Lending Club Closes Under $5 A Share

Shares of Lending Club broke through what might be an important psychological barrier on Monday (May 9) — the $5 level — and issues that caused the stock to tumble by a third on a single day of trading have brought greater scrutiny to bear on the company as an individual actor in the peer-to-peer lending industry but also on the alternative lending space.

As has been widely reported, its chief executive officer, Renaud Laplanche, stepped down in the wake of an internal review that found that a single investor was sold $22 million in loans, but the loans did not dovetail with that investor’s specific instructions and profile. The conference call with analysts also disclosed that senior managers at the firm, as Executive Chairman Hans Morris said, “made a change in the application dates of approximately $3 million of these loans and that was also internally discovered and promptly remediated.”

In the wake of those disclosures, the firm’s board hired a forensic auditor, who found no other date changes tied to any other first quarter loans.

Though there has been no real financial impact from the loans aforementioned and the $22 million is less than 1 percent of the loans that were originated and brought to market in the quarter, it may be that the breach of trust provides a crippling blow. Management pointed to tough credit conditions that have had an impact on the performance of one tranche of loans, grades D through G, which meant that the company, in order to help boost returns, pushed interest rates higher, by 220 basis points.

With total originations in the quarter up 68 percent versus last year, operating revenues paced even faster, at 87 percent growth year over year, to $151 million. It’s a fair question to ponder whether those growth rates will remain intact with the disclosures made Monday but also with the acknowledgement of a tough operating landscape. The mix of investors has been shifting, too, as banks and finance companies represented 34 percent of funding, up from 21 percent a year ago, with self-directed retail investors growing from 17 percent of the book to 20 percent.

Investor softness has carried over into April, said management on the call, perhaps setting the stage for even more volatility to come in the weeks and months ahead.