‘Bad Delivery’

LendingClub and its competitors match borrowers with people who want to finance them over the Internet. The ventures have been struggling recently to shore up investor confidence in their ability to quickly vet borrowers and set interest rates that reflect risks. That’s key to maintaining the young industry’s rapid growth.

By the end of Tuesday, at least seven analysts had cut their recommendations this week for LendingClub’s stock. Only six of 19 tracked by Bloomberg still recommend buying it.

“The more we learn, the less we understand about the actions taken by the board,” Henry Coffey, an analyst at Sterne Agee CRT, wrote in a note to investors after cutting his rating to “underperform.”

LendingClub bought back loans with altered dates from the buyer, Jefferies, and could’ve handled the incident internally as a “bad delivery,” he wrote. Laplanche’s other alleged sin stemmed from his investment in a fund that bought LendingClub’s own products. “Again why was this not simply treated as a misstep in disclosure?” Coffey wrote.

‘Tide Turning’

The scandal landed at a precarious time for online loan platforms after their explosive growth. U.S. regulators have been increasingly scrutinizing the industry. On Tuesday, the Treasury Department released a study, saying the ventures need to be more transparent about practices and subject to additional government oversight. At the same time, many buyers have been reassessing the quality of the loans.

Blue Elephant Capital Management, an investment firm that has securitized loans from Prosper, hasn’t bought significant amounts of online loans to consumers since September, said Brian Weinstein, a managing partner. Back then “we thought low rates and high volumes would lead to trouble,” he said.

With LendingClub potentially spooking other investors, his firm is looking for an opportunity to dive back in, he said. For example, bonds already issued may become cheaper, or the platform may have to boost interest rates.

“The tide is turning in favor of loan buyers,” said Weinstein. “If nothing else, this will refocus marketplace lenders away from maximizing volume and toward better underwriting standards.”