It might take the US Supreme Court to turn things around for investors in online lenders.
Shares of Lending Club and On Deck Capital have both fallen by around 50% and LoanDepot withdrew its IPO last week, citing market conditions.
This stems from rulings against the industry that could block them from using out-of-state banks to charge higher interest rates than are currently allowed by anti-usury laws.
“The case has significant implications … for a wide variety of other lending programs and arrangements that rely on the originating bank’s preemptive authority under federal law to charge interest rates and fees greater than those permitted under otherwise applicable state law,” lawyers at Ballard Spahr said in a note.
A number of lenders had been making loans in New York, Vermont, and Connecticut using a bank in Utah called WebBank.
The practice, dubbed “exporting” interest rates, means the ultimate loan is being made in Utah, even if the borrower is in New York. As a result, companies like Lending Club can charge rates that are higher than New York’s usury laws allow. Lending Club said on its August earnings call that 12.5% of its loans cross borders this way.
Of course, a lot of things have to go investors way on this for it to become a real catalyst for shares — starting with the very simple fact that the Supreme Court first has to decide to hear the case.
It could make that decision as soon as early 2016 Ballard Spahr predicts.
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