US throws social lenders out of its temple of economic doom

Fresh from putting the financial markets to the flame, a heroic regulator goes in search of innovation that needs snuffing out
Fresh from putting the financial markets to the flame, a heroic regulator goes in search of innovation that needs snuffing out

A critic might be tempted to observe that while the SEC was utterly ineffective in preventing the excesses that brought about the current financial crisis it is only too effective at stamping out viable alternatives to the status quo, such as social lending. 

*Ahem* I almost feel like apologising for that headline: blame the cold medicine. 

But the more urgent apology should come from US regulators the SEC to the credit crunch-afflicted poplace of the United States for blocking out the ray of light that was social lending. 

Last month they issued a cease and desist order to Prosper, one of the largest social lending enterprises in the US, forcing it to stop issuing loans. Techcrunch explains the significance of this move

And it is not just Prosper, but all P2P lenders, that are on notice. Loanio, a new entrant into the P2P lending arena that just launched last month, has suspended new loans until it registers with the SEC as well (see notice below). And last April, competitor Lending Club was the first P2P lender to temporarily cease operations (the SEC approved its registration, and its members are now lending again in about half the states, including California which gave it the go-ahead last week).

This is a stupid error for the US financial services market on two counts: 

  1. Some alternatives to the, er, discredited credit markets for individuals is now gone.
  2. For a nation that prides itself on innovation the US is putting a truly promising set of ideas around social media and finance in jeopardy. On the upside, an opportunity for the UK to perfect the models and wait for the regulators to see sense?

A critic might be tempted to observe that while the SEC was utterly ineffective in preventing the excesses that brought about the current financial crisis it is only too effective at stamping out viable alternatives to the status quo. 

Zopa, the most credible of the social lenders to my mind, was trying a slightly different model to the other social lenders has also had to pull out – its founders explain their thinking on The Tricky World of US Regulation heir blog. Its thriving UK operation, and Zopas in Italy and Japan remain very much alive. 

: : I seem to recall that Virgin Money US was operating a social lending system also. Haven’t seen anything about that being shut down….

: : : I guess that Gartner may want to revise its forecast of 10% of retail loans being made by social lending by 2010 in light of this.