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March 2003
Apparently Money Does Grow on Trees
By Susanne Deitzel

    It’s reinvigorating to find an Internet company not only surviving in this jaded post-dot-com era, but branching out widely in the increasingly electronic financial arena. And it’s downright hard not to notice the firm-rooted and ever-growing LendingTree, Inc., which has become the leading online lending exchange connecting consumers to a network of lenders who compete for their business.

      LendingTree’s mission is to empower customers with the ability to apply for loans of all types – home mortgage, home equity, automobile, personal, debt consolidation and credit cards – online at It also gives lenders a resource to mine for customers. It is not by happenstance that LendingTree was planted right here Charlotte, the second largest financial center in the United States.


Planting the Seed

      The seed for LendingTree was planted in 1995 when Doug Lebda, an accounting and business graduate of Bucknell College in Pennsylvania working as a derivatives consultant at PricewaterhouseCoopers, ran into repeated obstacles pursuing a $60,000 condo loan. Despite his strong finance background and the pursuit of what he considered a modest goal, Lebda encountered “a completely tedious process,” spending days phoning banks for current rates and weeks compiling the required data. In the end he felt “disempowered and frustrated,” even doubting that he had gotten the best deal.

     “I asked myself, ‘Why can’t I just put my information some place and allow lenders to compete over me?” Lebda found himself sparked into action by the ordeal. “I started writing checks for the venture and went out to create a marketplace business. I had to go sign up banks; they were not at all ready for my idea. None of them had Web sites. For me to say, ‘We’re going to transmit loan applications directly into your underwriting systems, get back approvals, and this is all going to happen online,’ that was quite a tough sell.” 

     Lebda had spent a year at the University of Virginia’s Darden School of Business, when he became disenchanted with the reception to his business plan. Anxious to grow his concept, he and his wife, Tara, pursued the endeavor with three phone lines from their apartment and different “free trial” copiers every two weeks.

     The 26-year-old Lebda and his wife began scouting for locations to plant their company-to-be. They selected Charlotte because of its well-connected airport, strong financial center, growing markets, efficient cost structures and rich talent pool. Lebda had been favorably impressed with Charlotte on previous job interviews and wanted to stay away from highly concentrated dot-com markets such as Silicon Valley and New York, to begin the business “in an environment that would sustain it for the long haul.” With income building from investors, the Lebdas moved to Charlotte in early 1998 and the Web site went online.


Counting the Rings: LendingTree’s Growth

     LendingTree has made the headlines repeatedly over its formative years for its successful rounds of venture financing in the tens of millions of dollars. Says Lebda, “We achieved great encouragement from our investors to think bigger and move faster than we had initially planned. Their support gave us the momentum we needed to act decisively, and get our name recognized. We were able to plan far enough ahead of any competitors to gain a real advantage.”

     Spurred on by the investors’ capital and commitment to development of its online technology and lending exchange capacity, LendingTree held an initial public offering of its stock in February 2000 at $12 a share, raising an additional $44 million. Later that spring, Lebda moved the company to its new, larger headquarters in Ballantyne.

     In August 2000, LendingTree acquired the key assets of HomeSpace Services, Inc, an online real estate company linking them to approximately 7,000 real estate dealers nationwide. With this purchase, LendingTree increased its exposure to those in search of loans, while also extending its reach into real estate markets. Explains Lebda, “We have found that our greatest competitors are neither other online lenders nor traditional banks. We discovered that customers would get the necessary information on our site, and then would be steered in a different direction by the realtor who helped them find their home.”

     The ability to counteract this has been a benchmark accomplishment in the company’s growth. LendingTree’s philosophy is that of customer empowerment, and customers are under no obligation to accept any of the offers through the site. By building a relationship with realtors and their agencies, LendingTree acquires a warm-blooded advocate for the customer; the realtor increases customer confidence by equipping them with a wealth of information and competent lending vehicle. The exchange increases closing rates, benefiting all involved.

      More recently, last month, LendingTree consummated a new partnership, adding a new tool to its Web site to enable consumers to utilize a customized home valuation option provided by FNIS, a leading source for real estate-related data, technology solutions and services and one of LendingTree’s largest investors. The home valuation tools allow consumers to conveniently access online information about home valuation and research home value ranges and neighborhood comparable home sales, as well as relevant neighborhood and crime information. It is yet another example of the type of value-added services LendingTree thinks consumers will use to find the best value when buying or selling a home.


LendingTree’s Offerings are Bountiful

      LendingTree’s basic structure is straightforward. Consumers log on to LendingTree’s site and answer a brief questionnaire about their borrowing needs and in return they are promised offers from up to four lenders. Using criteria that banks have supplied, LendingTree automatically forwards the lead to four institutions best suited to make the particular loan. The lenders then respond to the consumer with a rate quote. For that service, LendingTree charges banks varying amounts per customer lead and an extra amount if the lead results in an actual loan.

     At first glance, the LendingTree model appears presumptuous; after all, it functions to mediate the lending process between the buyer and lender. The proposal that a lender would subscribe to a program that could eventually lead a buyer astray was akin to “sleeping with the enemy”. However, Lebda reports than once lenders are familiar with the strategy, they become much more receptive to the process. “Our main profit comes from closed loans, so it is a mutual benefit, not a case of being pitted against one another.”

     Lenders also fear that an online exchange will cut into their business and reduce profits. But Lebda is quick to respond, “We have proven that people comparison shop. If the lenders don’t have a reasonable vehicle with which to do this, the buyer will apply at branches from several competing institutions. This raises the cost for lenders; not to mention the costs involved acquiring that customer. Huge advertising budgets are for naught if they can’t see the customer profile and what they are asking for.” He also points out how significantly it can lower their costs of acquiring customers – currently running between $2,000 and $3,000 for loans originated by independent mortgage brokers.

    Lebda adds, “We are definitively the largest and most effective channel for customer acquisition. We have also expanded our “Best Lending Practices” process to give the lender a metriced medium to gauge their success. They can measure their performance through our network.”

     Many other online loan companies have fought for this kind of leverage and LendingTree’s success has spurred considerable competition. However, says Lebda, “Getting there first, doing it better and being a step ahead gives us considerable confidence. Our attitude is that, ‘Imitation is the highest form of flattery.’”


LendingTree’s Fruition

     By all accounts, LendingTree is maturing nicely. In 2001, of the $2 trillion in mortgages the Mortgage Bankers Association of America estimates Americans took out, more than 1.4 million customers applied for loans via LendingTree, enabling the site’s lenders to book more than $12 billion in loans from its leads. E-LOAN, LendingTree’s closest Net startup competitor, originated $7.3 billion in loans the same year. (E-LOAN actually lends money to consumers and resells the loans to banks.)

     Now, the $100+ million LendingTree is turning the financial corner. Its most recent financial results for the fourth quarter ended December 31, 2002, demonstrated its second consecutive quarter of positive earnings per share and third year of sequential quarterly revenue growth. During the quarter, the company earned $5.6 million, or $.19 per share, compared to a loss of $.29 a share the same quarter in 2001. Total revenue for 2002 was $111.4 million, up 74 percent over the $64 million in revenue earned in 2001.

     Results for last year also marked record totals for transaction volume and closings for both the lending and realty services exchanges. In 2002, transmitted loan requests for the Company's lending exchange grew by 32 percent, while closing volume increased 80 percent over the previous year. The 2002 growth in the value of closed loans over the previous year was 106 percent for mortgage, 82 percent for auto, and 50 percent for home equity. The realty exchange produced 16 percent additional referrals and more than doubled closings over 2001 totals.

     Presently, the LendingTree Exchange is made up of more than 197 banks, lenders, and brokers (lenders) and has facilitated nearly $40 billion in closed loans since inception. More than 8.0 million consumers have accessed the LendingTree Exchange through the company’s Web site and online and offline partners.


Finding the Light: Marketing

     Some of LendingTree’s early detractors claimed that due to the volume of online businesses and untested marketing practices, it would be “impossible to build a strong brand for an Internet company.”

     Proving the contrary, a July 2002 study awarded LendingTree the number one position in Online Lending, and 67 percent total brand awareness among consumers nationwide. Lebda attributes this to several factors. Rather than invest heavily in Internet portals for exposure, LendingTree has chosen to market via traditional media, with a heavy broadcast emphasis. Fifty-three percent of consumers nationwide reported having seen or heard the “When Banks Compete, You Win,” tagged ads.

     Lebda says, “The brand-awareness is also built into the business model – ‘the brand architecture.’ We provide a great service, a great product; we emotionally empower the customer and deliver a tangible and gratifying end-result: a reasonable mortgage and a new home.”

     LendingTree has developed several partnerships that further propel its name through the pipelines. It offers value-added products such as Home Depot certificates, credit rebates and reward bonus points on credit cards; anything that Lebda explains might be “an incentive for the borrower to get over the hump.” He adds, “We have a very experimental culture at LendingTree and want to provide the best value possible for the customer.” Since April 2002, the company has also partnered with five leading airlines to provide mileage incentive benefits, and recently added MSN and Costco to its growing list of customer offerings.


Weathering Criticism

     There have been many LendingTree naysayers over the years. Some investors have claimed that LendingTree stock is overvalued; competing lenders complain that it is turning loans into a ‘commodity’, and also claim that its model has made it more susceptible to “sharp practices” (various ‘bait and switch’ attempts by some lenders to increase costs with fees and rate changes).

      Lebda has little problem logically dismissing these objections. “We have proven our detractors wrong time and again; conversely, we are focused on our long-term goals and try not to get too puffed up by our admirers. Our stock price is not a primary concern. It is short term, and we are focused on the corebusiness and long-term results. As all our reports have shown, we are strong, consistent and operating well beyond expectations.”

     Lebda answers grumblings from the competition just as decisively. “I think any intelligent lender out there admits, especially in the current rate environment, these loans are a commodity, and the institutions need to step up to the plate and utilize all their resources. We try to help lenders on our network maximize their advantages, and even train them in how to most efficiently use the vehicle. These lenders are used to people walking in, asking for a loan and delivering it shortly thereafter. With our network people have a longer time to browse and weigh their choices. We introduce the need for a higher level of customer service, and send trainers to educate the lenders on new techniques.”

     Additionally, Lebda explains how they combat unsatisfactory lender practices. “We have a very sensitive and thorough monitoring process of our lenders. There are market considerations that occur that can affect any lending process, however, any activity that does not meet our standards are met with fines and or expulsion from the network.”

      He references LendingTree’s in-house LTS (Lender Technical Services) a 24/7 IT department which hosts 3 mammoth projection screens monitoring three separate functions in the framework. “All our offers are real offers, and the lenders are bound to honor them.” Lebda says that unlike some of the competitors, LendingTree has built-in price change protections. “A bank on our system must offer us the same if not a lower quote than it would give any new customer locking in on that given day.”


Growing into the Future

     Concerns have been raised about the effect of additional and changing regulation on businesses like Lebda’s, both in the banking business and on Internet commerce. Contrary to the fears of many, Lebda has great confidence in regulation. “This is a highly regulated industry overall,and it should be. We have several full-time people making sure we are in complete concordance with regulations both nationally and in every state. Since we can conduct business via the Internet in any state, we must make sure we are following impeccable practices.” He adds, “Since we are in effect working for the consumer, and regulations are set to do the same, I think that it should be a very comfortable atmosphere and any future movements in that direction will actually benefit us.”

     Removing physical boundaries may give the LendingTree regulation upkeep a lot of work, but it works very positively for the consumer. The Internet model removes any market constraint that might be in effect regionally. Says Lebda, “A housing glut in the south might hurt a borrower at a local branch, but you could receive a quote from Wells- Fargo (a western-seated company) that will answer your needs more compatibly.”

      The model also protects LendingTree from any market frostbite that might occur if and when the “housing bubble” bursts. In such a situation, customers might not be inquiring about refinancing or new homes as much, but lenders are more dependent on outside sources for customer acquisition. Says Lebda, “When the lenders are more focused on us, that gives us added revenue to invest in our marketing and drives customers to our site, and to our lenders.”

     The idea of growth and empowerment flows freely in the atmosphere of LendingTree’s casual dot-com environment. Employees are fiercely, internally driven, while encouraged to explore creative and stimulating pursuits. Foosball, pool tables, and the occasional scooter sit off to the side ready to be used for a tension release. “Fridays-at-Four” is a once a month meeting held in “Town Hall,” a foyer where they engage in team building and compliments.

     It is this combination of nutrients – good ideas and good people – along with a healthy injection of capital that has enabled LendingTree to flourish and blossom into the leading lending exchange on the Internet.

Susanne Deitzel is a Charlotte-based freelance writer.
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