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Why LendingClub Corp Stock Plunged Today

By Jordan Wathen – Updated Apr 25, 2018 at 4:00PM

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A run-in with a regulator could cost the company precious time and money.

What's happening?

Shares of peer-to-peer (P2P) lending company LendingClub Corp (LC 3.48%) are down by about 15% as of 3:30 p.m. EDT after the Federal Trade Commission charged the company with deceiving customers.

The FTC said the P2P lender falsely promised consumers they would receive a loan with "no hidden fees," and that their loans would be funded by investors, when these statements weren't necessarily true, among other allegations.

So what

The FTC alleges that LendingClub is aware of the confusion caused by its marketing materials and website. In an internal compliance review, the online lender stated that "the origination fee is disclosed on the offer page tooltip, but is not readily apparent unless an applicant clicks on the tooltip. This omission could be perceived as deceptive as it is likely to mislead the consumer."

In its complaint, the FTC highlighted one instance where a borrower requested a loan for $15,000 to cover relocation expenses, but was surprised when he only received $14,000 due to an unexpected upfront fee of $1,000. 

The regulator also said that the lender told applicants their loans would be funded, even when the company knew an applicant may not qualify for a loan. The FTC wrote that "based on these misrepresentations, consumers believed that [loan proceeds] were forthcoming, and did not apply for credit with [LendingClub's] competitors."

$100 bills in glass jar

Image source: Getty Images.

In a press release, LendingClub said it "believes that the allegations in the FTC's complaint are legally and factually unwarranted." The company explained in a blog post that it uses a "government-approved form called the Truth in Lending Act Disclosure, which allows borrowers to know exactly how much their loan will cost them."

LendingClub wrote that while it had sent emails to customers saying their loans were 100% backed by investors in 2015, the emails were sent in error. It said that these emails were sent "just 88 days before LendingClub discovered and proactively corrected the error."

The company addressed two other complaints related to unauthorized withdrawals from its clients' bank accounts and privacy notices in its blog post.

Now what

LendingClub has already faced its share of problems in its short life as a public company. In 2016, it disclosed that an internal review uncovered $22 million of loans that were sold to investors despite the fact they did not meet the investors' criteria. That review began when its board of directors found that application dates on $3 million worth of loans had been changed, presumably in an effort to make them fit within the investors' requirements.

The online origination platform has struggled to balance the need to drive volume (which drives fee income) without sacrificing credit quality. The company has tightened its underwriting to make fewer loans to riskier borrowers, believing that doing so would increase returns for investors who buy loans from its platform, but those moves cost it much-needed origination volume and related fee revenue.

LendingClub wrote that it "intends to oppose the claims and work toward an early resolution of the matter in Federal Court," but the FTC's suit could be yet another distraction at a time when the company is struggling to grow in ways that are profitable for itself, and its loan buyers, too.

Jordan Wathen has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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