TREE LendingTree Inc

Online lender Prosper Marketplace Inc. has stopped courting new borrowers from at least two large loan referral websites, according to people familiar with the matter, the most recent sign of how funding woes are leading online lenders to slow down sharply.

Prosper has put its relationship with LendingTree Inc. and Credit Karma Inc. on hold as it tries to shore up new deals with investors to buy loans, the people said. The websites serve as platforms where millions of consumers shop for personal loans and other financing, while comparing pricing and other terms between lenders.

The moves by San Francisco-based Prosper follow problems at larger rival LendingClub Corp., whose board pushed out CEO Renaud Laplanche last month and which took steps this week to tighten loan underwriting standards to an extent that could decrease loan volume by about 5%.

Prosper and competitors including LendingClub for years have relied on websites like LendingTree and Credit Karma to help grow volume. The two sites are among the largest for comparison shopping, drawing consumers who shop for personal loans as well as auto loans and credit cards. Consumers select a lender they find through the sites and begin an application with that company. Lenders generally pay the websites a certain percentage of the loan volume they receive.

A pullback in these relationships shows one result of lenders continuing to face challenges finding investors to buy their loans. Prosper's lending volume is expected to be down again in the second quarter after falling 12% in the first quarter from the fourth quarter of 2015, people familiar with the company said.

Unlike banks and some other finance companies, marketplace lenders such as Prosper and LendingClub don't have customer deposits or big balance sheets to fund loans.

"We use a variety of online and offline marketing channels and we are able to quickly and efficiently adjust those channels to best match borrower and investor demand," noted Prosper CEO Aaron Vermut in a statement. "This ensures we maintain equilibrium, which is the No. 1 priority when running a marketplace business."

The online lender stopped buying leads from Credit Karma last month after making a similar move with LendingTree earlier in the year, some of the people said.

LendingClub also scaled back in May after its CEO resigned, though it has continued to buy loans from both websites, according to people familiar with the matter.

It is unlikely that the pullback by the two lenders will hurt LendingTree and Credit Karma, since both sites offer leads for many consumer loan categories beyond general-purpose loans. In other categories such as car loans and credit cards, LendingTree and Credit Karma rely largely on banks. LendingTree also has a large mortgage-shopping platform. Many banks and other lenders have also expanded their personal loan businesses in the last couple of years and are using the sites for leads.

"Our business moves in tandem with the collective demand of all of our lenders instead of any individual ones," says Doug Lebda, LendingTree's CEO.

If the slowdown in the sector broadens, however, it could become an issue. LendingTree's stock has been a strong performer, rising about 45% over the last year while shares of LendingClub, the biggest public marketplace lender, have sunk about 75%.

The industry's growth was already slowing down due to a hiccup in investor demand when LendingClub's Mr. Laplanche resigned following a number of disclosure failures at the company—including falsification of loan data. That has led investors to broader questions about online lenders.

Prosper wants to limit the number of borrowers as it searches for more investor capital. The company wanted to be sure it could fund loans where it had already promised preapproval, according to people familiar with the company.

The lender is also working with investment bankers to arrange deals with investors who expressed interest in purchasing loans, the people said. Mr. Vermut said in May that the company is "having some productive conversations with potential loan buyers."

Already, Prosper has cut its costs back substantially by laying off 28% of its employees and closing a Utah office.

Write to AnnaMaria Andriotis at annamaria.andriotis@wsj.com and Telis Demos at telis.demos@wsj.com

(END) Dow Jones Newswires

June 08, 2016 12:45 ET (16:45 GMT)

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