seen banks move a significant portion of their small business and consumer lending to P2BL/P2PL formats – “80-90% of the capital deployed through Prosper and Lending Club is from established financial institutions, not peer-to-peer,” source Forbes Oct 14, 2014. This allows banks and credit unions to match the cost efficiencies of new technology and profitably serve the same clients non-bank lenders are targeting. For the non-bank lender the challenge is now how to position their company relative to the large regulated players in a way that will enhance their staying power. We are encouraging some non-bank lenders and banks to form strategic alliances and some P2PLs to consider minority equity stakes from regulated entities.
Dodd-Frank and Other Regulations
Dodd-Frank, more correctly the Wall Street Reform and Consumer Protection Act, was signed into law July 21, 2010. It was created to respond to perceived problems that led to the Great Recession (2007-2010). There are literally hundreds of impacts in thousands of pages of new regulation plus many regulatory rules that are still to come during implementation; but the primary impacts include:
- The Volker Rule – restores elements of the Glass-Steagall Act which prohibits depository banks from proprietary trading, whereby instead of acting on clients’ orders and receiving commission payments, the trader assumes his own position with the capital of the firm.
- The “Durbin Amendment – a provision to increase competition in payment processing and regulate debit card interchange fees and encourage implementation of card security measures.
- Creation of a new agency, the Consumer Financial Protection Board (“CFPB”), with broad authority to impose new compliance, operational, and recordkeeping burdens on all financial institutions.
- Changes in liquidation rules for so-called “systemically important financial institutions”, including insurance companies and non-bank financial companies.
- Broad new restrictions on mortgage lending practices and loan terms, amended price thresholds for certain lending segments, new disclosure forms and procedures for all mortgages, and stronger legal liabilities in connection with real estate finance.
Call us to schedule a full review of Dodd-Frank impacts on your business, whether you are a bank, credit union, insurance company or non-bank financial service. As regulations continue to be implemented and new laws debated, CFOs2GO is monitoring progress and assessing impact for our clients. Contact us if you have questions.