Michael P. Regan is a Bloomberg Gadfly columnist covering equities and financial services. He has covered stocks for Bloomberg News as a columnist and editor since 2007. He previously worked for the Associated Press.

Let's go out on a limb and say that if you own the stock of a company, this is not exactly what you want to hear on the post-earnings conference call. From the transcript:

Unverified Participant: Thank you, James. So, let me start out by explaining who I am and why I am on the call this morning.

Please do explain, Mr. Unverified Participant, we're all dying to hear! This unverified soul on LendingClub's conference call was Hans Morris, a board member and chairman of its risk committee who was just promoted to the new role of executive chairman. He was on the call to explain why the founder and chief executive officer, Renaud Laplanche, and other executives were getting kicked out of the club over a hodgepodge of head-scratching discoveries, including irregularities involving $22 million in near-prime loans sold to an investor, a change in application dates on some loans to make them eligible for sale to the investor and failure to disclose an executive's personal interest in an investment fund that bought loans from the company. 

Borrowing Remorse
LendingClub's stock had already been punished by investors
Source: Bloomberg

All of his explaining may have only raised more questions than it answered, and LendingClub's shares were pummeled as a result, falling 26 percent on Monday to extend the stock's slump to 65 percent from its 2014 IPO price of $15. The shares had already down by about half, so it's clear that the seas were already angry at the sailing enthusiast Laplanche. 

The announcement serves as the latest broadside to the stocks of online lenders after On Deck Capital's disappointing financial results caused heavy selling last Monday. 

Both firms rely on a "peer-to-peer" model in which borrowers are matched with investors looking to profit by providing the capital for the loan. On the borrowing side, while growth in demand for loans was below some of Wall Street's estimates this quarter, it was still clearly robust. Almost $2.8 billion in loans were originated in the first three months of the year -- including at a clip of $99 million a day or more on its two busiest days.

Crowded Club
LendingClub's loan originations reached almost $2.8 billion in the first quarter.
Source: Company presentation.

It's the other side of the peer-to-peer equation that's coming under scrutiny. In other words, can companies like LendingClub and On Deck find enough investors to fund the loans? One of the metrics that investors focused on last week with OnDeck was that it only sold 26 percent of its loans on its Marketplace and relied on credit facilities to keep the money flowing to borrowers.

In LendingClub's case,  the mix of funding also shifted to rely more on banks and self-directed retail investors and less on dedicated funds and nonbank institutional investors:

Mix and Match
The mix of funding for LendingClub loans shifted toward more banks and other financial companies
Source: Company presentation

Now, volatility in financial markets in the first quarter certainly played a role. Fund managers who buy the loans faced a high level of redemptions during the quarter, acting CEO Scott C. Sanborn said on the company's earnings call. Meanwhile, he said, the market swings apparently didn't bother self-directed retail investors, who increased their share of funding thanks in part to a new relationship with Millennium Trust.

Still, coupled with On Deck's report last week, Lending Club's news of irregularities and the shifting funding mix call into question how online lenders will meet surging demand from borrowers in a way that one day results in consistent profits. And, as Compass Point Research & Trading analyst Isaac Boltansky pointed out, it's likely to result in more intense scrutiny from regulators such as the Securities and Exchange Commission and Consumer Financial Protection Bureau. If the industry leader is playing fast and loose, what does that say about the others? 

It's possible that the risk-off sentiment that spooked some loan investors in the first quarter might have proved to be a temporary problem. But Lending Club just gave them some good reasons to remain spooked. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Michael P. Regan in New York at

To contact the editor responsible for this story:
Daniel Niemi at