Slideshow A Spring to Forget for Marketplace Lenders

  • May 12 2016, 9:00am EDT
8 Images Total

Digital upstarts that seemed on top of the world a few months ago have suffered a series of setbacks of late that raise questions about their long-term survival. Here's a look at the developments that have brought some once-high-flying online lenders back to earth.

Related: Online Lenders' Stumbles: Growing Pains or Flawed Model?

Small-Business Borrowers Are Unhappy

A report from seven Federal Reserve Banks in March found that applicants appreciated online lenders' quick decision-making but chafed at their repayment terms and interest rates. The result: only 15% of the small-business owners approved for loans from online lenders were satisfied with the borrowing experience.

Related: Small Businesses Are Unhappy with Online Lenders

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Funding Is Drying Up

At the surprisingly downbeat Lendit conference in April, executives at some top marketplace lenders warned of a looming shakeout in marketplace lending as hedge funds and other investors — spooked by rising delinquencies — have pulled their money from the sector. Chicago-based Avant, which specializes in subprime consumer loans, is offering tours of its loan-servicing operations in an effort to assuage investors' concerns. "We're all hands on deck," said Chief Operating Officer Adam Hughes.

Related: Funding Anxieties Threaten Marketplace Lending's Growth

OnDeck Investors Head for the Hills

Shares of OnDeck Capital had been declining steadily for months, but they've been in a freefall since May 2, when the small-business lender reported a surprising $12.3 million loss in the first quarter and said it could lose up to $49 million this year — after it had previously predicted a profit of $10 million to $14 million. Chief Executive Noah Breslow attributed the results to a lack of interested buyers for its loans (see previous slide), which forced it to hold more loans on the balance sheet. OnDeck shares are down more than 40% since the beginning of the month and more than 80% since its December 2014 initial public offering. They were trading below $5 midday Wednesday.

Related: Why Institutional Investors Are Shunning Online Lenders

Prosper Slashes More Than 25% of Its Workforce

The San Francisco firm said last week that it is laying off 170 of its 619 employees as it, too, struggles with slowing growth due to investors' waning interest in the sector. CEO Aaron Vermut will forego his salary for a year, and the firm will close its operations in Utah, where it had been planning an expansion into offering consumer loans at the point of sale.

Related: Online Lenders' Stumbles: Growing Pains or Flawed Model?

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Shake-Up at Lending Club

Lending Club founder and CEO Renaud Laplanche abruptly resigned on May 9 amid accusations that top executives falsified documents related to a pool of loans sold to an investor. The news was a blow not only to Lending Club — whose shares plunged 35% that day — but also to the industry, which lost one of its most visible leaders. Some experts also suggested that improprieties at Lending Club could further sour investors on marketplace loans and hasten regulatory scrutiny of the sector. President and Chief Operating Scott Sanborn has been named acting CEO.

Related: Lending Club Mess Raises Fresh Fears About a Market's Rapid Growth

States Seize Initiative

With the federal government yet to regulate online lenders, three states -- Illinois, California and New York — are taking matters into their own hands. In Illinois, lawmakers have introduced a bill that would prohibit small-business lenders from making loans in which monthly payments exceed 50% of a borrower's monthly net revenue. If passed, the bill would be the toughest of its kind in the nation. Meanwhile, in California, the state's Department of Business Oversight this week sent pointed queries to 14 online lenders asking for detailed information on their underwriting practices and referral-fee policies as well as proof that they are complying with fair-lending laws. The results of this inquiry could lead to increased regulation of the sector. "These online lenders are filling a need in today's economy, and we have no desire to squelch the industry or innovation," Jan Lynn Owen, the department's commissioner, said when the probe was launched late last year. "We have a duty, however, to protect California consumers and businesses, and they have more and more at stake as this industry grows."

Related: Online Lenders Queried by Regulators on Referral Fees, Bank Deals
States Seize Initiative on Oversight of Online Business Lenders

... But the Feds Have Their Own Ideas

The Treasury Department on Tuesday released a 45-page white paper that laid out recommendations for regulating the marketplace lending sector and called for stronger protections for small-business borrowers in particular. But industry representatives quickly rejected the idea that small businesses should be treated like consumers, arguing that a new law would restrict small firms' access to credit. It's a battle that's likely to get more heated in the months ahead and could ultimately be decided by which parties win the White House and the Senate in the fall.

Related: Marketplace Lenders Draw Line in Sand: No Legislation
Treasury Pushes for Tighter Controls on Marketplace Lenders