(Reuters) - New York state's financial regulator is investigating the business practices of Lending Club Corp LC.N including the interest rates it charges consumers and its relationships with banks, a person familiar with the matter said on Wednesday.
The New York Department of Financial Services (NYDFS) subpoenaed San-Francisco based Lending Club asking for information about loans it issued to New Yorkers since May 17, 2013, such as underwriting standards and how Lending Club verifies borrower information.
NYDFS also wants agreements that Lending Club has with banks, including Utah-based WebBank, the person said. Lending Club has until June 21 to respond.
The probe deepens the legal storm gathering around the online lender. New York’s action is at least the second probe launched against Lending Club since its founder and chief executive Renaud Laplanche was ousted last week 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. Lending Club also said this week that it was in contact with the U.S. Securities and Exchange Commission, although the reason for those communications was unclear.
The probe by New York’s financial regulator, unrelated to Laplanche’s ouster, centers on its treatment of borrowers in New York. Lending Club said in a statement that it would cooperate fully with the investigation.
The regulator can determine whether a lender’s interest rate practices comply with the state’s usury laws, which cap interest rates at 16 percent. Lending Club charges interest rates as low as 5 percent and as high as 29 percent, according to the company’s data.
Any ruling against Lending Club could have ripple effects across the online lending industry. That is because a loan deemed usurious becomes void, said David S. Rich, a New York business litigation lawyer. The lender, in such a case, generally forfeits the principal and interest, Rich said.
In New York, charging interest rates of more than 16 percent per year is civil usury, while interest of more than 25 percent is a criminal offense.
Lending Club has previously said it is able to charge rates above 16 percent because it funnels its business via WebBank in Utah, where there is no interest rate cap.
While Lending Club makes only 8 percent of its loans in New York, a finding that ultimately voids them would be a major blow to the company when it is trying to persuade investors, many of them based in New York, to keep funding its operations.
The New York probe will also focus on whether Lending Club’s activity requires the company to be licensed to lend in the state, said the person familiar with the matter, who was not authorized to publicly discuss the inquiry. The state regulator is not presently probing other online lenders but will follow industry activity, the person said.
Lending Club is the largest of so-called marketplace lenders, which sell their consumer and small-business loans on to investors.
Last year, the 2nd U.S. Circuit Court of Appeals in New York made it easier for consumers to challenge interest rates in debt collection cases, by reviving a lawsuit in New York against two units of Encore Capital Group Inc, one of the largest U.S. debt collectors.
The court said that the units did not qualify as national banks, and did not deserve certain protections that such banks get against claims brought under state usury laws.
Amid the fallout from Laplanche’s departure, Lending Club has canceled its summer internship program, sparking outrage on Reddit after a user posted about having already secured summer living arrangements in San Francisco. Other interns made plans to travel from the east coast, the user wrote. (bit.ly/1WEkCwy)
“It’s certainly not a decision that was taken lightly, but we think it’s the most prudent course of action for everyone involved,” a Lending Club spokesman said in a statement.
Reporting by Suzanne Barlyn; Additional reporting by Joy Wiltermuth and Michael Erman in New York; Editing by Chizu Nomiyama, Bernard Orr
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