In the wake of rising defaults, NYDFS wants to ensure whether these fintech companies have done their due diligence and are in compliance with the state’s various statutes. LendingClub has also mentioned that it is in talks with the SEC. It has however not clarified the need and the context.
As per a person who is familiar with the matter at hand, financial regulators from the state of NY have launched a probe into the workings of LendingClub Corp and is currently preparing to launches probes into the activities of other online lenders, who are licensed to lend in the state of New York, as well.
According to a source who preferred to be anonymous since he was not authorised to speak to the media, although the New York Department of Financial Services (NYDFS) has yet to specifically target any online lending company, depending on the results of its May 17 subpoena it sent to LendingClub, it will decide whether it will broaden its investigation into lending practices of the industry which might need scrutiny.
Last week, the NYDFS subpoenaed San-Francisco based LendingClub, which follows a peer-to-peer lending system, for more information including the interest rate it charges, details on how it verifies borrower’s credit worthiness and its underwriting standards.
LendingClub has said it will fully cooperate with the investigation. It has until June 21 to respond to the subpoena.
In the wake of the financial crisis, companies like LendingClub have enjoyed robust growth rates and have attracted tons of investment dollars through their promise of cheap unsecured personal and business loans. Hailed as “fintech” companies, unlike banks which retain some of the risks from the loans they provide as profit, they sell the loans to pension funds, hedge or even to individual investors.
So far U.S. regulators have only taken baby steps to regulate the sector with the Treasury however calling for greater scrutiny into the sector.
The NYDFS can determine the maximum interest rate and check whether the interest rates charged comply with the State’s usury laws which cap it at 16%. As per LendingClub’s data, the interest rates that it charges varies from 5% to 29%.
Incidentally, LendingClub is not licensed in the State of New York. It had stated previously that it can charge interest rates above the stipulated rates since it routes its business via WebBank in Utah, which has not capped interest rates, so far.
Depending on what it finds during the probe, the NYDFS’s investigation into LendingClub could result in licensing requirements be imposed on online lenders with additional oversight of loan and business terms.
This additional scrutiny could act as a trigger for headaches for other online lenders including Ondeck and Prosper, which is the second largest online lender in the market.
The investigation by the NYDFS comes in the wake of the entire industry smarting from reduced investor appetite as loans that have given are seeing a gradual rise in default.
This action by the NYDFS is at least a second time regulators are probing LendingClub and its CEO Renaud Laplanche, who was earlier ousted after an internal probe found that the company had falsified documentation in the loan packages. The outcome of an earlier investigation had resulted in Laplanche’s departure.
Meanwhile LendingClub, in what could be a slip, has disclosed that it was in contact with the U.S. Securities and Exchange Commission. The need and reason for such communication is however unclear and wasn’t clarified.