What happened to the online lending industry?
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"Remember when peer-to-peer lending was supposed to be the antidote to the financial sector's shady practices?" asked Jonathan Ford at the Financial Times. In the years since the financial crisis, online lenders have been relentlessly hyped as the future of better banking, offering more transparency and faster, cheaper loans by directly connecting borrowers with investors through technology. For a while, this Silicon Valley approach helped fuel blistering growth in the sector. But now the biggest and best-known online lender is embroiled in a controversy "that would not have looked out of place on pre-crisis Wall Street." Renaud Laplanche, the charismatic founder and CEO of LendingClub, was forced to resign last week over revelations that his company had "improperly sold" millions of dollars' worth of loans to an investor. Laplanche also failed to disclose a personal stake in a fund he had persuaded LendingClub's board to invest in — a fund "whose business involved investing in, um, LendingClub loans."
Laplanche's abrupt exit "has rattled" the fast-growing fintech industry, which considered LendingClub to be one of its leading lights, said Peter Rudegeair and AnnaMaria Andriotis at The Wall Street Journal. "In fact, LendingClub grew so fast that its internal controls couldn't keep up." Under pressure to maintain growth, Laplanche decided earlier this year to sell LendingClub loans to Wall Street investors as securities. One of the buyers — investment bank Jefferies — demanded more disclosures in the agreements with borrowers. LendingClub complied, but not before selling Jefferies $22 million in loans that didn't meet the bank's standards. Making matters worse, a LendingClub employee falsified dates on some of the loans so they could be sold. "Twenty-two million dollars isn't that much money, given that LendingClub facilitated $2.6 billion in loans in its most recent quarter," said James Surowiecki at New Yorker. But the sleight of hand "plays into investors' broader concerns" about whether the "ready-fire-aim approach of the tech industry" is compatible with the heavily regulated world of banking. "'Move fast and break things' is a useful motto when you're writing software, but it doesn't work as well when you're making loans."
The reason this scandal hits home isn't that LendingClub's actions "were so alien to the banking industry, but that they were so familiar," said Matt Levine at Bloomberg. Forging loan data isn't just "the reddest of red flags"; it's darkly redolent of the run-up to the housing crisis. Back then, banks passed off risky mortgages to investors as quality securities, even though many of those mortgages were riddled with mistakes, misrepresentations, and even outright forgeries. "You know the rest." Investors shouldn't be surprised that LendingClub's stock has plunged 35 percent since Laplanche's departure, said Gretchen Morgenson at The New York Times. The company never provided enough details about its business or borrowers' performance to justify the hype it received. Nor does its business model look so revolutionary in hindsight, with more than half of its loans financed by big financial institutions instead of individuals. The lesson here? "Disrupting finance turned out to be harder than promised."