MARY LOUISE KELLY, HOST:
OK, to news now of a scandal rocking the financial industry, or, more precisely, a small but important part of that industry - online lending. Lending Club, one of the first companies to link borrowers and investors directly online, is in trouble. The CEO resigned. Investors were lied to. NPR's Aarti Shahani reports.
AARTI SHAHANI, BYLINE: The scandal started with a very big no-no. Employees of Lending Club went into the company database and doctored loan applications to make them look better.
PETER RENTON: Once the loan application has been made, that data is sacred. That data should never be tampered with, never should be touched in any way.
SHAHANI: Peter Renton is a mover and shaker in the online lending world and an investor. In the case of Lending Club, that means he puts his own money into the loans that go out to borrowers. And, he explains over Skype, he doesn't want to be lied to.
RENTON: And that's been the most damning thing. If investors can't trust what Lending Club is telling them, then they don't want to invest.
SHAHANI: That said, Renton is not pulling out. While Lending Club has problems, he says, so does the entire fintech industry. Fintech is a compound word - fin for finance, tech for technology. And when fintech first rose up to challenge big banks and give consumers more choice, the startups paid more attention to the tech part, making nice easy-to-use apps. Now, with Lending Club's fall from grace...
RENTON: That thinking has completely changed in the last month. These companies now say we are in the finance business first and foremost.
SHAHANI: Sounds like a pretty obvious revelation. They are dealing with billions of dollars, not Facebook post or tweets. Lending Club discovered the employee misconduct internally and disclosed it. The company is now under investigation by New York's bank regulator and the Justice Department. For Renton, the main lesson is oversight, like banks have.
RENTON: If you don't have oversight so the regulation is actually being implemented and adhered to, then there's a problem.
SHAHANI: A smaller rival of Lending Club has a different takeaway. According to Al Goldstein, CEO of a company called Avant, the problem is the business model itself. Lending Club makes money by being a middleman, pairing investors and borrowers. If they'd had their own money in it - weren't just a platform for other people's money - they'd be a lot more rigorous at managing that money. He explains over Skype.
AL GOLDSTEIN: If the online lending companies actually had skin in the game and were holding loans, they would have substantially more at stake to make sure that their processes were sound. And you wouldn't have the same kind of issues that we've seen happen.
SHAHANI: Lending Club announced this week they're getting stricter about the loans they make and setting higher interest rates. It's not that borrowers did anything wrong. There was no spike in defaults or missed payments. But investors are turned off. And the company says it needs to court them with higher returns. Aarti Shahani, NPR News, San Francisco.
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