View source version on BARRON'S
Lending Club (LC) shares continued their descent Wednesday. On Monday the online lender ousted its chief executive after the board found he improperly sold a large number of loans to a single investor.
Wall Street firms are halting their purchases of Lending Club loans, which could jeopardize future syndications. At the same time, the Treasury department is calling for more oversight and transparency.
Lending Club’s stock was trading near $4 Wednesday afternoon, down from more than $7 a share before the news broke.
What do Lending Club’s woes mean for all the burgeoning set of companies that are either operating peer-to-peer investment platforms or creating related services? Barron’s asked a few.
This small sample saw Lending Club’s problems as regrettable growing pains for a new industry, but ultimately thought the increased transparency that will result would be a benefit. Below are their comments:
Matt Burton, CEO of Orchard, a technology platform for online lenders:
I was saddened by Mr. Laplanche’s resignation because he’s been a central figure for marketplace lending and has done a lot to transform the industry. But ultimately this is a learning moment and an opportunity for everyone to set the bar even higher in order for our industry to thrive.
No single news event or data point can tell the story of an entire industry. Lending Club is not synonymous with any one executive, and marketplace lending is not synonymous with Lending Club. Investors should keep in mind that marketplace lending, as a business model, is here to stay, and events like this – unfortunate as they are – present an opportunity for all participants in the industry to learn and grow.
Brendan Ross, president of Direct Lending Investments, which operates a fund made up of online small business loans:
Lending Club’s response to this issue is illustrative of the sector’s commitment to complete transparency. No one lost any money here, and yet their CEO and founder is gone. It’s a strong statement and should be applauded. The fact that Lending Club mis-sold a small batch of loans does not change the attractiveness of these loans as an asset class. They still offer much higher yields than traditional fixed income investments, with low volatility. In addition to total transparency, investors should be looking at the degree to which the lender’s interests are aligned to theirs. That’s why we increasingly structure our agreements with the lenders we work with in a way that ensures there is no incentive for them to make bad loans, because the default risk is all on them.
Mitch Wasterlain, founder of Capfundr, an online real estate investing firm:
Online investing, and the use of technology to disintermediate banks and brokers, are here to stay. Ironically Lending Club’s problems do not stem from its use of technology or from accessing individual brokers. It’s more reminiscent of the subprime problem where the business is dependent on selling assets to institutional investors and securitizers whose appetite can be very fickle. When demand for the assets dries up the machine is clogged and it puts enormous pressure on the originator to get production out the door by any means possible.
The key difference is in the business model. In a more traditional fund management model such as CAPFUNDR’s, you make money by attracting assets under management, and you can only do this by building trust over a period of time. You don’t have the same pressure to churn your assets to generate gains on sale.
Original Author: Amey Stone