First quarter numbers provide best evidence yet that the online consumer
loan auction marketplace is viable, even with a more moderate advertising budget.

The front door of LendingTree’s Mortgage area. Note the emphasis on simplicity, “1 easy form…up to 4 real offers.”

But surprisingly, the dominant, “We’ll pay you $250!” message is not well explained. To find out what the catch is, users must return to the home page and follow the obscure, “Want extra cash” link. (The $250 rebate is for accepting a credit card with their app,.)

 

LendingTree 230 employees $4.6 billion originated (2000) 11115 Rushmore Dr. Charlotte, NC 28277 (704) 944-2110 www.lendingtree.com

No report on online lending would be complete without a long look at LendingTree. For much of 2000, while the business and technology press have been penning obituaries for online lenders, LendingTree racked up 1.8 million loan applications resulting in 145,000 closed loans worth $4.6 billion dollars, more than $1 of every $10 booked online in the U.S. (see Table 3).  

Naysayers point to last year’s unsustainable $50 million dollar TV-advertising campaign and question the economics of the business. Granted, that wasn’t a rational marketing budget, but it was what investors demanded, at least early in 2000.

In LendingTree’s case, unlike many consumer dot-coms, it appears the brand-building money wasn’t entirely wasted.

In Q1 2001, thanks in great measure to the refi boom, with less than $7.2 million in advertising, the company racked up 750,000 loan applications, of which about 350,000 were good enough to sell as leads to at least one, and oftentimes as many as four, of its stable of 121 lenders. In total, about 22,000 non-credit card loans closed in the first quarter.

That’s an advertising cost of just under $10 per application, $21 per good (transmitted) application, and $330 per closed non-credit card loan. If you also throw in the 40,000 plus credit cards cross-sold to applicants, then the advertising cost drops to $116 per closed loan/card.

LendingTree makes money whether the loan closes or not. Lenders pay $6 to $8 per qualified application and $100 to $400 for each closed loan (not including credit cards which are significantly less, see Table 6). LendingTree’s total revenue per transmitted application was $31 in Q1 ’01 vs. $21 in variable marketing expense (e.g., advertising). Therefore each transmitted application contributed $10 dollars to offset fixed expenses and eventually to make a profit. The company expects an operating profit during Q4. This is a good business.

Along with NextCard, PayPal, and several stockbrokers, LendingTree appears to be one of a handful of “new” successful financial service business models to emerge from the Internet land rush. If the company hits its new profitability projection of Q4 2001, its on the way to becoming a household name in the first decade of the new millennium.

 Home Equity Business Remains Strong

The big jump in volume in Q1 was on the mortgage side as consumers rushed to take advantage of interest rate declines. Much of the mortgage volume surge may be short lived, but LendingTree is less dependent on mortgage interest rates than most online lenders.

Why? Its thriving home equity business generated 200,000 applications and 32,000 closed loans in 2000 (see Table 1, below). Despite the popularity of cash-out mortgage refinances this year, the home equity product is on track to beat last year’s numbers. One reason, the size of LendingTree’s HEQ network, which averaged about 50 lenders for most of 2000, grew by a third in first quarter, to 71 lenders. Because a home equity application is four times as likely to close as a mortgage application, the company makes almost twice as much revenue per home equity loan.

Table 1

LendingTree Home Equity Lending Volume

$ millions

Source: LendingTree, 5/01

 

LendingTree made a strategic move into the real estate brokerage market through its Aug. 2000 acquisition of HomeSpace. Users can earn rebates of up to $1,000 on each home bought or sold.¹

 

Other Developments

 

LendingTree became a player in the online real estate business with its acquisition of HomeSpace on Aug. 2, 2000. LendingTree paid $6.2 million in cash plus 639,000 shares, and assumed certain liabilities. The total value at the time was more than $11 million. Home buyers who use a LendingTree network real estate agent earn a rebate of as much as $2,000.¹ The total network includes 7,000 Realtors in 650 real estate companies with more than 2,400 offices in all 50 states.² The network includes agents from Coldwell Banker, Century 21, Prudential, ERA, Remax, GMAC (formerly Better Homes and Gardens), and Realty Executives.

¹$1,000 each for the sale and purchase of a home valued at more than $150,000; $500 for each transaction for homes less than $150,000; users must snail-mail documentation to LendingTree to claim the rebate.

²The Web site lists 41 states with agents in the network; however, 3 states (WV, AK, and OK) do not allow rebates.

LendingTree has not been a big search engine advertiser. In our most recent search engine research, we found only one banner ad running on “loan” keyword searches on Yahoo. The company also advertises on BankRate.

Table 2

LendingTree Web Traffic

thousands of unique users¹ by month

Source: NetScore, 5/01  www.netscoreonline.com  PC Data Online, 4/01   ina = info not available            international = users accessing from outside of the U.S.;

*min:sec; average time spent at the site by each unique user in April

LendingTree continues to give borrowers a $100 to $250 rebate for accepting a credit card with their application. This successful promotion, originally with FirstUSA, has been running for two years, resulting in approximately 150,000 cards being issued.

A-rated credits are set up with a Bank of America US Airways card that carries a $90 annual fee. B credits may receive a no-annual-fee Aspire card from Columbus Bank and Trust. Problem credits are eligible for a First Premier card, which costs $208 the first year for a credit limit of $250 to $1,000 and $84 annually thereafter.

Lending Tree posts the results of customer feedback on each lender. Lenders can opt out of having their scores posted.

Only 10 of the 137 lenders listed achieved a perfect 5-star ranking in the overall experience: Bank of America, Champion Mortgage, Citizens Bank, Dime Savings, eSmartLoan, Genisys Financial, LendNetwork.com, Soluna First, Synergy Federal Savings Bank, and Transouth. Dime, Citizens and LendNetwork tied for the best scores across all categories with 5-star rankings in 4 of 5 categories, and 4.5 stars in the final category.

 

Table 3

LendingTree’s Share of Total Loan Market

full-year 2000 figures

Total Market
Total U.S. consumer loan originations	$1.9 trillion
Portion originated online	$44 billion
% online	2.3%
LendingTree Share
$ volume	$4.6 billion
% of online loan originations	10.5%
% of total loan originations	0.2%

Source: LendingTree annual report, 5/01; market sizes sourced from Forrester

 

Table 4

LendingTree Variable Marketing Expense

Type	Q1 Expense	% of Var. Mktg.	% of Tot Mktg.
Media	$5.8 mil	80%	60%
Strategic partnerships	$1.1 mil	15%	11%
Affiliate payments	$450,000	6%	5%
Variable marketing costs	$7.2 mil	100%	75%
Fixed marketing costs	$2.4 mil	n/a	25%
Total marketing costs	$9.6 mil	n/a	100%

Source: LendingTree, 5/01

 

Table 5

LendingTree Metrics

Source: LendingTree, 2000 annual report

1.)    Authentic loan applications that meet underwriting criteria for at least one lender; each loan request may be shipped to multiple lenders, but it only counts as one loan request in this total

2.)    Includes cross-sold credit cards, 65% of total closed loans in 2000, see Table 7, for results with credit cards removed

3.)    Does not include revenue from licensing the LendingTree platform (Lend-X)

4.)    Fixed and variable marketing costs

Table 6

LendingTree Pricing

Source: LendingTree price list and OBR assumptions                *Assumes 1 of every 5 transmittal closes, and each transmittal goes to 3 lenders, from the lender’s standpoint, resulting in 1 closed loan per 15 leads      **Actual network revenue divided by number of closed loans

Table 7

LendingTree Loan Originations by Type

Source: Online Banking Report, 5/01; from LendingTree earnings releases                ina = information not available

1)     Number of applications submitted regardless of credit quality

2)     Number of applications transmitted to one or more lending partners; prescreened to match lender’s criteria, but not guaranteed to be approved

3)     Number of applications that result in a closed loan (i.e. loan origination) at a LendingTree lender

4)     Static pool close rate incorporates the average time lag between the submission of a loan application and closure; 120 days for mortgages, 90 days for home equity, 60 days for auto/personal, and 30 days for credit cards

5)     Network revenues on the income statement is higher because we have excluded set-up fees, adaptive marketing fees, and realty service revenues