LendingClub's pullback amplifies consumer debt-load worries

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LendingClub is the latest U.S. lender to tighten its credit standards, amplifying concerns that riskier borrowers are taking on too much debt.

Citing worse-than-expected performance on loans to customers with checkered credit histories, the San Francisco company said this week that it plans to start approving a more creditworthy mix of borrowers going forward.

The move displeased Wall Street analysts, who worry that that it will shrink loan yields and hurt LendingClub’s bottom line. The company’s shares plunged 16% Wednesday to close at $4.59 after senior executives provided weaker-than-expected revenue guidance for the fourth quarter.

LendingClub specializes in making unsecured personal loans of up to $40,000, which its customers often use to refinance their credit card debt. There is nothing to stop such borrowers from racking up new credit card debt, which over time can become unmanageable.

U.S. household debt hit $14.8 trillion in the first quarter of 2017, up $1.4 trillion from a decade earlier, according to a recent report by the ratings firm Standard & Poor’s. The S&P report stated that low interest rates have encouraged consumers to shoulder more debt in recent years, and it raised the question of whether borrowers will be able to meet their obligations if rates rise substantially.

The decision by LendingClub to tighten its borrowing criteria for personal loans follows similar actions by competitors Discover Financial Services and Prosper Marketplace.

Discover reported that 3.19% of its personal loans were charged off in the third quarter, up from 2.63% in the same period a year earlier. The Riverwoods, Ill.-based firm vowed to curtail originations to certain less-creditworthy borrowers.

Prosper has tightened loan criteria in its higher risk segments after borrowers began to show signs of stress in late 2015 and early 2016.

Lending Club has narrowed its own lending criteria several times in the last two years. In a conference call with analysts on Tuesday, CEO Scott Sanborn explained the company’s latest tightening in the context of the broader U.S. credit sector.

“The economy remains healthy,” Sanborn said. “At the same time, consumer debt levels have continued to increase as credit supply has returned to the market, and losses have risen from their post-recession lows.”

LendingClub said Tuesday that its third-quarter revenue climbed 24% from the same period last year, to $154 million. It said it expects revenue this quarter to climb to between $158 million to $163 million, which is below what investment analysts had been predicting.

For LendingClub, the risk that borrowers who are overstretched will default on their loans is not the only reason why it is dialing back expectations for revenue growth.

A second concern involves borrowers who receive a less expensive offer from another lender and repay their LendingClub loans before the end of the three-year or five-year terms. Such prepayments reduce the returns to investors who bought the loans from LendingClub’s online platform.

“These customers are being marketed pretty aggressively, and we are seeing a slightly elevated level of prepayments,” LendingClub Chief Financial Officer Thomas Casey said during Tuesday’s conference call. “So it’s not just credit.”

Another potential problem is that LendingClub will increasingly have to compete with banks, which can fund their loans through low-cost deposits, for a smaller pool of more creditworthy borrowers. That dynamic could drive up customer acquisition costs, which have long been a problem for online lenders.

“Although the overall market remains large and borrower acceptance of online loans continues to grow, the competitive environment continues to reintensify,” Michael Tarkan, an analyst at Compass Point Research & Trading, wrote in a research note.

Sanborn downplayed that concern. He noted that the specific categories where LendingClub is tightening its borrowing criteria comprise just 3% of the company’s total loan volume.

“And our application volume in the quarter was up over 50%,” he said. “So borrower demand overall is very, very high.”

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