June 23, 2011

History & Outlook For Internet Lending

June 23, 2011

History & Outlook For Internet Lending

[Editors Note: Rob Chrisman is on a cycling vacation this week so he’s asked some guest writers to step in on DailyBasis. Today are online lending pioneers Owen Raun & Michael Hillman.]

Internet Lending Begins
Just a little over fifteen years ago, with the publication of Statement of Policy 1996-1 in The Federal Register, Nick Retsinas’s HUD determined the direction of the use of the Internet in consumer-direct business sourcing. Up to that point a handful of small, visionary mortgage companies had been attempting to use the web in the same way other industries were by getting “free” advertising on the Internet. Their model was to go consumer direct, get leads from your site, cut commission splits, take apps, process, deliver, and fulfill in all ways thereby cutting operational costs. It was the dot-com promise—and the dot-com Bust.

Computerized Loan Origination Systems (CLO)
The change implemented by HUD in 1996 was to the interpretation of the anti-kickback provisions of Sections 8a &b of RESPA with regard to what had become known as “CLOs” (Computerized Loan Origination Systems). In going beyond the “qualified CLO” of 1994, HUD opened the door to entrepreneurs who chose, rather than to be mortgage lenders themselves, to be online marketers of consumer-facing mortgage “opportunities” and transparent competitive marketplaces. The key was that these market operators could earn their fees if everyone acted within certain HUD-delineated restrictions: lender-neutral, multi-lender platforms with standardized CLO fees.

Business Model
The Internet can be a place where a mortgage lender can go to disintermediate his advertising agency and media vendors and where he can outsell his salespeople and go direct to the public with his message. Since 1996 it’s a place where a mortgage lender can still leave the marketing for mortgage customers—both online and offline—to the professionals and buy leads from them under the new CLO rules, hopefully maintaining or building client base while controlling marketing expense and cutting commissions.

Early Examples: eLoan & LendingTree
Two obvious examples of this dichotomy are E-LOAN and LendingTree. Janina Pawlowski and Chris Larsen were Silicon Valley whiz kids who clearly early saw where the Web was going, but they saw it too soon and got caught up in that dot-com mind set that told us that “E-Commerce is here! The old world is gone forever!” E-LOAN was such a well crafted solution—but why didn’t it work? Because its value proposition was lost in the medium, it was ahead of its time. It tried to attract borrowers with the internet, to the internet, to explain why you should get a mortgage on the internet.

Who Was/Is Successful?
Lendingtree’s model worked. TV ads promoting that viewers get up and go to their computers and submit a form so that banks could compete for their loan was irresistible. Lenders could set filters for the lead types and locations they wanted and focus on those chosen consumers. With dropping rates and expanding products in our industry Lendingtree allowed lenders (like us) to expand from single market referral based companies to multi-state internet call centers. Lendingtree’s “long form” lead became the standard, still unmatched on-line.

Who’s Emerging In Online Lending
Several competitors sprang up, most notable LowerMyBills. The “short form” lead became the favorite of the larger call center lenders. Cheaper and in much larger quantities, these lenders grew with the expansion of HELOC’s, 125%, Alt-A and Subprime.

Model Starts to Change
The long and short form leads placed the contact with the consumer before the price was quoted. Today with scaling back of available products, increase in Web 2.0 consumer empowerment and better technology more lead generators have put the price before the contact. Zillow, Google, iCanBuy are examples and Bankrate has had that model for some time now. The consumer sees the price, and chooses to contact or be contacted by the lender.

Good/Bad of New Model
Lenders like the quality of the leads but quantity can be an issue. A bigger issue with this “price before contact” is the “price”. How do you get noticed? Well, low ball pricing usually. We would like to think that the internet has matured enough where lenders that “lure” with price can’t survive. The recent LO Comp change has kicked some in the teeth as company margins need to be set and can’t vary (much). Time will tell but from what we can see – companies that deliver a fair price and have customer service scores to back it up will come out the winners. Quicken Loans comes to mind here.

The empowered Web 2.0 consumer and younger borrowers will have more opportunity to check on and select a lender prior to initiating contact. A nice website with company managed testimonials is no longer enough. Websites that allow consumers to “rate” lenders and loan officers will become more common. Yelp and epinions are examples. Lenders must always invest in some manner of connecting with and communicating with new clients, and while there’s no single technology solution, lenders must learn to engage clients online. The technology that enables that will win.