LendingClub strengthens ties with issuing bank

LendingClub announced that it has strengthened its issuing bank relationship to provide additional investor protection and maintain access to affordable credit, in light of concerns created by the Madden vs. Midland decision from the Second Circuit Court of Appeals last year. Under the enhanced structure, the issuing bank (WebBank) maintains an on-going economic interest in all loans sold, which is paid only when borrowers make payments on their loans, the issuing bank also maintains an ongoing contractual relationship with borrowers, who may seek additional credit through the Lending Club program in the future. “The purpose of that is to ensure…the economics of the bank are tied to the loans,” said LendingClub CEO Renaud Laplanche.

LendingClub Corp.’s recent restructuring may save the company the headache of playing catch up on coming legal changes. And it may inspire other online lenders to strike preemptively.

LendingClub LC, +2.61% said Friday it would transfer more of the risk on its loans to its banking partner WebBank in exchange for paying higher fees to the bank. The move is aimed at getting ahead of possible legal action that could affect the company’s practices, with some analysts arguing the move won’t affect consumers and others saying the risk shift could hurt them long term.

Under LendingClub’s model, consumers apply for loans on the site, which are then sold to investors, with the loan facilitated through Salt Lake City, Utah-based WebBank. A ruling made in Madden v. Midland Funding, LLC, a debt collector, said that loans sold to non-banks have to follow state rules, which can have caps on how much interest is charged. The ruling made it to the Supreme Court on appeal.

But LendingClub isn’t waiting for that higher-court decision. The company has already shifted more of the loan responsibility to its WebBank affiliate. In fact, Lending Club said the Madden case does not apply directly to its business model but that it hopes to ease any potential concerns with this move.

“We believe this new structure will strengthen the foundation of our program to provide borrowers the ability to access affordable credit on a nationwide basis and to provide investors with greater certainty,” Renaud Laplanche, Lending Club founder and CEO, said in a press release.

Investor reaction was muted with the stock closing down 0.5% Friday, after a tough week for most online lending companies. On Wednesday, shares of OnDeck US:ONDK , an online lender for small businesses, fell 20% after the company reported fourth-quarter results that included disappointing guidance. Shares of Lending Club are down 5% on the week.

Read:Online lender shares battered after On Deck Capital’s disappointing outlook

Josh Beck, vice president of equity research at Pacific Crest Securities, said he believes the move is a positive for Lending Club and should help it clear regulations.

“I think it really helps distinguish Lending Club and the framework they use to originate loans from some of the others in the ecosystem,” Beck said.

Beck believes this new framework will have “a very immaterial impact” on Lending Club’s finances and the interest rates charged to borrowers on the site.

Lauren Saunders, associate director at the National Consumer Law Center, said she’s concerned this change could encourage a work-around for “rent-a-bank” models so that payday lenders could continue to charge higher interest rates.

“It’s just a tweak to try to keep a business model that can potentially be dangerous for consumers,” Saunders said, acknowledging that LendingClub’s proclaimed average loan interest rate of 12.6% would be a competitive rate for consumers within this segment.

Beck said he expects LendingClub’s move to inspire other consumer lending companies, such as Prosper Marketplace, Inc., a private peer-to-peer lender, to take similar action. Non-consumer lending platforms, such as OnDeck, will not be impacted to the same degree, he said.

Other online consumer lenders have listed this ruling as a possible risk to future business. Elevate, an online lender, postponed its initial public offering (IPO) in January due, it said, to difficult market conditions. It listed the Madden v. Midland case going to the Supreme Court in its prospectus as a potential risk to the company if the court finds that Elevate’s practices fall under this ruling.

The delayed debut followed a similar move by LoanDepot, which postponed its IPO in November due to market conditions. LoanDepot also said it worried about added risk if the court found its relationship with Cross River Bank fell under the case law.

But fears of a winding down or end to online lenders are overstated, National Consumer Law’s Saunders said.

“I think these things have ebbs and flows and when you have new models there’s always a sorting out period,” she said.