LendingClub is a prominent fintech enterprise that operates as a peer-to-peer lending platform. Its primary purpose is to facilitate connections between borrowers and investors. At the pinnacle of its success, LendingClub emerged as the world’s largest peer-to-peer lending platform. It distinguished itself by registering its offerings as securities with the Securities and Exchange Commission (SEC), which was an unprecedented move in the industry. Additionally, LendingClub became the first peer-to-peer lender to provide loan trading on a secondary market.
However, the company’s reputation took a hit in 2016 when it faced accusations of fraudulent activities. This led to a substantial drop in the company’s stock price, resulting in a loss of investor confidence.
LendingClub’s Loan Fiasco: Unpacking the Scandal
During the early months of 2016, LendingClub, like other peer-to-peer lenders, faced challenges in attracting investors. As a result, the company made several adjustments to increase the interest rate charged to borrowers. However, despite these efforts, LendingClub continued to struggle with the impact of a slowing US economy, further exacerbating investor concerns. These factors ultimately contributed to a significant drop in LendingClub’s share price.
The Accusations- The Start of LendingClub’s Downfall
In 2016, LendingClub faced serious accusations regarding the falsification of loan applications and the inflation of revenues. These allegations were brought forward by both the US Department of Justice and the Securities and Exchange Commission (SEC). The claims were centred around LendingClub’s purported selling of loans to investors, which was based on fraudulent information. The allegations further asserted that LendingClub was aware of the falsification of loan applications.
The investigation revealed that the San Francisco-based company sold loans worth $22 million to an investor, despite the fact that these loans did not meet the investor’s explicit instructions. The board also found that some employees at LendingClub were aware that these loans did not comply with the investor’s criteria. Additionally, the application date for $3 million of these loans was manipulated to make them appear to comply with the investor’s requirements.
Moreover, during the investigation, the New York Times reported that LendingClub’s former CEO, Renaud Laplanche, had failed to disclose to the board his ownership stake in an investment fund that the company was considering purchasing. The Wall Street Journal has also reported that Laplanche was found to have not fully disclosed his knowledge of the problematic loans.
The Fallout Continues: CEO Exits Amidst Scandal
Following the board review, LendingClub’s CEO Renaud Laplanche was informed on May 6 that he no longer had the board’s confidence, ultimately leading to his resignation on May 9. In addition, three other managers at the firm had either resigned or been fired due to their involvement with the problematic loans. The news of Laplanche’s departure caused the company’s share price to drop by a staggering 34 per cent, leading to the stock price plummeting to 70 per cent of its initial public offering value.
The fallout from this incident extended beyond just financial losses, as the Securities and Exchange Commission reportedly launched an investigation into the disclosures LendingClub made to investors. The incident brought into question the integrity of the company’s management and its ability to maintain ethical practices. It was now crucial for LendingClub to take swift action to address these concerns and restore the trust of its stakeholders.
Rocked by Aftershocks: LendingClub’s Turbulent Aftermath
The consequences of the revelations were profound for LendingClub, resulting in a widespread departure of investors, massive layoffs, and the new CEO’s appointment. This resulted in the company’s stock price experiencing a sharp decline, reaching only half its previous value by the year’s end.
The Ripple Effects of LendingClub’s Irregularities
The impact of LendingClub’s troubles was not limited to its own business. The marketplace lending industry as a whole felt the repercussions of the revelations. Prosper Marketplace, a fellow online lender, had to relinquish 25% of its employees in 2016. Even though it made profits for the very first time ever, its value dropped by 70% in 2017. Similarly, OnDeck, an SMB marketplace lender, survived from the crisis in 2016 with significant damage, leading to widespread speculation in early 2017 that Kabbage was close to buying it.
The SEC Strikes Back: LendingClub & Laplanche Face Charges
The SEC filed charges of fraud against LendingClub, Laplanche, and LCA for their improper use of LCA assets for LendingClub Corporation’s benefit. The LendingClub Corporation was Laplanche’s parent company, where he served both as CEO and founder. Additionally, LCA, Laplanche, and his predecessor CFO Dolan faced accusations of manipulating fund returns. These charges compounded the legal issues already faced by LendingClub and Laplanche following the earlier scandal.
Underwriting Woes: The Alleged Deception Leads to DOJ Investigation
LendingClub was then scrutinized by an investigation by the Department of Justice (DOJ) for their actions that happened in the midst of January 2009 and September 2010. The DOJ was looking into allegations that LendingClub misled WebBank, the company’s FDIC-insured lender, which led to WebBank underwriting more than 200 loans that didn’t fit the company’s lending criteria. The DOJ claimed that LendingClub made these loans to increase their underwriting figures and achieve their monthly lending volume targets, which was a violation of the FIRREA (Financial Institutions Reform, Recovery and Enforcement Act) of 1989.
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The Settlement: LendingClub’s Redemption from the Regulatory Storm
In September 2018, LendingClub, its subsidiary LC Advisors, founder and former CEO Renaud Laplanche, and former CFO Carrie Dolan saw the conclusion of a two-year investigation by both the Securities and Exchange Commission (SEC) and the Department of Justice (DOJ). Mr. Laplanche agreed to a settlement with the SEC, which included a $200,000 fine and a three-year ban from the securities industry, without admitting or denying any wrongdoing.
Navigating the Bumpy Road to Recovery
LendingClub’s journey to be a thriving business once more was a challenging one, marked by slow progress and occasional setbacks. Despite this, the platform has seen a return of investor confidence, although revenue growth and loan volume have been sluggish until recently. LendingClub faced a new challenge in 2018, when the Federal Trade Commission sued it for allegedly double withholding payments and charging hidden fees to consumers.
In conclusion, LendingClub’s journey to recovery after the events of 2016 has been challenging, but ultimately successful. Despite facing significant setbacks and negative publicity, the company has persevered under new management and with new directives in place. While the effects of the investigations and lawsuits were initially felt, LendingClub’s commitment to transparency and responsible lending practices has helped it regain the trust of investors and customers alike. With a record-breaking amount of revenue and originations reported in Q2, LendingClub’s future looks bright, and it is poised to continue its mission of making credit more accessible and affordable for all.
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