The trouble for LendingClub began innocuously enough in early May when allegations surfaced of improper disclosure in connection with the sale of a relatively small loan portfolio to Jeffries & Co.
Meet the new bank same as the old bank – that might be best way to sum up one of the crucial lessons learned from the recent embarrassing reversals suffered by the LendingClub, which had been the one-time darling of the Fintech world, as a pioneer in the peer-to-peer, online lending market.
The trouble for LendingClub began innocuously enough in early May when allegations surfaced of improper disclosure in connection with the sale of a relatively small loan portfolio to Jeffries & Co. But the problems soon escalated when it emerged that loan documents had been modified after the fact in order to meet the purchaser’s requirements and LendingClub’s Board of Directors stunned the market by requesting the immediate resignation of Bernard LaPlanch, the company’s founder and CEO.
Not surprisingly, the announcement of Laplanch’s resignation and related disclosure problems lead to a swift and sharp sell off in LendingClub’s shares, the launch of a formal investigation by the U.S. Department of Justice and, worse yet, the announcement that several financial institutions were suspending further purchases of LendingClub’s loan inventory.
For all the ink that has been spilled about the potential of Fintech startups to transform the stodgy world of financial services — not just on the blog but by commentators all over the financial press – LendingClub’s misfortunes underscore an important point about how even the most groundbreaking of Fintech companies, built along the most disruptive of business plans, are still very much subject to the laws of the marketplace. Lenders, whether they are Fintech or old brick and mortar banks, share some fundamental characteristics, such as the critical importance of maintaining confidence and trust.
Indeed, the fact that LendingClub, as a peer-to-peer lender, was not exposed to a run on deposits didn’t make the crisis of confidence any less severe. Without sufficient capital of its own, LendingClub’s loan operations are completely dependent on the resale of the loans it makes to private investors. Once those investors lose confidence LendingClub has almost no current capacity to bring loans onto its balance sheet. Hence the last few weeks the company has been looking high and low to find new loan sale counterparties so it can keep its origination platform busy issuing new loans. Ironically, the Wall Street Journal reported, LendingClub had retained Jeffries & Co. – the counterparty that had been the cause its present difficulties – to assist with the search for new loan buyers.
No doubt, there’s been a sigh of relief in the executive suites at Citibank and JP Morgan now that the bad press is finally being directed at one of their Fintech rivals. For all the promise of technology to transform the world of finance, it seems highly likely there will quite a few more speed bumps ahead, particularly now that the relatively benign lending environment of the last few years looks like it’s about to get more difficult. We take particular note of the recent announcement by the Board of Governors of the Federal Reserve Bank of a substantial uptick in the default rate among commercial borrowers, which makes us think may soon be joined by a number of other Fintech lenders in the fight for survival.