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Why you shouldn't panic about the Lending Club scandal

This commentary was originally published on Medium.com.

So the CEO of Lending Club resigned. I wasn't expecting that. Folks have talked about how new, smaller marketplace lenders could make mistakes that impact the entire industry. Today, it appears to have come from the market leader.

So, what's going on?

Lending Club founder and former CEO Renaud Laplanche
Getty Images
Lending Club founder and former CEO Renaud Laplanche

It appears that an internal loan review, called for by the Lending Club Board, found irregularities in $22 million worth of loans geared towards one specific buyer. The irregularities were non-credit and non-pricing in nature. It also appears that at least one person internal to Lending Club had an economic interest in a loan portfolio, which was not disclosed. The board apparently took swift action upon the findings. And the CEO resigned.

What does this mean for the industry?

The situation and its implications are fluid, but here's what we know

1. Lending Club's fundamentals appear strong. This is important for the industry, because as the largest marketplace lender, they are looked to as a bellwether for industry health. They meet street expectations every quarter. This quarter was no exception. In fact, it was the first quarter of positive EPS. A milestone that would have likely been the focus of today's news if not for the resignation announcement. From a purely performance-based standpoint, this was a positive signal.

2. Renaud Laplanche will be missed. He is not the first CEO in finance to resign, but he was the face of Lending Club and viewed as the godfather of peer-to-peer, the steward of marketplace lending. And now he's gone. This was unexpected. Markets don't like "unexpected".

3. Folks will jump to conclusions. What will we learn about the Lending Club loan irregularities? Therein lie perhaps the most forward-looking implications. Will this turn into an internal personnel issue or a more widespread marketplace lending issue? It appears to be the former, but not all the dust has yet settled. The initial reaction of the market is typically cautious, and Lending Club stock is down over 30 percent today as a result.

In the immediate term, we'll probably see more headlines that drive clicks and sell papers. But ultimately, fundamentals — not headlines — will win. If you believe in efficient markets — even semi-efficient markets — that's what happens.

Over time, the platforms in finance — marketplace lending or otherwise — that serve the customer better than others, offer investors solid risk-adjusted returns transparently, and demonstrate strong unit economics will win.

Renaud might be leaving an industry he helped create, but he's not taking the fundamentals with him.

Commentary by David Klein, CEO and co-founder of CommonBond, a fintech lender that has focused on funding and refinancing student loans. Prior to CommonBond, Klein worked in consumer finance at American Express, as director of strategic planning and business development. He started his professional career as a consultant at McKinsey & Company, where he advised clients in the financial services industry. Klein graduated from Brandeis University with a BA in Politics, Economics and International Business, and attended the Wharton School at the University of Pennsylvania. Follow him on Twitter @DavidXKlein.

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