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Informed Investor Alert: Peer-to-Peer Lending

WASHINGTON, D.C. (December 13, 2010) – A good loan can be hard to find, so borrowers and lenders increasingly are turning to the Internet to locate one another. The North American Securities Administrators Association (NASAA) encourages investors to be mindful of the risks of online loan “matchmaking,” which is known as peer-to-peer lending, social lending, person-to-person lending or P2P.

“Peer-to-peer lending allows individuals and small businesses to receive loans that would otherwise be difficult or costly to obtain from traditional banks, while investors fund such loans based on the promise of a capital return,” said NASAA President and North Carolina Deputy Securities Administrator David Massey. “Peer-to-peer lending is an emerging business model that is still in its infancy. There are several risks that investors should take into account before getting involved.”

NASAA today issued an alert to help potential investors in peer-to-peer loans assess the risks of lending over the Internet. The alert is available here.

“When you see a peer-to-peer lending opportunity on the Internet, you should do your homework,” Massey said. “In many cases, the lending organization may be selling securities that come within the state securities laws. Contact your state securities regulator to make sure the securities are registered and authorized for sale in your state and to obtain the background and licensing information on the company facilitating the loan.”

NASAA’s investor alert urges potential lenders to consider the risk of the borrower defaulting on the loan. Peer-to-peer loans are unsecured; therefore, investors are dependent on the borrower to repay the loan and may have no legal ability to pursue the borrower in the event the borrower fails to pay. The notes issued to the lender are not FDIC-insured, nor are they guaranteed by any federal or state agency.

NASAA also advises investors to be aware that the identity of the borrower is often not available to the lender, making it impossible to verify independently the status of the borrower’s finances and business prospects. The lending platform may not do a thorough background check of the borrower, and borrowers may incur additional debts to other lenders.

The Dodd-Frank Wall Street Reform and Consumer Protection Act mandated that the Government Accountability Office conduct a one-year study of the regulatory framework for peer-to-peer lending. Because peer-to-peer lending platforms often involve both loans and securities, they may be regulated by the Securities and Exchange Commission, state securities regulators or state banking regulators.

“It takes time to fully assess the risks and rewards of financial innovations such as peer-to-peer lending,” Massey said. “Investors should proceed with caution when considering new investment vehicles.”

NASAA is the oldest international organization devoted to investor protection. Its membership consists of the securities administrators in the 50 states, the District of Columbia, Puerto Rico, the U.S. Virgin Islands, Canada and Mexico.

For more information:
Bob Webster, NASAA Director of Communications
Leah Szarek, NASAA Asst. Manager of Communications and Investor Education