Lending Club's latest move looks like a risky one.
The online lender, founded by Renaud Laplanche in 2006, has decided to package its loans and sell them to investors as bonds, The Wall Street Journal reports.
Lending Club, which went public in 2014, has seen its share price drop in recent months, and like the rest of the alternative lending industry, faces the prospect of increased scrutiny from federal regulators. Packaging loans as bonds could bolster the company's share price, WSJ suggests, by diversifying its revenue stream beyond fee income, which is now its bread and butter.
Lending Club started out as marketplace lender for consumers about a decade ago. Since it went public in 2014, its share price has slid more than 70 percent. It ventured into the lucrative small business lending market just over a year ago. Marketplace lenders, sometimes referred to as a peer-to-peer lenders, connect borrowers with individuals and institutions who bid with each other to make the loans.
In that regard, Lending Club's business model is different from online lenders OnDeck and Avant. These lenders make the loans themselves, using their own credit scoring models, and hold the loans on their own books. Like Lending Club, however, they also package some of their loans together and sell them to investors through bonds.
As many as two dozen online lenders repackage their loans for sale as securities, according to financial industry experts. Meanwhile, numerous online lenders have begun working with large Wall Street banks to sell their products to a wider customer base. In November, OnDeck partnered with JPMorgan Chase to provide underwriting for some of that bank's small business loans. In October, online lender Biz2Credit inked a similar deal with Customers Bank. Also that month, online lender Fundation began working with Regions Bank to offer its loans to the bank's small business owner customers. And CAN Capital and Wells Fargo have a referral partnership for borrowers who don't qualify for the bank's loans.
At least one financial services analyst questions whether Lending Club's latest move is a sound one, given the negative press that online lenders have gotten for charging high rates and lending to unworthy borrowers.
"It will be interesting to see if [Lending Club] can sell these for what they think they can get," says Christine Pratt, a senior analyst for Aite Group, a financial services industry research company.
Online lenders to businesses can charge annual percentage rates (APRs) of 50 percent or more, and they are unfettered by many of the regulations that apply to consumer lenders, Pratt says. Among those regulations is the obligation to conform to Fair Credit Reporting Act standards. As such, they may be willing to lend to businesses that are poor credit risks.
As much as two-thirds of online lending portfolios that have been sold to the market in recent months contain consolidation loans, Pratt says, which essentially are loans desperate borrowers take out to get out of other loan obligations. Such loans could jeopardize portfolios, and the bonds themselves.
Meanwhile, investor appetite for these types of bonds appears to be waning. In the first quarter of 2016, the industry sold $1.5 billion of securitized online loans to investors, The Wall Street Journal reports, a decrease of 21 percent from the fourth quarter of last year.
Pressure has also mounted recently on the alternative lending industry to become more transparent regarding lending practices, fees, and terms. Last week, a group of prominent senators sent a letter to the U.S. Government Accountability Office, asking it to take a closer look at peer-to-peer lenders and other alternative lenders that have emerged in the past few years. Securities and Exchange Commission Chair Mary Jo White, in a speech earlier this month at Stanford University, said her agency as well as other federal regulators and watchdog agencies would be examining the alternative lending industry more closely in the coming months.
A Lending Club representative said the company was in a quiet period related to upcoming earnings, and was unable to comment.