New York state's
financial regulator, which recently launched a probe into LendingClub Corp, is
preparing to look into the activities at other online lenders and whether they should
be licensed in New York, a person familiar with the matter said on Wednesday.
The New York Department of
Financial Services (NYDFS) has not yet established which companies it may
target, but information it receives in response to a May 17 subpoena sent to
LendingClub, one of the largest online lending services, could shed light on
broader industry practices that require scrutiny, said the person, who was not
authorized to discuss the issue publicly.
Last week, NYDFS subpoenaed
San-Francisco based LendingClub, a so-called peer-to-peer lender, asking for
information about loans it issued to New Yorkers since May 17, 2013.
Information demanded by the regulator includes interest rates that LendingClub
charges, underwriting standards and details about how the company verifies
borrower information.
LendingClub has until June 21 to
respond. It has said it will cooperate fully with the investigation.
Hailed as a "fintech"
rival to traditional banks in the wake of the financial crisis, lenders like
LendingClub enjoyed rapid growth and attracted plenty of investor dollars
through their promise to provide quick and cheap unsecured personal and
business loans online. Unlike banks, which retain some of the risk from the
loans they make, marketplace lenders sell the loans on to hedge funds, pension
funds or individual investors.
U.S. regulators have taken baby
steps so far to regulate the sector with the Treasury this month calling for
greater scrutiny.
The NYDFS can determine whether a
lender's interest rate practices comply with the state's usury laws, which cap
interest rates at 16 percent. LendingClub charges interest rates as low as 5
percent and as high as 29 percent, according to the company's data.
LendingClub, which is not licensed
in New York, has previously said it is able to charge rates above 16 percent
because it funnels its business via WebBank [WEFNB.UL] in Utah, where there is
no interest rate cap.
Broader examination of the
industry by NYDFS could lead to licensing requirements for online lenders in
the state along with additional oversight of business practices and loan terms.
The ramped-up scrutiny could
trigger headaches for other leading online lenders such as Prosper, the
second-largest marketplace lender, and Ondeck, among others. Prosper, which
declined to comment, does not have a New York license, according to its
website. It is unclear where Ondeck is licensed, and a representative did not
immediately return a call requesting comment.
The entire industry is already
smarting from weakening investor appetite for their loans as defaults rise.
New York's action is at least the
second probe launched against LendingClub since its founder and chief
executive, Renaud Laplanche, was ousted earlier this month after an internal
probe found the company had falsified documentation when selling a package of
loans.
The U.S. Department of Justice
launched an investigation into the events leading up to Laplanche’s departure.
LendingClub has also said that it was in contact with the U.S. Securities and
Exchange Commission, although the reason for those communications was unclear.
(Reporting by Suzanne Barlyn; Additional
reporting by Heather Somerville in San Francisco; Editing by Carmel Crimmins
and Matthew Lewis)
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