Definitions

Source: Online Banking Report, 11/00

We first wrote about loan marketplaces two years ago after an eye-opening conversation with LendingTree founder Doug Lebda at Fair Isaac’s 1998 Interact In that article, we recommended that banks take part in Mr. Lebda’s system, if only to learn how to originate loans online.

We still believe in that advice; in fact, we are going one step further in this Report. Lenders should not only participate in loan marketplaces as indirect lenders, but also should steer their own customers to loan marketplaces as part of an open lending initiative..

Since our mid-1998 report, loan marketplaces have received mixed results. On the consumer side, only LendingTree has been able to build a large following closing more than 200,000 loans in Q3 2000.¹ But those loans were driven in by brute spending, a strategy no longer supported by investors. The company’s YTD 2000 operating loss of $52 million (through 9 months), has many observers questioning the validity of the loan-auction business model itself.

We believe LendingTree has the right strategy. But, like many Internet companies, it must find more cost-effective ways to drive business. One important strategy, called Lend-X, is to work closely with financial institutions to deliver loans to the bank’s customer base.

¹The small business loan marketplace has several promising entrants including LiveCapital and PrimeStreet .

Table 1

Advantages of an Open Loan Platform

•          Maintain continued contact with the customer
•          Get to monitor the loan traffic: applications, offers, and closed loans
•          Access to customers’ personal financial statements (if they agree to share)
•          Potential to book more loans through increased traffic and credibility
•          Positive publicity and improvements to bank image
•          Reinforces bank’s role as primary financial provider, increasing account retention across all accounts
•          Referral fees on loans placed with others
•          Fewer outright declines equals happier customers and less customer-service expense
•          Sale of ancillary loan services, such as insurance, home warranties, credit reports, etc.
•          For mortgage applications, getting the first crack at the home equity loan
•          You can recommend a refi as soon as rates go down
•          Increased Web site traffic
•          Customers are happily surprised by the open platform and pass the word along
•          Better CRA performance by facilitating loans to a wider range of credit profiles

Table 2

Disadvantages of an Open Loan Platform

•          You’ve introduced your customers to the competition; if you have a poor value proposition, you’ll exacerbate the problems you already have
•          Inevitably, some lost loan deals
•          Customer confusion over the new process
•          Lack of control over the pricing and practices of competitive lenders
•          Customer service complexity in resolving problems associated with other lenders

Table 3

Advantages of Lending through an Online
Loan Marketplace

•          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  lending online while building your own infrastructure
•          Determine how your lending price/performance compares to other bidders
•          Test the importance of price vs. other loan attributes: 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

Table 4

Disadvantages of Lending through an Online Loan Marketplace

•          Lower margins on individual loans
•          Ultra-fast turnaround time is required on initial loan decision (measured in hours, not days)
•          Shared customer relationship
•          Shared control of the loan process
•          Competitors can better track your pricing
•          Competition from the loan marketplace or its partners for ancillary services: bill payment, credit bureau services, client-list rental, sales of aggregated applicant info, 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 (most of these issues have been ironed out, but your compliance department may not necessarily agree with all business practices)
•          Privacy issues with shared applications
•          Resource shortages (capital, human, equipment) at the loan marketplace which is still focused on survival (could be mitigated with equity investment)
•          Customer service coordination and problem resolution
•          Corporate culture issues

LendingTree is the dominant consumer loan marketplace today, on a pace to book nearly
one million loans annually across its network of more than 115 lenders.

Table 5

the LendingTree process

1.        User completes an online loan application; a 15-to-30 minute process.

2.        LendingTree pulls a credit score and classifies the application from sub-prime to A+.

3.        LendingTree sends the application and credit score to up to four lenders interested in this type of loan. Lenders pay a few dollars for the privilege of bidding on the deal.

4.        Lenders do their own underwriting, including pulling complete credit bureau report(s). Note: All credit bureau inquires for secured loans/lines (home equity, mortgage, car) received during a 14-day period are counted as a single inquiry for the purpose of calculating subsequent credit scores. This is not the case for personal loans or credit cards.

5.        As soon as an hour later, lenders post loan offers on the LendingTree Web for viewing by the user. Users are notified when offers are made.

6.        User selects the offer they like best and works directly with the lender.

7.        Lender closes the loan using normal procedures and pays LendingTree several hundred dollars at closing.

Source: LendingTree, 11/00