San Francisco-based Lending Club has been issued a subpoena (ordering it to attend court) from the US Department of Justice, in a case that could become a game changer for the alternative finance sector.

The online peer-to-peer lender, which offered loans and lines of credit to individuals and small businesses, is accused of misleading shareholders into believing it had strong enough internal controls to prevent questionable lending practice and ensure proper disclosures to customers.

The company’s chairman and chief executive Renaud Laplanche resigned last week following an internal probe uncovering alterations in US$3mn-worth of loan application dates, sending Lending Club’s share price down 51%. Laplanche is also accused of failing to disclose his personal interests in a fund that Lending Club was considering investing in.

Less regulated than banks, alternative financiers have been the subject of concerns from the traditional financial sector, and this case could have major repercussion on the future of the sector. GTR talked to Hogan Lovells partner Emily Reid to provide some clarity.

GTR: What impact will the subpoena have on the Lending Club’s own business?

Reid: There should be no impact on loans that have been made – borrowers will still be required to repay. The only concern would be the potential for borrowers to claim that, because of some defect in process, their agreements are not enforceable. I’ve no reason to think this will happen but the US is a very litigious place. I don’t know how the subpoena will affect the Lending Club’s business in detail but it will clearly be very disruptive. As far as I’m aware, loans can still be made as long as funds are being made available – which I gather is an issue.

GTR: Can the company recover investors’ confidence by collaborating with the investigation, or has their reputation been affected irreversibly?

Reid: If an investigation shows that this was an isolated issue and this conclusion is made available quickly, I think the impact on reputation could be limited. I imagine senior executives will be pushing for early resolution for this reason. If major lapses are identified, the damage could be significant.

GTR: What can other lenders in this space learn from Lending Club’s mishandling of the loans?

Reid: The UK industry lobbied to be regulated by the Financial Control Authority (FCA), recognising the need for protection for both investors and borrowers. Lending Club’s problems show the importance of having a compliance culture and the need for constant vigilance to maintain standards.

GTR: Do you expect any changes in regulators’ attitudes towards alternative financiers following the investigation?  

Reid: The FCA will no doubt be keen to learn from the Lending Club experience. In particular, I think it will be looking for information from P2P lenders (and others in the fintech sector) that might help to identify problems at an early stage. It will reinforce its resolve to use innovative ways to test new products in a safe environment, such as an industry sandbox, where new products and services can be thoroughly tested on real data.