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It seems all the dominos from Lending Club's internal control lapse haven't quite fallen yet. Bloomberg reports that banks are seeking to scale back their lines of credit to institutional investors who fund loans from online lending platforms. Eager to avoid repeating the same mistakes of the subprime crisis, banks’ risk committees are looking at how they might reduce, renegotiate, or even cancel funding agreements with investors.
"This is noise banks want to avoid," said Allard, who heads FireBreak Capital, a hedge fund that focuses on lending. Wall Street firms are particularly concerned about the short-term funding they provide to investors to help them buy online loans that are usually packaged quickly into bonds and sold to other fund managers, the people with knowledge of the reviews said. Known as "warehouse lines of credit," this form of financing triggered billions of dollars of losses for banks during the subprime crisis. Starting around 2007, mortgage companies that had planned to bundle their loans into bonds found that investors wouldn’t buy their securities. The companies couldn’t pay off the short-term financing from banks that funded their home loans.
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