Prosper Marketplace, an online company that arranges loans directly between borrowers and lenders, is lobbying hard for Congress to put a new consumer financial protection regulator in charge of its industry.

The company is one of two industry leaders in the so-called “person-to-person” (P2P) lending market that has developed in the last five years. Backed by venture capital money, the online industry drew headlines as an innovative way to match borrowers and lenders directly instead of through a conventional bank.

{mosads}As part of the Wall Street overhaul package in Congress, Prosper is lobbying for a provision that would place the new consumer regulator over the industry. The company is waging a vocal battle against the Securities and Exchange Commission (SEC), which found in 2008 the firm was trading in securities and needed to comply with securities law.

Prosper, which has spent $330,000 lobbying in the last year with the Podesta Group, won its case in the House last December. But the Senate did not include a similar measure when it passed its version of the bill in May.

House and Senate lawmakers are set to finalize the overhaul legislation over the next month, and the lending issue is one of scores of differences both large and small that lawmakers must reconcile before sending the bill to President Barack Obama.

Prosper, which spent at least $5 million completing the SEC registration process, argues the SEC is stifling the industry by treating it as a complicated Wall Street securities product instead of a typical bank loan.

The company is urging lawmakers to retain the House provision in the final bill.

“Every month that goes by, P2P lending is getting pulled away from what it could be: the purest form of community banking,” Chris Larsen, chief executive and co-founder of Prosper, said in an interview. “Frankly, this is kind of a turning point in the industry. Is it going to go back to a community banking paradigm or look like a special-purpose entity, Wall Street structure?”

The company went through a nine-month dark period before finally completing the SEC registration process in July 2009.

The SEC said it has an investor-protection responsibility to require registration and disclosure forms. The commission briefed congressional staff at their request before the full House and Senate voted on their bills, said John Nester, SEC spokesman.

“Regardless of the innovative way in which investments are solicited, investors are entitled to the full and fair disclosure that our securities laws require,” Nester said. “Investors in notes issued by peer-to-peer lending platforms should be afforded the same protections that investors in other securities receive.”

Prosper has had hundreds of meetings on Capitol Hill, and Larsen founded a related association, the Coalition for New Credit Models, which has spent $150,000 on lobbying with Podesta.

The House provision, championed by Rep. Jackie Speier (D-Calif.), would place the consumer agency as the industry’s primary regulator and exempt it from securities regulations once it adopts new disclosure requirements.

“We should encourage new lending models like person-to-person lending but with the strongest consumer protections possible,” Speier said. “My amendment ensures that both consumers and small lenders are fully and appropriately regulated, and that individuals’ financial privacy is protected.”

Many industries have lobbied for carve-outs from the consumer agency, which would have broad rulemaking and enforcement powers and is central to the Obama administration’s revamp of regulatory laws.

Larsen argues the new agency would have a “very high bar on regulation” and that it would better protect both borrowers and lenders and also set industry-wide standards. Among its concerns, Prosper said current regulations do not provide strong enough protections for borrowers’ credit information and private data. That type of information helps lenders decide whether to extend a loan.

“The SEC is not tasked with protecting borrowers. It becomes a non-issue for them,” Larsen said.

Lending Club, the other large industry player that registered with the SEC, supports current regulations and has not lobbied Washington lawmakers.

“We understand that this is an expensive process, but at the same time [it] provides a level of transparency and provides certainty to both borrowers and lenders,” said Jason Altieri, Lending Club’s general counsel.

“Currently we’re fine with the regulation by the SEC. We think they are the appropriate group to manage this nascent industry. They have been very accessible and accommodating. We have been happy with them.”

{mosads}Meredith Cross, the company’s former counsel with WilmerHale, is currently the director of the SEC’s division of corporate finance and does not participate in the commission’s work on the P2P industry, the SEC said. Speier plans to urge House and Senate lawmakers in the conference to keep her provision.

The industry is struggling to regain momentum it had before the SEC acted in 2008. Between the two firms, loan volume in 2009 was $62 million, roughly 30 percent less than 2008, according to Jim Bruene, editor and founder of Online Banking Report. Bruene said in a January report that Lending Club overtook Prosper in 2009 as the industry leader with 85 percent of the market. 

Prosper emerged from the SEC registration process in July 2009.