Securitization U-turn behind catastrophe at Lending Club

By:
Louise Bowman
Published on:

Jefferies deal scuppered by loan date changes; Laplanche, Mack investors in Cirrix fund.

Any firm that had just released first-quarter results showing sales up 68% year-on-year, operating revenue up 87% year-on-year and a profit of around $4 million after a loss of $6.5 million the prior year should be feeling pretty pleased with itself.

Lending Club, which has just done this, instead finds itself on "death watch", its share price languishing at $3.50 on May 13 to give it a market valuation of just $1.34 billion. This for a firm that has $868 million sitting in cash.

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Renaud Laplanche

The fall from grace of the marketplace lender will go down as a classic case study in the risk and impact of fraud on a business. Since news of CEO Renaud Laplanche’s departure broke on May 9, the impact on the business has been brutal.

The firm received a grand jury subpoena from the Justice Department on Monday and now faces a slew of class action lawsuits from investors, many of whom had been nervous about the company for a while: on April 29, the short interest in the stock was already $71.05 million, or 23% of the float.

This is in addition to the class action lawsuit recently filed against it by Ronald Bethune in New York over the breach of usury rates – which has been strengthened by recent Consumer Financial Protection Bureau proposals against arbitration clauses in consumer credit.

It was Lending Club’s decision to embark on a series of securitizations – having previously insisted that such a programme would not be necessary – that proved eventually to be Laplanche’s undoing.

He had made much of the firm’s strong retail investor base, but like all marketplace lenders was struggling to find the capital to match that 68% year-on-year loan growth. It was therefore working with Jefferies on a $150 million deal that was due to launch in May.

It was the selection of $22 million of near prime loans for this deal that triggered the exposure of "a violation of business practices" at Lending Club when it emerged that the power of attorney language in the documentation made them ineligible for the pool – but they were sold anyway.

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Scott Sanborn,
Lending Club

In a letter to investors from the firm’s new CEO Scott Sanborn, it was revealed it had detected changes in the application dates of 361 loans sold to a single investor (Jefferies) and had addressed the issue within 48 hours.

Anxiety

The search for capital to match its growing loan book was also behind the other violation of business practices uncovered at Lending Club. All marketplace lenders are anxiously courting institutional capital, indeed SoFi has established its own fund for this purpose.

Before the Q1 results, however, it emerged that Laplanche had been pushing for Lending Club to invest in a fund, Cirrix Capital, for it to be able to increase purchases of the firm’s own loans.

By April 1, Lending Club had invested $10 million in the fund and Laplanche himself had invested $4 million. Another Lending Club board member, ex-Morgan Stanley CEO John Mack, had also invested in Cirrix Capital.

These interests were not public when Laplanche was encouraging the Lending Club investment: it was only in an April proxy statement from Lending Club that it was revealed that Laplanche, Mack and Lending Club together now owned 31% of the Cirrix Capital fund.

These revelations have unsurprisingly given investors pause for thought. In its 10Q, released five days after the scandal broke, Lending Club revealed that "a number of investors that account for, in the aggregate, a significant amount of investment capital on the platform, have paused their investments in loans through the platform in the last five business days".