Lending Tree has a mellow and inviting front page with the consumer-friendly tag-line, “Apply in Minutes, Know within Hours.” It looks like a place offering genuine assistance, not simply trying to make a buck off page impressions.

On the right side of the screen is a customer testimonial followed by a table of features. In the lower righthand corner a scrolling “ticker” lists participating lenders, an important credibility builder.

Finally, the two calls-to-action at the bottom, “Start Looking for a Loan,” and “Check your Loan,” engage the target market immediately.

Lending Tree Participating Lenders

American Finance & Investment

Bann-Cor Mortgage

Eastern Mortgage

Greenpoint Mortgage

The Money Store

National City

Pacific Capital Mortgage

PNC Bank

YES Capital Funding

Zions Bank

Source: company, 6/30/98

Launch Date: Applications first taken February 18, 1998. The company was launched in 1996, originally operating under the name CreditSource USA.

End-User Cost: $0

Target Market: Consumers looking for vehicle loans, first mortgages, and/or second mortgages.

Lending Tree compares itself to online competitors.

How it Works:

1. User visits www.lendingtree.com .

2. User completes secure online loan application that takes less than 15 minutes according to the company.

3. Lending Tree pulls a credit score from TransUnion and classifies the application from sub-prime to A+.

4. Lending Tree sends the application and credit score to a maximum of four lenders interested in this type of loan. Lenders pay a few dollars for the privilege of bidding on the deal.

5. Lenders do their own underwriting, including pulling complete credit bureau report(s). Note: Fair, Isaac credit screening programs now use algorithms that classify these multiple credit bureau inquiries as a single inquiry for the purpose of calculating a credit score.

6. As quickly as an hour later, lenders contact the applicant by email and phone with credit offers. All offers are also posted on the Lending Tree Web where users can log in with a password to evaluate all offers side by side.

7. User selects the deal they like the best and proceeds to closing.

8. Lender closes the loan using normal procedures and pays Lending Tree several hundred dollars at closing.

Financial Institution Cost: Initial license fee in the $10,000 range; several dollars each time they bid on a deal; several hundred dollars when the loan closes.

Financial Institution Pros:

•  Incremental loans, loan fees and loan outstandings.
•  Potential to reduce acquisition costs.
•  Can test new underwriting criteria.
•  Can test new loan products (e.g., sub-prime).
•  Can test new geographic markets.
•  Can test new market segments (e.g., lawyers).
•  A way to get started in online lending while building an infrastructure to take applications on your own Web.
•  Determine how your lending price/performance compares to other bidders.
•  Test ways to attract borrowers other than price. For example, if the other three bidders are offering mortgages for 7.25%, you could test whether buyers might pay 7.375% if you require a smaller down payment, bundle a home equity line of credit, and/or give them a free computer, etc.)
•  Low fixed costs.
•  Lending Tree is operated and directed by ex-bankers familiar with regulatory, compliance, and operational issues faced by lenders.

Financial Institutions Cons:

•  Cutthroat competition in speed and price..
•  Requires ultra-fast turnaround time on initial loan decision (measured in hours not days).
•  Diminishes the value of your band name, at least in terms of commanding a premium price based on name alone.
•  Must share the customer relationship.
•  Must share control of the loan process.
•  Competitors can track your price versus underwriting criteria.
•  Lending Tree could eventually move up the value chain by offering bill payment, credit bureau services, renting their client list, selling the aggregated info on applicants, email refi alerts (e.g., telling your customers when to refi the loan you hold/service); could be mitigated with contractual arrangements.
•  Compliance issues with the bidding process and timing of disclosures (Lending Tree says they have these figured out, but your attorney may not agree).
•  Privacy issues with shared applications.
•  Financial resources of Lending Tree (realize they are still thinking “burn rate,” e.g. survival, when you are focused on increasing earnings/revenue); could be mitigated with equity investment/ commitment.

The Latest Developments:

•  Creating a co-branded loan center at GeoCities.
•  Expected to become a featured lender on Infoseek in July.

Tools & Advice relies heavily on calculators and worksheets licensed from SmartCalc.

Analysis: On paper anyway, the concept sounds intriguing. The company reports a 65% approval rate and a 25% close rate on approved applications, e.g. 16% of applications close. That’s a good indication they are attracting a stellar applicant pool. But they have several significant challenges ahead:

• Creating a trusted brand name and environment where users feel comfortable submitting private info. Once there are dozens, even hundreds of loan marketplaces established, users will gravitate toward the biggest “names.” The company should
  
  beef up its online info on privacy, security and other credibility-builders (see NextCard, OBR 5/98).
• Creating enough traffic to feed their lenders a meaningful volume of loans. Long-term, lenders won’t bother mastering the nuances of a proprietary framework unless they can count on significant loan volume. Again, as competition increases, lenders will only deal with sites that can deliver significant loan volumes such as GetSmart or Quicken.com.
• Keeping enough lenders in the fold to maintain a realistic bidding process (as more lenders create good direct lending capabilities they may be less interested in sharing revenues and customers with Lending Tree). For a while, the company must maintain a delicate balance, feeding enough volume to each lender to keep them interested, and bringing in new lenders to beef up the overall program.
• Making sure lenders are playing fair. Any auction will quickly disintegrate if there is the slightest perception that the process is rigged or tilted in favor of one or more bidders.
• Keeping fraud/nuisance apps to a minimum. Lenders should be spared from dealing with worthless applications.
• Resisting the temptation to compete with its lender partners for ancillary services such as credit report sales, bill payment, etc.

Despite all the cautions, we like what the company is doing. We had an opportunity to visit with company founder and President Doug Lebda recently in San Francisco and came away impressed with the company’s direction. They have assembled a savvy group of board members and advisors that should provide the needed direction. The biggest challenge is gaining mindshare in the burgeoning market for online loans.

Whether Lending Tree can take it to the next level depends on a lot of factors we can’t fully evaluate. However, we have little doubt the business model is a winner. Financial institutions should consider participating in one or more loan marketplaces as a learning exercise if nothing else.

Contacts:

Robert G. Wilson is CEO; James Bennett is Co-founder and VP Marketing & Business Development; Richard Stiegler is CTO; Donald Colby is COO; Douglas Lebda is Founder and President at
(704) 541-5351.