Regulatory capture in P2P lending

Via The Browser, this article from some Slate affiliate has an excellent example of regulatory capture in action in the peer-to-peer lending industry.

For those of you unfamiliar with the concept, essentially it's a broker who facilitates loans between regular people over the internet. There's also a sort of charity version of this – Kiva – but the difference between P2P lending and Kiva is that Kiva doesn't return a profit for lenders whereas P2P lending generally does, and also P2P lending is often from people in rich countries to people in rich countries, whereas Kiva has people in rich countries lending to those in poorer ones.

But anyway, it looks like these P2P sites like Prosper and Lending Club return relatively high profits to lenders (7-9% are the quoted figures) with very low (>1%) delinquency rates. One forward-looking company, Lending Club, realized that regulation was imminent, so they did what any prudent firm does faced with the incentives of imminent-yet-malleable regulation: they tried to co-opt them for their own benefit, and it looks like they succeeded:

With venture capital money behind it and a high-powered team of former executives from American Express, Goldman Sachs, MasterCard, and E*Trade, [Lending Company] decided to be proactive and hired lawyers who reached out to the SEC in early 2008. "We wanted to help define the space, to participate in the dialogue about how our industry would work, and how it would be regulated," CEO Renaud Laplanche says. "Because we really expect this business to grow huge in coming years, and we wanted to be sure everything was done right." [...]

In April of 2008, Lending Club registered with the SEC and accepted the somewhat daunting task of filing every single loan with the SEC as a security. Starting in October—just in time for the global economic meltdown—Lending Club went online with full federal approval and all paperwork duly filed. Laplanche told TBM that the process has now been mostly automated; the same technology that enables his company to replace a traditional bank or collection agency allows it to make regular automatic filings through the SEC's EDGAR filing system. While there was some initial pain and expense, he thinks they are far outweighed by the potential of the business.

So now Lending Club is quickly gaining ground on the hogtied Prosper and Loanio. While its main competitors twiddle their thumbs waiting to get back into business, the company has facilitated more than 3,000 loans for $30 million.

So basically, because they were the first ones to ask about the rules, they were the only ones not blind sighted by them, and so they get to do $30 million in competition-free business. Now, some could say that that's their reward for being good corporate citizens and proactively seeking out regulation, but then again, I don't think it's a coincidence that they also happen to have "venture capital money behind it and a high-powered team of former executives from American Express, Goldman Sachs, MasterCard, and E*Trade." I'm not sure that stacking the game in favor of incumbents with deep pockets is really the best way to encourage innovation.