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The Baltimore Sun is reporting the Prosper Settlement.

A settlement for $1 million dollars paid to 20 different states was announced today, with Prosper Marketplace agreeing to the payout after complaints poured in claiming that the peer-to-peer lending service was selling securities that were unregistered.

Prosper Marketplace is a business model that matches up those who want to borrow money with those willing to lend it to them. It’s very much like an auction with the potential lenders bidding on the right to loan money to the loan-seekers. A list of people with the loan amounts they’re looking for appears on the site, and people who would like to make the loan and profit from the interest that the borrower will have to pay back actually bid on the loans. The lowest bidders’ monies are used to fund them, with Prosper Marketplace actually issuing promissory notes to the lenders and managing the transactions.

But unlike some websites that take the information offered by people who want a loan and present it to legitimate lending institutions who bid for the business with the best interest rates and terms, this service allowed anyone to bid in hopes of providing money for the loan. The state regulators that make up the North American Securities Administrators Association decided that the company in essence holds an online auction to find people to fund notes that aren’t secured in any way. Because the loans amount to unsecured promissory notes, regulators say they’re securities that haven’t been properly registered, and so the practice must stop immediately.

Each state must put its stamp of approval on the settlement for the entire penalty to go through, with an agreement that the settlement is valid also including the agreement to stop investigating any prior transactions that Prosper took part in before the investigation began.

It was only a week ago that the Securities and Exchange Commission ordered Prosper Marketplace to stop selling unregistered securities. The spokeswoman for Prosper, Tiffany Fox, indicated that the company is eager to settle the matter. They plan to register with the SEC so that they can continue with their business model. In the meantime, they’re not playing middleman for any new borrowers and investors, but the agreements that were made before the SEC cease and desist order, they make clear on their website, are still valid.

Prosper has announced on its website that lenders can still expect to have their monies paid back, they can still keep an eye on all of their loans, and they can still access the money currently in their Prosper Marketplace account. They also point out to borrowers that they are still expected to honor any agreements they’ve already entered into, and that their plan to register with the SEC, which could take several months to complete, won’t affect current loans.

They also point out on their website that a borrower looking for a loan can still create a new listing for the hoped-for loan, and they’ll do their best to find an alternative way to find a lender.

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