Online mortgage lenders may be in hot water after U.S. Department of Justice officials opened a formal investigation into LendingClub, a prominent peer-to-peer loan site.
Earlier this month, the San Francisco-based company was discovered through an internal review process to have violated business codes by selling some $22 million in loans to a single investor who made risky deals with people with poor credit.
The revelation was enough to force LendingClub’s Chairman and CEO Renaud Laplanch to resign, but that wasn’t all. Two more senior executives resigned shortly after reports detailed that the application date data of $3 million in loans had been changed by upper management.
The news caused LendingClub’s stock prices to quickly plummet by 39%.
Company president Scott Sanborn, who is now also acting CEO, penned a letter to investors in an attempt to regain confidence in the prospects of online lending.
“The problems identified this quarter run counter to our values and will never be tolerated,” Sanborn wrote. “We’re working hard to make things right and prove to you that we continue to deserve your trust.”
“Our business thrives on data,” the filing continued. “We use it in every aspect of our operations, from making credit decisions to hiring employees. Data integrity has been — and will always be — critical to Lending Club.”
To many, online and peer-to-peer lending seems to be the future of mortgaging, a new phase since the rise of the modern mortgage market between 1949 and the early 21st century. Loans through online sources tripled between 2014 and 2015, topping $36 billion last year.
Still others, including the U.S. Department of Treasury, worry about the long-term feasibility and implications of digital loan markets.
A report on online lending from the Treasury warns, “Some online marketplace lenders are accepting applications without FICO scores or with short credit histories and making credit decisions based on the applicant’s college, school, and current income.” Their current methods remain “untested through a complete credit cycle” of high interest rates or unemployment.
In an opinion piece for the Washington Post, economist Robert J. Samuelson asks:
Could online lending cause the next financial crisis? While the odds seem overwhelmingly against it, the recent turmoil at LendingClub — a leading online lender — makes it hard not to ask the question. There are some disquieting parallels with subprime mortgages, which seemed beneficial until sloppy and fraudulent lending practices triggered a wider collapse of confidence. Are we about to repeat the cycle?
LendingClub’s story, however, is far from finished. Chinese billionaire Chen Tianqiao recently bought an 11.7% stake in the company, which has prompted stock value to rise again.