Are Changes Coming To The P2P Lending Model?

LendingClub was the first peer-to-peer lender to file for an IPO and raised $900 million in 2014 – marking the largest U.S. tech IPO of the year. The company's peer-to-peer model introduces loan seekers to individual investors who offer loans at a typically higher interest rates versus what banks and other traditional lending institutions offer.

In a report published Monday, Michael Tarkan of Compass Point maintained a Sell rating on LendingClub with a $12 price target as investor appetite is "evolving" to account for the Madden v. Midland case.

"The Madden v. Midland case, which called into question federal preemption laws for non-bank institutions in NY, CT, and VT, has reportedly been driving changes in investor demand for marketplace loans originated in those three states," Tarkan explained.

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"Specifically, marketplace lender Avant, as well as Bank of New York Mellon and Prospect Capital, have reportedly considered pulling loans within securitization pools to avoid interest rate usury issues. Goldman Sachs, Credit Suisse, and JP Morgan have also reportedly contemplated limiting exposure to loans originated in those states. And rating agencies Moody's and Fitch have recently cautioned investors over the same topic."

LendingClub's Management's Take

However, LendingClub's management continues to state that its operations has seen "essentially no impact" following the Madden ruling in states where it operates. Management also noted that it is "having no trouble" funding loans in New York, Connecticut and Vermont and that it continues to see "plenty of investor interest."

Impact On Retail

With that said, Tarkan questioned where this leaves the retail investors. The analyst suggested that if what the company's management has said is true, retail investors "may be at a disadvantage" relative to institutional investors.

In fact, demand from the "more sophisticated institutional segment" has evolved to the point where some investors are completely avoiding these loans to avoid any potential "unforeseeable issues."

Tarkan continued that firms like LendingClub are evaluating changes to their business structure to avoid any Madden-related issues. However, if LendingClub were to institute state interest rate caps, it could drive lower volume, lead to increased credit, interest rate risk for investors and elevated funding risk for the company.

Looking Ahead

While Tarkan acknowledged that the Madden case does not "force" the company to alter its current loan issuance model, recent instances of institutional investors avoiding loans within the Madden-related states "serves as a signal" that changes to the current framework are ahead. As such, near-term disruption and/or weaker loan-level economics "will be inevitable."

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