Peer-to-peer lending involves lending money to people who are not affiliated with the lender. According to the agreement, these are usually unsecured personal loans of smaller to larger amounts. Peer-to-peer lending, or P2PL, bypasses traditional means of financing such as banks and other institutions. It differs from peer-to-peer (P2PI) investing, which is primarily aimed at lenders. JAKARTA, July 22 (Reuters) – Indonesia has launched a crackdown on peer-to-peer (P2P) lenders through new regulation and capital requirements, a move that industry sources say should help clean up a booming online lending sector plagued by consumer complaints. Certainly, there are rules. P2P lenders must conduct themselves with care, integrity and competence in accordance with the FCA`s business principles. They must also have a contingency plan in case their business goes bankrupt, including a small amount of reserve capital to serve as investor protection. However, these regulations are more in line with what P2P lending once was: a means of mediating between borrowers and lenders, rather than the sophisticated financial transactions they are today. In its advanced form, there is a need for stronger regulation, particularly as regards how P2P lenders attract and manage invested money, as well as their accountability to the FCA. One of the reasons P2P has been spared the most difficult enforcement cases and lawsuits is that borrowers, platforms, and investors (so far) coexist in an environment of non-coercion and leaked outcomes. P2P serves a big purpose in rebuilding our economy, especially for creditworthy borrowers who cannot get sufficient credit from traditional credit sources.

Platforms are true technological disruptors for financial services. At the same time, investors are able to achieve yields and default rates “as advertised”. Collaboration is key to keeping running smoothly and, to be fair, the larger platforms are doing most of the work in this regard. Payday lending and mortgage reform have provided the industry with a nice regulatory distraction for now. But as interest rates rise and borrowers` FICO scores decline, it remains to be seen whether this cushion holds. The other big unknown is the Consumer Financial Protection Bureau, which has yet to flex its P2P muscles. Market participants should be pleased with the progress made so far, but the real test of market consistency will be how they manage the next market cycle. Compared to savings accounts and certificates of deposit, peer-to-peer lending is riskier but offers higher interest rates. The reason for this is that investors in peer-to-peer lending sites assume most of the risks that banks and other financial institutions usually assume.

Peer-to-peer platforms had few restrictions on borrower eligibility at first, leading to adverse selection issues and high default rates. In addition, some investors have found the lack of liquidity for these loans, most of which have a minimum maturity of three years, undesirable. P2P land grabbing is ongoing. Traditional sources of credit are being replaced by new credit platforms and providers. Offline lenders are developing an online presence. The new platforms seem to have been around for years. Above all, competition for borrowers and investors is fierce. On the horizon, battles over leverage and the need to evolve, evolve, evolve.

In the midst of this frenzy lies a potential legal and regulatory powder keg. Here are my top five legal and regulatory issues in the P2P real estate sector: Peer-to-peer lending has several advantages. Lenders, for example, have a larger choice of borrowers to work with. There may also be more flexibility in creating and revising the loan agreements themselves. Loans between individuals can sometimes give rise to disputes. This is a common dispute when the lender does not repay the loan amounts in accordance with the terms. Many participants in P2PL agreements come from poor credit backgrounds, which is a particular problem. Many people seek P2PL loans because they do not qualify for a bank or other institution. This puts the lender at risk. It is undeniable that there will be resistance to the enforcement of stricter P2P regulations. However, regulation would solve many operational problems for lenders. For example, empowering agencies to report debtors to credit reporting agencies would ultimately generate greater interest in the industry among borrowers and investors by highlighting the fact that P2P is a reliable alternative to traditional financing options.

Licensing protocols for small business lenders are very different from those for consumer lenders or even real estate lenders. Consumer platforms typically need to hire a bank to lend to consumer borrowers. WebBank and Cross River Bank are examples of these corporate banks (see my article “Consumer Top 5” for more information). Small business platforms have more choices in their licensing approach than their mainstream counterparts. Only five states categorically require licenses for business loans: California, Nevada, North Dakota, South Dakota and Vermont. The process of obtaining a financial lender license in California takes about nine months and can be a somewhat painful process. P2P lending trends emerged nearly a decade ago, alongside the development of fintech platforms in mobile devices as an alternative financial service. It allows customers to access loan applications through digital applications.

Despite its popularity and benefits, Fintech P2P is vulnerable to legal issues and data misuse due to inadequate regulations. For example, consumers often face various predatory lending practices due to a lack of regulatory oversight. Some FinTech regulatory violations related to consumer protection include illegal FinTech, privacy disclosure, high interest rates, and debt collection issues such as bullying or violence. In addition, the challenges of transparency and cyberbullying also occur regularly in transactions. The new A+ regulation will enter into force in mid-June. Regulation A+ announces a new type of quasi-public offering that breaks with the classic dichotomy between registered public offering and private placement. Regulation A+ is a new way for small business lending platforms to raise capital from accredited and non-accredited investors without becoming fully registered public companies. For platforms, it is worth noting the ability to record debt on a “deferred and continuing” basis, similar to shelf offerings registered under SEC Rule 415. Therefore, platforms may apply to offer payment-based bonds under Regulation A+, even if those obligations apply to different underlying loans and even if those loans have not yet been issued. Early peer-to-peer lending was also characterized by disintermediation and dependence on social networks, but these characteristics have faded. While it is still true that the advent of the Internet and e-commerce has abolished traditional financial intermediaries and that people are less likely to switch to members of their social circle, new intermediaries have proven to be time and money savers.

Crowdsourcing can open up new opportunities for lenders and borrowers who don`t know each other. Despite its drawbacks, P2P loans are gaining traction and are certainly becoming more and more popular. There are P2P lenders in several countries, including Italy, the Netherlands, China, and Japan, with start-up activities in many other countries. Under existing Financial Conduct Authority (FCA) guidelines, peer-to-peer (P2P) lenders operate in a virtually unregulated space. While this is not harmful in itself, it creates a number of risks, as the FCA has acknowledged. The most important of these risks is that as businesses become more complex, their resemblance to traditional financial institutions increases, but their regulatory obligations do not. This leads people to forget that P2P is always a risky investment where the likelihood of regulatory arbitrage is higher than other financial services firms. If a risk is realized in these circumstances, it jeopardizes the reputation of the industry.