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crowd lending

It is also known as crowd-lending, peer-to-peer or marketplace lending. Companies or individuals seek to obtain funds from the public through platforms in the form of a loan agreement.

This form of crowdfunding also comprises 2 variations of the basic business model (often arising from differences in legal structures across Member States):

  • Consumer lending, where individuals (consumer-to-consumer) or institutions (business-to-consumers) lend directly to individuals, typically through unsecured loans, where no collateral is requested from borrowers.
  • Business lending, where individuals (consumer-to-business) or institutions (business-to-business) lend directly to businesses. Loans can be secured or unsecured.

In the more typical business model, the loan contract is between the lender and the borrower; the platform would provide the contractual terms and conditions, would send contracts to the parties, and coordinate payments and repayments.

In another business model, a platform would cooperate with a credit institution which originates the loans.

In yet another business model, the pledged amounts are transferred to an escrow account, which is managed by the platform or a partner bank. Once the threshold pledge is reached, payments are transferred from the escrow account to the project’s account.

Invoice trading crowdfunding is a form of asset-based financing whereby businesses sell unpaid invoices or receivables, individually or in a bundle, to a pool of investors through an online platform. Typically investors are institutions and high net worth individuals, and rates are set through online auctions.

Crowd-lending business normally entails three main activities: credit intermediation, money handling and debt collection. Lending platforms act as intermediaries providing services that allow borrowers to obtain a, mostly unsecured, loan and lenders to invest in the loan in exchange for a financial return. In particular, these services, for which the platforms charge a fee, include the following: (1) registration and checks of borrowers’ identity and eligibility for the loan, including their creditworthiness; (2) online tools enabling lenders either to choose which borrower(s) to lend to or use automated bidding functions to better diversify their risk; (3) setting an interest rate based borrowers’ credit profile or enabling online reverse auctions; (4) processing of lenders’ money onto borrowers’ accounts, and borrowers’ repayments according to the agreed terms; (5) debt collection on behalf of lenders if borrowers do not repay on time. Depending on the business model, some of these activities and services may also be outsourced to external suppliers, including authorised payment service providers; accordingly, the platform would no longer need to apply for necessary authorisations.

For ensuring responsible lending, platforms are obliged to give risk warnings to consumers, rather than explicitly required to assess their creditworthiness. For the sake of duties segregation the involvement of independent risk management providers is necessary. This way the conflict of interests would be prevented.

Money-handling is present in all types of crowdfunding loans. The two examples below show the way platforms carry out processing of payments from lenders to borrowers. In a typical model, lenders transfer money in and out of their client account. When the lender’s money is not lent out, it is held on trust in a segregated client account at platform’s bank account. The funds are treated as separate from the platform’s own accounts and are subject to internal control mechanisms and accounting procedures in accordance with national rules on client money handling. In another model, the money does not flow through the platform, as the payment services are outsourced to a partner credit institution; the latter provides a loan to a borrower in order to consequently resell the debt to investor(s).

The provision of payment services is a regulated activity that may be undertaken by specific categories of service providers, such as credit institutions, e-money and payment institutions, and subject to prudential supervision. The national rules implementing the Payment Services Directive could apply to crowdfunding platforms, covering the payment side of their activities, if the latter, depending on their business models, act (i) for both the payer and the payee and (ii) handle their funds. In this case, the platforms are subject to an obligation to safeguard all funds which have been received from the payment service users or through another payment service provider for the execution of payment transactions and deposit them in a separate account in a credit institution.

When platforms receive money from lenders, usually through bank transfers, they might also be subject to applicable anti-money laundering and counter-terrorist financing rules set out in the AMLD, in particular an obligation to carry out a due diligence on the basis of the risk assessment. Relevant for the risk assessment would be the identity of the consumer, payment method, geographical risk factor such as country of origin of the credit institution.

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