On December 11, 2014, VogelHood issued a note warning that Lending Club’s peer-to-peer lending business model will be subject to regulatory risk. Further analysis indicated that Lending Club made no effort to engage Washington to curb potential scrutiny into its business practices. On May 16, 2016, LC revealed it had received a Justice Department subpoena in light of disclosure of faulty internal lending controls.
Lending Club has no Washington presence
- The Lending Club does not have any in-house lobbyist in Washington, nor does it have any lobbying firms on retainer. Lending Club also does not have a Political Action Committee (PAC). Lack of engagement with important members of Congress and issues is likely to leave the company in a compromising situation should a policy threat arise.
- By comparison, Wells Fargo, who has been reported to be concerned about the rise of Lending Club’s business model, has spent $4.75 million on lobbying in the first three quarters for 2014 and has a company Political Action Committee (PAC) which has donated $2.35 million to candidates in the 2014 election cycle.
- On January 20, 2014 the Financial Times reported, “Tensions between banks and peer-to-peer platforms have arisen because the P2P model cuts traditional lenders out by matching capital directly with borrowers.”
- Wells Fargo has rejected the notion of any threats originating from Lending Club’s business however, the company has barred employees from investing in loans made by Lending Club and other peer-to-peer lenders.
- Lending Club’s loans are regulated under WebBank’s industrial loan charter. While WebBank is FDIC insured, the company also has no presence in Washington.
Lending Club faces complex regulatory regime; policy threats abundant
- Lending Club’s regulatory regime is different than traditional banks because it is not a depository institution. However, Lending Club is still subject to state and federal securities laws, lending law and consumer protection laws. Lending Club must comply with the Truth in Lending Act, Equal Credit Opportunity Act, Fair Credit Reporting Act, and the Fair Debt Collection Practices Act.
- Lending Club touts its partnership with WebBank, an FDIC-insured bank, on its website. This relationship could be construed by a retailer investor to mean that the loans to which he or she lends money are also FDIC-insured. Lending Club is not a depository institution and no deposits or loans are insured.
- Congressional lawmakers or the Consumer Financial Protection Bureau may eventually find this point of confusion as justification to subject Lend Club and other peer-to-peer lenders to additional regulation.
Regulatory threats regarding Springstone
- Lending Club also faces regulatory scrutiny through the companies that it acquires and the various businesses they are engaged in. On the company’s most recent 10Q statement dated September 30, 2014, Lending Club reports, “We received a Civil Investigative Demand from the Consumer Financial Protection Bureau (“CFPB”) dated June 5, 2014 related to the operations of Springstone.
- The purpose of the investigation is to determine whether Springstone is engaging in unlawful acts or practices in connection with the marketing, issuance, and servicing of loans for healthcare related financing. As of September 30, 2014, we had provided all of the documents requested by the CFPB.”
Samir N. Kapadia
Senior Vice President, VogelHood Group