Regulation

Lender Ender

SEC vs. loan clearinghouse

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Feeling a little wary of banks these days? Until recently, people looking to get a small loan had another option: Prosper, an online auction site that let individual lenders choose whom to loan money, leaving the two parties to negotiate terms between themselves. But threats from state and federal regulators have led Prosper to suspend its operations and left its future uncertain.

A borrower using Prosper would set a maximum interest rate he was willing to pay, and then a reverse Dutch auction would take place, with lenders competing on terms to win the right to make the loan. The site, which allows potential borrowers to create profiles, offered the kind of personal connection and individual vetting that might have prevented some of the outrageous loans that precipitated the mortgage crisis.

In October, however, Prosper suspended all new loan proceedings and in late November, the Securities and Exchange Commission (SEC) issued a cease-and-desist order against the website. Fred Joseph, securities commissioner of Colorado and president of the North American Securities Administrators Association, said in a December statement that Prosper's business involved issuing securities, "but since Prosper's activity began in 2006 these securities were not properly registered."

Since launching in February 2006, Prosper has administered $178 million in loans. The overall default rate is a relatively high 18.5 percent, but the returns on successfully completed loans are higher than those offered by competing investments. Prosper and other microlending sites, such as Lending Club, have long maintained that they are only clearinghouses and thus are not subject to SEC regulations aimed at companies that issue securities.

In early December, Prosper agreed to pay 20 states $1 million to settle the charge that it sold unregistered securities. The site is still in a state of suspended animation, shutting down one more slice of the already constricted credit market.