Recent Press

Anyone who has stood atop Mount Washington in Pittsburgh, with the city's three rivers flowing several hundred feet below, knows that it would take a flood of biblical proportions to cover it over with water. But when Doug Lebda applied for a mortgage on a condo there in 1996, his lender strung him along for months -- then at the last moment demanded he buy flood insurance. Lebda found the entire experience "disempowering, hard to sort through and difficult to understand."

And it inspired him-then a 25-year-old consultant for Price Waterhouse-to start Charlotte, North Carolina-based LendingTree LLC., an online exchange where more than 230 lenders compete for mortgage borrowers, often providing them with multiple offers in 10 minutes or less. Aided in no small part by a red-hot refinancing market, LendingTree has turned out to be a big success: Lenders on the exchange have funded $74 billion in loans-most of them home mortgages-since 1997.

The company went public in January 2000, then last year sold to New York-based IAC/InterActiveCorp, an eCommerce company that owns such high-profile businesses as Expedia.com and Ticketmaster. At its most basic form, LendingTree is a giant marketing machine that uses its strong brand to generate leads more cheaply than participating lenders can on their own. According to Lebda-now 33 years old and still running the company as chief executive officer -- the company's biggest challenge is converting those leads into funded loan commitments, a process that's complicated by the fact that LendingTree does not control the underwriting decision. Because LendingTree makes most of its money after a loan closes, it uses a carrot-and-stick approach to boost closing rates as high as possible.

But now an even bigger challenge may be looming directly ahead. As the refinancing market cools down after two years of record loan volume in 2002 and 2003, lenders are being forced to shift their emphasis to purchase mortgages. While all lenders will have to make this difficult adjustment, the online origination channel may find the purchase market to be a particularly tough nut to crack. This is due to the influential role that real estate agents often play in directing homebuyers to preferred lenders. Because of this, LendingTree has built a companion network of realty firms that could turn out to be an important strategic weapon in the next few years.

LendingTree has since branched out to include car loans, credit cards, personal loans and student loans, although mortgage and home-equity lending accounted for 80 percent of the company's revenue in 2003. President and Chief Operating Officer Thomas J. Reddin says that LendingTree will spend approximately $70 million on marketing in 2004, which covers the cost of television and print advertising as well as its relationships with such important Internet portals a s Yahoo! , America Online, Priceline.com and AutoTrader.com.

The company also sources leads through strategic partnerships with the likes of Costco Wholesale Corporation, the American Automobile Association (AAA) and several of the major U.S. airlines.

The 8-year-old company employs about 250 people and operates from two large one-story buildings in a suburban office park several miles south of Charlotte. The environment is pleasant but spare, suggesting this is still a startup operation that spends money carefully. Even Lebda's office is smaller than what most senior vice presidents would enjoy at one of the megabanks in downtown Charlotte. The company holds a monthly "town hall meeting," where as many employees as possible cram into a central location in one of the buildings to discuss a variety of issues.

The work that goes on there is running the country's largest online loan exchange, where potential borrowers are matched up with willing lenders. Consumers can access the exchange though its Web site (www.lendingtree.com) or by calling an 800 number and talking with a telephone representative. They then fill out a lengthy application form that includes personal financial information, and agree to provide LendingTree access to their credit report.

One of the attractions of the exchange is that lenders have the ability to set up customized "filters" that match applicants with their predetermined underwriting criteria. These applications are then routed to up to four lenders, which use special software tools to automatically evaluate them. LendingTree has licensed its own underwriting software-which it calls its automated response engine (ADE)-and this system is used by many of the company's participating lenders. Lenders also have the freedom to use their own ADE system instead.

Once a prospective lender has evaluated the application form and made a loan offer, LendingTree notifies the applicant by e-mail and directs him or her back to the Web site to review and compare the offers. If an offer is accepted, LendingTree notifies the lender automatically and the rest of the process is handled offline. However, the company does monitor the process through closing and makes itself available to both borrower and lender. LendingTree maintains a two-stage pricing structure where lenders pay a modest $11 "transmission fee" for every lead they receive, and then a subsequent "closed-loan" fee that ranges between $400 and $800, depending on the size of the loan.

"Lenders only get those customers who meet their criteria, and they only pay on success," says Reddin. The LendingTree exchange also has created a level playing field that tends to minimize some of the advantages that normally come with size in the offline world. "A major money center bank and a correspondent lender can compete equally," says Reddin.

If there's one compelling reason to participate in the LendingTree network, it's efficiency. Thanks to the heavy investment it has made in marketing, LendingTree claims to have nearly 70 percent brand recognition among adults in the United States-which gives its participating mortgage lenders far greater reach than most of them could enjoy on their own. First Franklin Financial Corporation, San Jose, California, a subsidiary of National City Corporation, Cleveland, started originating mortgage loans through LendingTree about four years ago. Michael Petree, a senior vice president for retail lending who also serves on a lender advisory committee at LendingTree, says he can generate leads through the exchange for a fraction of what it costs First Franklin on its own.

"And I don't mean a little bit cheaper-I mean 300 percent cheaper," says Petree, who adds, "Dollars and cents is what brought us together." Approximately 50 percent of First Franklin's online mortgage origination comes in through the LendingTree exchange, prompting Petree to refer to it as a "very significant and strategic partnership."

Metric obsessed
LendingTree is a metric-centric company that measures just about everything having to do with its business, and probably the most important calculation of all is the closing rate of its lenders. Because the company doesn't prosper unless its lenders prosper, it has looked very closely at all the factors that contribute to a high closing rate. For example, LendingTree's long-term objective is for all mortgage customers to receive an offer within three to 10 minutes of sending in a completed application form. Only about 65 percent of the exchange's mortgage loans are quoted that quickly now.

"When the consumer gets four offers immediately, the closing rates are higher," says Lori Collins, a senior vice president whose responsibility includes managing LendingTree's relationship with its lenders. The company uses a formula to determine the order of preference for how leads are allocated to lenders. The most important criteria are the lenders' closing rates, but the formula now considers their response time as well.

"Our goal is to have 100 percent of our consumers receive an instant offer," Collins says. The company also pays close attention to service quality, and grades each participating lender quarterly. Collins uses a "SWAT team" approach with chronic poor performers. The lender's account executive at LendingTree is required to put together an action plan to improve service quality within a specified period of time. Collins says, "Lenders do not want to have a low score," because these are included in the allocation formula for leads, and LendingTree has the right to terminate lenders that do not improve their service-quality ratings after a reasonable period of time.

"We terminate two or three a month," Collins says. As might seem intuitively apparent, LendingTree also sees a high correlation between a lender's service-quality score and its closing rate. Indeed, Lebda says that one of the lessons of eCommerce is that "success has less to do with technology than people think." He also believes that while price is important, "it's not always the lowest price that gets the deal. Success online has more to do with sales and service."

If LendingTree uses a stick to prod its lenders to respond quickly and provide good service, it also holds out some important carrots. The company offers sales training through an in-house trainer, and last year worked with 600 of the 5,000 lending officers who originate loans through the LendingTree network. It plans to train approximately the same number of loan officers this year as well. Not surprisingly, the company has found that closing rates are usually much higher when lenders assign a dedicated sales team to the network.

LendingTree also performs detailed benchmark studies that examine a lender's online sales and service operation. At a cost of $30,000, the company spends approximately four weeks gathering data, then gives the lender a detailed report of its findings, often with 60 to 70 recommendations. It then works out an implementation plan and tracks the lender's progress. Lenders receive a rebate on the $30,000 fee if they implement at least 70 percent of the recommendations.

LendingTree has accumulated a wealth of best-practices information in the process that it uses to evaluate the lender's operation. This program is optional, and last year 17 lenders participated. The company expects even more to take part in 2004. One lender that has participated in a benchmark study is First Franklin, and Petree swears by the process. He found the recommendations to be "right on." Petree feels the electronicmarketplace is so dynamic that First Franklin is considering the possibility of assembling its own consulting staff to perform best-practices evaluations on an ongoing basis.