Lending Club receives subpoena, may fund loans on balance sheet

The Lending Club ship has yet to steady.

Lending Club has revealed that it received a grand jury subpoena from the U.S. Department of Justice (DOJ) in the immediate aftermath of former CEO Renaud Laplanche’s departure last Monday. The company has also contacted the SEC. Lending Club said in a 10-Q filing that it intends to cooperate with both the DOJ and the SEC. The 10-Q filing advised that Lending Club “may be subject to litigation related to the events surrounding the resignation of Mr. Laplanche”.

Laplanche was forced to walk the plank last week after an internal review found that he had overseen sales of $22m in near-prime loans to a single investor, which were “in contravention of the investor’s express instructions as to a non-credit and non-pricing element, in March and April 2016”. Laplanche was also found to have held an interest in a fund that was a customer on the Lending Club platform. The company’s shares have fallen 45% in the past week.

This grand jury subpoena comes at a time when a large number of opportunistic law firms have been announcing their own investigations into Lending Club. We’ve received such announcements from no less than six different law firms in the past week.

The 10-Q filing also includes confirmation of the rumours that a number of Lending Club’s institutional investors are pausing their investments in loans on the platform – at least until they’re able to run tests on their existing portfolios. Lending Club acknowledged the risk that these investors “may not return”. In response, Lending Club is mulling entering into agreements with large institutional investors in order to boost liquidity on the platform.

Alternative solutions appear to include a potential equity raise and equity inducements. The former solution would seem to represent a method of allowing the company to purchase loans using its own balance sheet – in the style of a hybrid lender, such as OnDeck. Such a course of action would represent a significant adjustment in model. “Equity inducements” likely refers to the company giving up some equity in exchange for institutional lending commitments – a tactic that SoFi is also said to be employing. 

The 10-Q filing included the following note of caution:

“If our attempts to secure additional investor capital to meet platform origination volume are not successful, we likely may need to use a greater amount of our own capital to purchase loans on our platform compared to prior periods, particularly in light of regulatory commitments to fund loans solicited by direct mail and other contractual purchase obligations. We also may need to reduce our platform's origination volume. These actions likely will have material adverse impacts on our business, financial condition (including our liquidity), results of operations and ability to sustain and grow loan volume.”