The FTC's Lawsuit Against LendingClub Could Have 'Manageable' Outcome, Says Morgan Stanley

LendingClub Corp LC shares plunged nearly 14 percent Wednesday but began to recover Thursday after the Federal Trade Commission accused the firm of deceptive practices.

Even now, though, the Street’s bulls aren’t retreating.

The Rating

Morgan Stanley analyst James Faucette maintained an Overweight rating on LendingClub with a $6 price target.

The Thesis

The FTC complaint could result in either a penalty over origination fees with “manageable” potential damages; a minor change in disclosure requirements that would minimally impact ability to convert borrowers; or LendingClub’s forced purchase of impacted loans from securitized deals, Faucette said in a Thursday note. (See the analyst's track record here.) 

Morgan Stanley considers the odds of the latter scenario occurring “extremely low.”

The stock could face pressure until remediation opportunities are announced, Faucette said. The ratio of complaints to borrowers is apparently small, which Morgan Stanley interprets as an indicator that the issues are not "endemic," the analyst said. 

“One thing that leaves us scratching our proverbial head about parts of the FTC complaint is that LC appears to use a government approved Truth in Lending Act Disclosure for loan applications, which is standard across the industry and not unique to LC."

LendingCLub said it may have already addressed some of the FTC’s concerns with changes in disclosure practices made after the investigation began.

Price Action

LendingClub shares were up 5.42 percent at $2.92 at the time of publication Thursday afternoon.

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