Lending Club shares tumble after Justice Department probe announced

Peer-to-peer platform LendingClub saw its shares crash by another 10% after the US Department of Justice (DoJ) announced the commencement of a probe into its business practices yesterday. The shares currently stand at $3.51, down 77% from $15 when the firm floated in 2014, and down 86% from the high of nearly $26 in December 2014. Analysts from KBW have stated that the platform’s “survival is very much a question mark at this point”, however others have commented how this drama is the “one thing they did wrong out of a million things (they did) right”. Multiple reports suggest that the investigations headed by both the DoJ and the SEC have broad implications not just for LendingClub, but for the burgeoning peer-to-peer loan industry, enough to affect companies that have not yet gone public. Furthermore, Todd Baker of Broadmoor Consulting writes in TechCrunch today that to survive such a scandal, online lenders may have to consider “remodelling themselves based on the institutions they vowed to replace, either by becoming banks…or else striking up partnerships with banks” such as OnDeck did recently with JPMorgan, allowing JPM to offer online loans to small-business customers using OnDeck’s technology.

Jon Swartz, and Trevor Hughes

USA TODAY

SAN FRANCISCO — 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 could be now casting a shadow over the online-lending industry.

A day after the company disclosed in a securities filing that it received a subpoena from the U.S. Justice Department, LendingClub shares (LC) were hammered more than 8% in trading Tuesday.

Lending Club shares plunge after subpoena disclosure

For months, investors have sold off the once high-flying stock on worries about the business model. The selloff 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. It said some investors had halted investment in loans through the platform to audit or run tests on their portfolios.

Stifel bank analyst Scott Devitt called the developments "disheartening" and reiterated a hold on the stock.

"LendingClub has been a company with such potential to provide positive change in an industry that needs it, but the company now faces material headwinds," he wrote in a note to investors.

In a statement, LendingClub 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.

Fear and loathing in online lending

The industry has also attracted the attention of federal regulators, which worry fintech companies' dependence on data-analysis 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 are often more willing to make riskier loans. The companies have increasingly 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.

“It’s much more risky, and my suspicion is that a lot of the people, many of the people, who put money into those sites don’t have a good appreciation of the risk,” said professor Steve Bradford, a securities law expert at the University of Nebraska College of Law. "There’s a lot of people out there who don’t understand that fairly basic point.”

Some of these concerns — plus weaker demand from both borrowers and investors — are reflected in LendingClub's current stock price.

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 the hopes of investors and executives.

After Tuesday's stock drop, LendingClub, at $3.60 per share, is far below its IPO price of $15.

LendingClub shares debut to 56% stock rise

"If the IPO was irrational exuberance, the last six months have been irrational vindictiveness," said David Klein, CEO of Common Bond, an online tech-enabled consumer lender. "People in the financial world have been skeptical for a long time (over LendingClub and other similar services). This is their 'I told you so' moment."

Doug Naidus, who runs small-business lender World Business Lenders, sees parallels between today’s fintech industry and the dot-com bubble of the late 1990s. Naidus founded MortgageIt and took it public as it became one of the country’s top mortgage lenders before selling it to Deutsche Bank in 2006. He said fintech companies are rushing to grow fast without paying sufficient attention to their financial and internal controls, or even their actual profits.