How Larry Summers would regulate peer-to-peer lenders

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Lend me your ear.
Image: AP/J. Scott Applewhite
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Former US Treasury secretary Larry Summers is calling for more regulation for peer-to-peer lending companies like Lending Club and Prosper, which have attracted a flood of money from Wall Street investors chasing high returns.

Summers laid out his vision in a speech today (April 15) at Lendit USA, the online marketplace industry’s annual pep rally (paywall).

Summers, who sits on the board of Lending Club, argues that these upstarts need time to test and learn from these new business models before getting slammed with too much government regulation. But he cautions that online lenders need to adhere to the same disclosure requirements and fair-lending rules as banks.

“Make no mistake, I am not arguing for laissez faire,” Summers told conference attendees, noting the ”financial innovation in which consumers were substantially exploited in mortgage finance just a dozen years ago.”

“But we need also to recognize that people are not going to improve their credit without getting credit” and that marketplace lending will help people access more credit, invest, and ultimately grow the economy, he said.

Here are Summers’ principles for regulating the marketplace lending industry, as summarized on his web site (and reiterated in his speech):

1. Permission not prohibition: Let new business models emerge. Regulators should allow new firms to operate, generating data on the outcomes created by novel business models, before writing new rules. Regulation is necessary but only when necessary.

2. Insist on transparency and disclosure–then let consumers decide. As new lenders serve parts of the market that have historically not had access to credit, high rates will draw regulatory scrutiny. Regulators should require full transparency and disclosure and see how consumers react to new products and prices before writing rules.

3. Maintain a level playing field: Don’t give incumbents an unfair advantage, but discourage business models based on unfair regulatory arbitrage. Regulators should strive to put entrants on equal footing with incumbents, but without sacrificing consumer protection. No lending business—online or offline—should get a pass on usury laws, fair disclosure and other critical safeguards.

4. Provide workable regulatory frameworks. To date regulatory authorities have generally maintained appropriate attitudes towards innovative lenders. It will be important as the industry evolves and grows that regulators not create overhangs of uncertainty or burden excessively those attempting to innovate.