LendingClub’s travails may cast shadow on industry
A grand jury subpoena following the abrupt investigation of its CEO may be the least of worries for LendingClub.
In less than two weeks, the peer-to-peer lender has gone from industry darling to a company that jettisoned founder and CEO Renaud Laplanche, faces a federal investigation and shareholder lawsuits and now could be casting a shadow over the onlinelending industry.
A day after the company disclosed in a securities filing that it received a subpoena from the U.S. Justice Department, LendingClub shares were hammered 8% in trading Tuesday.
For months, investors have pummeled the once high-flying stock. The sell-off became a rout following Laplanche’s resignation after an internal probe over $22 million in improper loan sales — prompting fears among those in the industry about long-term fallout. LendingClub also warned that efforts to renew investor confidence might be costly.
LendingClub, in a statement, said it was “not surprised” by the subpoena and is “fully cooperating and has engaged in a productive and orderly dialogue through counsel.”
“I would like to hope, and think, this is an isolated incident and not indicative of the entire industry,” said Peter Renton, author of The Lending Club Story and co-founder of LendIt, a community for peer-to-peer lending. “But the industry seems to be punished for what is happening at LendingClub. You won’t get fired for not investing in an online lending company now,” Renton said, noting the difficulty some of the dozens of companies in the space are having raising money in equity rounds.
LendingClub’s woes could imperil the IPO ambitions of similar companies such as Social Finance, Kabbage Capital and CAN Capital, according to Renaissance Capital, which operates exchanged-traded funds focused on IPOs. The industry has also attracted the attention of federal regulators, which worry fintech companies’ dependence on dataanalysis to make loans and assess risk could lead to problems.
“While data-driven algorithms may expedite credit assessments and reduce costs, they also carry the risk of disparate impact in credit outcomes and the potential for fair lending violations,” Treasury said in a white paper on the industry last week. “Importantly, applicants do not have the opportunity to check and correct data potentially being used in underwriting decisions.”
LendingClub operates, in a way, like Uber — it’s a platform for borrowers and individual lenders or investors to connect, rather than a financial institution that loans the borrower from its own capital. Such companies can often line up loans for borrowers faster than a traditional lender and often are more willing to make riskier loans. The companies increasingly have attracted institutional investors, including traditional banks, seeking a greater profit. In some cases, the loans are smaller than what a bank might traditionally offer but can make the difference for an untested entrepreneur looking to expand rapidly.
When LendingClub went public in a December 2014 IPO, fintech was the fledgling technology, and it was the company. Shares surged 56% the first day of trading, creating a market valuation of $8.5 billion overnight and inflating hopes of investors and executives. After Tuesday’s drop, LendingClub, at $3.60 per share, is far below its IPO price of $15.