Lending Club legend Renaud Laplanche was forced to give up his position of CEO and Chairman on Monday after the Lending Club board discovered a violation of the company’s business practices.
Caton Hanson, co-founder of Nav, shares his thoughts on what this means for Lending Club and the future of the alternative lending industry.
So Renaud Laplanche, CEO of Lending Club, resigned after it was discovered that the company had knowingly loaned Jefferies Group $22 million dollars’ worth of loans that it didn’t want. What’s your initial reaction?
Caton: Maybe I’m reading a little more between the lines than I should, but I feel like the real reason that the board asked for Laplanche’s resignation is that he hadn’t disclosed his stake in this other investing fund that Lending Club was considering buying into. Those involved with the internal investigation and quoted anonymously by The New York Times said that the discrepancies between what Jefferies wanted and what it got were fairly minor, but that Lending Club took it very seriously anyway and immediately bought back all the loans.
It’s still an issue, of course—it’s a compliance infraction. But it doesn’t seem like this crazy thing that came out of the blue. With Jefferies, you’re dealing with pretty savvy investors. It’s not like this happened to the consumer. Lending Club sold some loans that didn’t meet the criteria they promised. Don’t get me wrong—that’s fraud. I wouldn’t discount it or understate its importance for even a second. But I don’t want to make the opposite mistake and overstate its importance, either, because it plays into the hands of people who are invested in seeing alternative lending fail.
In some of the online commenting I’ve seen, you have more people defending alternative lending than attacking it, but the ones attacking it seem to be exhibiting a lot of schadenfreude, like, “See? We predicted this would happen.”
Caton: Well, we were waiting for this. It’s easy for me to say, “Oh, it’s not that big a deal, these were savvy investors and they should have known what they were getting into.” I think if you dig a little deeper, there really is concern. People can argue in good faith that it’s evidence that Lending Club’s loans aren’t what they say they are, they aren’t performing the way they say they are, their portfolio isn’t as good as they’re representing, they’re trying to sell off some bad loans. So maybe that does speak a little bit to that attitude of, “Uh oh, we told you so, we were just waiting for it.” On the other hand, the $22 million package sold to Jefferies represented something like 0.6% of Lending Club’s March quarter loans.
Is there evidence that the loans themselves were bad?
Caton: From what I’ve read, it had more to do with a senior manager changing dates on some of them. It doesn’t necessarily mean that they were bad loans, only that they didn’t fit Jefferies’ risk parameters, so someone forced them to fit. That doesn’t negate the fact that Lending Club bought the loans back and immediately sold them to another investor. But the internal investigation also uncovered Laplanche’s nondisclosure regarding his personal investment in this other company, and I’m pretty sure that that’s why he ended up stepping down. That’s a major conflict of interest, especially at that level. It’s a big deal either way, because he was one of the main spokespeople for the industry—a bright, passionate, eloquent guy. So for him to take a fall like that is going to have a pretty big impact on the industry as a whole.
It got caught pretty quickly. The acting-CEO, Scott Sandborn, says they’ve already put new controls into place to ensure it doesn’t happen again.
Caton: They’ve handled it probably as well as can be expected. The guys they fired aren’t getting severances. But this is coming after one of the worst recessions in American history. And you’ve got academy award winning movies telling the story of how lenders selling subprime loans destroyed the economy, and everybody’s still understandably upset, cautious and jumpy. But to say, “Oh, look, alternative lending is no good, peer to peer lending is no good,” is in my opinion a considerable overreaction.
“This is coming after the one of the worst recessions in American history. And you’ve got academy award winning movies telling the story of how lenders selling subprime loans destroyed the economy, and everybody’s still understandably upset, cautious and jumpy. But to say, ‘Oh, look, alternative lending is no good, peer to peer lending is no good,’ is in my opinion a considerable overreaction.”
Just reading comments sections at The Wall Street Journal and other places, I’ve noticed that a lot of people who use Lending Club and lenders like it are saying, “I’m making money with these guys, the interest rates are great, I’d never go back to a bank.” They’re distressed by Laplanche’s fall because it might hurt something that’s been positive in their financial lives.
Caton: Yeah, this isn’t a subprime mortgage kind of thing; these are people lending in $25 dollar increments and spreading the risk across thousands of loans. But there’s this whole other thing in the alternative lending space where we haven’t been really tested yet. There hasn’t been a recession during alternative lending’s rise to prominence. So everyone’s waiting. “What’s really going to happen, is it really going to be able to get through one of these crises?” And you can predict that the big banks, who were already hoping for alternative lending to fail, will be beating the loudest drums about this. Which is kind of hypocritical—let’s stamp out this industry that’s competing with us because one guy resigned as a consequence of doing what we’ve practically turned into an art form for hundreds of years.
I mean, imagine that Laplanche doesn’t have this secret conflict of interest and that the whole problem boils down to some senior managers changing dates on what amounts to a fraction of a fraction of Lending Club’s overall loans. So they investigate, fire a couple of people, buy back the loans from Jefferies and resell them. The headlines in that scenario probably aren’t going to be quite so doomsday. Maybe as more details come out I’ll see it differently, but for now I think that people connecting Laplanche’s resignation primarily with the changed dates, and not his non-disclosure, is distorting the story a little.
You mentioned the Zenefits story earlier as a comparison, when this thing first broke.
Caton: Right. Zenefits is a company that basically provides free HR solutions in exchange for being able to sort of broker insurance. So they’re supposed to be super compliant with all these laws. It turns out that they’re not so compliant, and the CEO, Parker Conrad, resigns, and it’s a big deal. But the focus is more on, “Are these unicorns really worth what they say they are?” It’s not, “Oh, my gosh, we knew this model wouldn’t work, let’s get rid of this technological disruption to the solid, respectable institutions who’ve already claimed this space for themselves.” The story wasn’t about that—it was a human nature story.
You mean about Parker?
Caton: Yeah. Look, we all know that technology is moving at this incredible pace, and it’s changing the ways we deal with finance, insurance, etc. Especially when it comes to ordinary people—in many ways they’re the biggest beneficiaries of all this pioneering and innovating. So as technology changes we get more and more flexible and people start coming up with brilliant alternatives to institutions that have enjoyed monopolies until now. But the one thing that doesn’t change is human nature—the one thing you can predict about alternative lending is that people are going to get greedy and hide stuff and eventually get outed and shamed. But to use that as a stick to beat the technology or the model with—that’s just hasty, and maybe a little disingenuous, too.
“As technology changes we get more and more flexible and people start coming up with brilliant alternatives to institutions that have enjoyed monopolies until now. But the one thing that doesn’t change is human nature—the one thing you can predict about alternative lending is that people are going to get greedy and hide stuff and eventually get outed and shamed. But to use that as a stick to beat the technology or the model with—that’s just hasty, and maybe a little disingenuous, too.”
That you shouldn’t put your complete trust in any one person shouldn’t come as a surprise.
Caton: You know, this whole shakeup is really probably a good thing when you think about it. Now we know of something else to watch out for or tighten—we can strengthen some of these compliance issues a little bit. But it shouldn’t be like, “Alternative lending’s gonna get it, let’s outlaw it, let’s get the CFPB involved and make sure that people can’t do peer to peer lending without a bunch of hurdles,” so that ultimately you’re forced to just go trudging back to your bank to get a loan. It doesn’t make sense. Everybody was waiting for it to happen, and it happened, and the world didn’t end. And the people the CFPB is supposed to protect, they weren’t hurt at all. Let’s keep it that way by not overreacting to predictable human frailty in a dynamic, growing market.
“The people the CFPB is supposed to protect, they weren’t hurt at all. Let’s keep it that way by not overreacting to predictable human frailty in a dynamic, growing market.”
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