When the legal system makes your business model a shaky one, change the model.
That’s a shift online lender Lending Club is mulling over — one in which the firm may have to forgo at least some of its revenues in an effort to keep making loans and not running afoul of state usury laws.
As noted by The Wall Street Journal, the firm makes loans that are at least somewhat above levels seen at state interest caps, often in tandem with bank agreements. But a legal challenge looms in the form of a recent federal-level court ruling, and if the ruling — Madden v. Midland Funding LLC — reshapes the lending landscape, the state-level interest rate caps would hold. WSJ notes that the ruling is at least one reason why the company’s shares have been sliced nearly in half in a little over a year since the firm’s initial public offering.
Under the Madden decision, which was handed down through the Second U.S. Circuit Court of Appeals, a debt collector was ruled unable to collect payment on loans it bought from a bank that stood above a state cap. The debt collector, Midland Funding, has appealed the case all the way up to the United States Supreme Court, where it has yet to be decided if the case will be heard. In the case of the Madden decision, banks can lose the protection they have not to adhere to state lending laws, and this led, at least in part, to the Lending Club model shift.
Lending Club said Friday (Feb. 26) that it will boost the fees paid out to WebBank, which is owned by Steel Partners Holdings. WSJ noted that the conglomerate will “have its financial interests tied more to the repayment of the loan” because the fee gets paid out in installments that would end if the loan is not repaid on time. The company has also been in the midst of raising rates it charges to borrowers. Servicing fees have averaged about 66 basis points on loans, with 10 percent of its loans made in jurisdictions tied to the Madden case and 12.5 percent of its loan portfolio operating above state usury limits.