Lending Club dominates this sector in the US and Laplanche, who co-founded the firm in 2006, has been one of the industry’s most high-profile advocates.
Lending Club had been due to announce its first quarter results on Monday and the industry was hopeful for a good set of numbers after the slowdown in loan growth reported by rival platforms Prosper Marketplace and OnDeck the week before.
What it got instead was a bombshell. As well as reporting its first quarter numbers, Lending Club announced that the sale of $22 million loans to a single investor ($15 million in March and $7 million in April) breached that investor’s express instructions and – shockingly – certain personnel at the firm were aware that the sale did not meet the investor’s criteria.
Three senior managers at the firm have now either resigned or been fired.
Lending Club repurchased these loans at the beginning of April and subsequently resold them to another investor at par. The nature of the breach is unclear, but the loans did not conform to a non-credit and non-pricing element of the initial investor’s criteria.
The response from the market has been swift and savage. Already down 36% on the year by Friday, Lending Club stock slumped a further 23% to $5.50 after the news was announced. Shares in its December 2014 IPO were priced at $15 to give the firm a $5.4 billion valuation.
Lending Club has been one of the most shorted stocks in the market on the back of concerns around the growth of marketplace lending, so there will be a lot of happy hedge funders as a result of recent developments.
The marketplace lending industry is facing a growing challenge in attracting institutional investors which is constraining growth, so the news from Lending Club could not have come at a worse time.
Indeed, Lending Club has mandated Goldman Sachs and Jefferies to arrange the debut securitization of its loans, after previously saying this would not be necessary. It remains to be seen whether such a deal now emerges.
Lack of enthusiasm
The inaugural European marketplace lending securitization from Funding Circle last week attracted disappointing investor enthusiasm, with nearly 60% of the senior notes going to KfW with a European Investment Fund wrapper.
In Lending Club’s fourth quarter 2015 earnings call, Laplanche had been confident the firm could attract enough capital to keep its growth projections on track.
“The adjustment [of interest rates upward] combined with diversity and breadth of our investor base, together with the short-term nature of the loan portfolio that generates high monthly payments and makes large amounts of capital available to investors, for investors to redeploy on the platform at higher rates, will provide more than enough capital to continue growing originations in a responsible manner and rapidly capture market share, particularly as other market participants cut back,” he claimed.
The firm had projected a 70% growth in its loan book to $14 billion in 2016.
Lending Club posted net income of $4.1 million for the first quarter, up from a loss of $6.4 million last year. However, the firm now has a mountain to climb in convincing investors both institutional and retail that it has its house in order.
In addition to the $22 million loan sales, an internal review has also discovered the failure to disclose to its own risk committee personal interest held in a third-party fund while Lending Club was considering an investment in the same fund. It is further fuel to the fire: if the largest and one of the oldest marketplace lenders is uncovering such breaches, what is going on elsewhere in the sector?
“A key principle of the company is maintaining the highest levels of trust with borrowers, investors, regulators, stockholders and employees,” says Hans Morris, newly appointed executive chairman of Lending Club on Laplanche’s departure.
“While the financial impact of this $22 million in loan sales was minor, a violation of the company’s business practices along with a lack of full disclosure during the review was unacceptable to the board. Accordingly, the board took swift and decisive action, and authorized additional remedial steps to rectify these issues.”
President Scott Sanborn is now acting CEO.
Last summer, the US treasury launched a request for information (RFI) on marketplace lending, the results of which were published on Tuesday.
Lending Club, together with Prosper Marketplace and Funding Circle, launched the industry’s first trade association in April in the hope that drawing up codes of business conduct will help to burnish the sector’s reputation. That looks like a somewhat hollow aspiration now.
Laplanche’s departure is a significant setback for marketplace lending. However, while the industry will almost inevitably now attract far more rigorous regulatory oversight, online consumer lending is going through growing pains from which it will emerge.
These marketplace platforms need to open up their underwriting procedures to far greater scrutiny to regain trust that their processes work. It might be online, but this is consumer lending. And that requires traditional legwork on the part of both lenders and borrowers that no computer algorithm can replace.