What's going on?
The CEO of Lending Club, a leading peer-to-peer lending company, resigned on Monday. Lending Club’s stock fell about 35% on the news.
What does this mean?
It appears that Lending Club purposefully altered some details about loans to make it easier to sell those loans to another investor (amongst some other things). It’s important to note that a big part of these “peer-to-peer” lenders’ business models is actually to sell loans on to investors (they are, to a large extent, simply a middleman). Therefore, the business model is predicated on finding both willing borrowers and willing lenders. The changes that were made to the loan documentation don’t appear to have been major and Lending Club, basically, refunded the investor’s purchase. Still, this cost the CEO, and at least three others, their jobs.
Why should I care?
For the stock: The news highlights Lending Club’s other problems. Even before the news on Monday, Lending Club’s stock had declined in value more than 70% since it became a public company in December 2014. Lending Club (and others in the space) has been struggling to match borrowers and lenders at the scale that it thought it could (basically, the growth of the industry is slowing).
For you personally: Reputation and integrity are extremely important in financial services – and that’s perhaps why Lending Club’s board forced its CEO to resign. It may seem like financial firms are always getting in trouble for mistreating their customers, but that’s at least partly because financial firms operate under such a big regulatory microscope. And so while Lending Club’s offences appear relatively minor, the board is perhaps uber-sensitive about protecting the integrity of its “disruptive” company.