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The following is an excerpt from a 10-K SEC Filing, filed by E LOAN INC on 4/1/2002.
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E LOAN INC - 10-K - 20020401 - BUSINESS

PART I

ITEM 1. DESCRIPTION OF BUSINESS

GENERAL BACKGROUND

E-LOAN, Inc. was incorporated on August 26, 1996 and began marketing its services in June 1997. Our purpose is to make the entire loan process not only more affordable but actually enjoyable. We are a leading online provider of loans directly to consumers, offering borrowers a variety of purchase and refinance mortgage loans, auto loans, and home equity loans and lines of credit to suit their financial needs. We also offer access to credit cards, unsecured personal loans and education loans supplied by third-party providers.

We originate loans through our website and by telephone, fund the loan using warehouse and other lines of credit, and then promptly sell closed loans into the secondary capital markets. Our principal sources of income are gains from the sale of mortgage, home equity, and auto loans which are derived based on a mark-up to the secondary market investor price, and interest income earned on loans during the brief period that they are held pending sale. All loans are underwritten pursuant to standards we establish to conform to the underwriting criteria of the ultimate purchasers of the loans. In this way, we minimize our credit risk with our loan products.

Product diversification . We offer diversified loan products - mortgage, home equity, and auto - in order to reach more potential customers regardless of the interest rate market. We are able to shift resources such as marketing and operations expenses among our products to take advantage of seasonal and cyclical lending opportunities as the mix of business changes in response to interest rate and economic conditions. This product diversification strategy helps reduce volatility and provide more stability through a range of economic cycles. When interest rates are low, consumers refinance higher interest rate home and auto loans to lower their overall borrowing costs. When interest rates are higher, consumers still have the need to borrow and are concerned about finding the best loan - perhaps a home equity line of credit - to meet their needs for such uses as home improvement or paying for college education.

Low Cost Producer Strategy . Our business model starts with a focus on being a low cost producer of loans. Low cost producer refers to the expense required to originate and sell a loan. This low cost position enables us to offer consumers great rates with fast service. Highly satisfied customers will help drive overall consumer adoption and our overall share of the lending market. Increased market share will drive economies of scale that further help lower our costs to originate and sell loans.

Business model. Our business model seeks to transform the traditional loan process by focusing on all three parts of the loan transaction: point of sale, transaction fulfillment, and sale of the loan to the capital markets. At the point of sale, we have reengineered the lending process to lower the cost to consumers, improve their control over the process, and expand the number of loan options compared with what consumers typically find in the offline world. We provide a clear means to compare and contrast loan products by making their true cost as transparent as possible. With strong capital market relationships, we underwrite and fund our loans as compared to a broker who serves as an intermediary. Control over loan fulfillment allows us to streamline processes and help eliminate inefficiencies, saving borrowers time and money. Finally, when selling loans we sell to the highest bidder in the capital markets. This allows us to offer borrowers the lowest rates available from a broad range of loan purchasers in the capital markets. The ability to innovate in all three parts of the loan transaction allows us to take full advantage of the enormous opportunities in online consumer lending.

INDUSTRY BACKGROUND

Shortcomings of the Traditional Consumer Debt Market

Consumers seeking financing for homes, cars or other purchases often encounter obstacles in obtaining multiple rate quotes, unbiased advice, thorough comparisons of loan products and timely credit decisions. For consumers, obtaining a home loan often represents an especially difficult transaction. While not as complex or difficult, obtaining an auto loan can be an especially aggravating and potentially costly transaction.

Traditional Mortgage and Home Equity Lending. While increased competition in the mortgage industry over the past decade has resulted in tremendous innovation in the mortgage loan choices available to consumers, the level of complexity associated with these loans has also increased. In addition, the underwriting and lending processes remain paper-based and time-intensive, with little visibility into the process for consumers. As a result, we believe that the traditional mortgage lending process causes many consumers to feel:

  • uncertain that their single source lenders and brokers are providing unbiased advice and are recommending the most suitable loan products;
  • skeptical that rates initially quoted will ultimately be available;
  • intimidated by the number and variety of loan products available;
  • pressured to commit to a particular product before they have researched and compared products to their satisfaction;
  • frustrated with the amount and types of fees they are required to pay; and
  • overwhelmed by the substantial time and effort that it takes to get a mortgage loan.

Many borrowers receive little ongoing assistance in managing their debt after the loan is closed. Many direct lenders who also engage in mortgage servicing are not committed to proactive monitoring of their customers' loans because they risk losing servicing fees if customers refinance with other lenders. Multi-lender brokers have an incentive to pursue refinancing opportunities, but typically lack the technological capability to proactively monitor the market changes of thousands of loan products in real time.

Traditional Auto Financing. In the auto lending arena, consumers (prior to the increase in the popularity of the Internet) have relied largely upon local auto dealerships to provide financing. This is due in part to the difficulty in obtaining loan information from a variety of national lenders for comparison. Because direct lenders only offer their own products, it may be time-consuming and frustrating for a borrower to search for the lowest rate by comparing loans among several local lenders in the consumer's area. Traditionally, dealers have bundled financing with the sale of the car, and as a result, dealers can manipulate the terms of the financing package to compensate for any price concessions the buyer may negotiate for the vehicle. The elements of the loan, such as payment, term, and interest rate may not be easily understood and transparent to the buyer, because the dealer has little incentive to make it so.

Market opportunity

The consumer debt market is substantial and highly fragmented among many lenders. The evolution of Internet usage and the lending industry's adoption of electronic solutions to traditionally paper based processes provide for a significant growth opportunity within this market.

Consumer Debt Market. According to industry sources, the 2001 U.S. consumer debt market for our focus products totaled approximately $2.8 trillion in originations, which is comprised of approximately $2.0 trillion in mortgage loans (approximately $1.1 trillion of which were refinance transactions), approximately $422.0 billion in home equity loans and approximately $400.0 billion in auto loans. The average mortgage market totaled a significant $1.5 trillion in annual loan originations over the past four years (1998-2001), and 2001 was a record year for mortgage refinance loan activity.

Research from Tower Group [August 2001] projects steady growth for online mortgage lending over the next four years. In 2000, online mortgage loan sales reached approximately $13.0 billion, or 1.3 percent of total U.S. mortgage loans originated for that year, and in 2001, online mortgage loan sales reached approximately $45.0 billion. Tower Group forecasts that total online mortgage sales will grow to $180.0 billion in 2005, accounting for more than 12 percent of total U.S. mortgages.

Internet Market Evolution. The last several years have seen a tremendous change in consumer adoption of the Internet with early usage centered on finding information; people have moved to conducting simple transactions such as buying books online, and then to using the Internet to buy airline tickets and make stock trades. Research conducted by the Pew Internet and American Life Project confirms the perception that consumers first go online for email, games and information searches. Then they tend to look at research on products and finance, and after some experience of online life they make a purchase online, which involves more trust and faith in an online business to keep their critical personal and financial information secure. Jupiter Media Metrix, an online research and consulting firm, predicts that as these Internet users become more comfortable with the Internet, they will continue to make more ambitious purchases. Jupiter estimates that online shoppers now number 67 million and estimates that this will grow to 132 million over the next four years. The number of affluent online shoppers, defined as those with household incomes over $75,000, is projected to grow from 26 million today to 44 million over the same time period. We believe this evolution will significantly contribute to consumer adoption of online lending over the coming years.

Loan products are ideally suited to fulfillment over the Internet because they are often complex, requiring extensive consumer research to find the right product and provider, and do not require the consumer, provider and product to be in physical proximity. Loans - as opposed to other products marketed online, such as computers - have the potential to evolve into a completely electronic product. The Internet gives consumers informational links and graphical interfaces for comparing competing loan products, as well as transaction capabilities to complete their loan.

PRODUCTS AND SERVICES

The E-Loan Solution

We make the loan process more affordable by using the technology of the Internet to find the right loan for the consumer, to streamline every aspect of the loan application and approval process, and to pass cost savings on to consumers. We eliminate unnecessary, commissioned financing intermediaries such as mortgage brokers and auto dealer finance salespeople. We eliminate most traditional lender fees such as administration, commitment, processing, underwriting, wire transfer, or document preparation, which can exceed $1,500 for a mortgage. Our website is designed to offer prospective borrowers easy access to rate quotes, information about loan fulfillment and a variety of interactive tools and services to help them understand their options and make the best choices for their personal situations. At our website, borrowers can:

  • quickly search a database of loan products from a variety of capital market sources;
  • compare two or more loans along many characteristics;
  • use a calculator to determine the size of the loan for which they will qualify;
  • apply for loans online;
  • receive a credit decision in a very short time;
  • obtain a mortgage loan pre-approval letter;
  • set up rate watch and monitoring accounts so that they can receive automatic notification;
  • receive overnight documentary drafts to take to auto dealers; and
  • track their loan applications online through our unique E-Track service that monitors every stage of their loan application in real time.

Given the range of consumer debt products and the difficulties consumers face in accessing and evaluating a variety of loan options, we believe we have a substantial opportunity to market debt products online in a convenient, cost-effective way and to build a leading national brand name in consumer lending.

E-LOAN Innovations

We continuously look for ways to break down barriers and eliminate redundant steps to make the loan process significantly faster, easier and far less expensive for both consumers and ourselves. Our loan process starts electronically with the customer and stays that way. From the start to the end of the process, the loan information is not re-entered by anyone at E-LOAN or by anyone at the secondary market loan purchaser. Where technology and automation make sense, we use it. Where a person can make a distinct difference, such as consulting with a customer, our team members provide professional advice.

Some of the important innovations that we have introduced to date include E-Track, analytical loan recommendations, ongoing mortgage monitoring, our proprietary underwriting system, online disclosures, and flash funding.

E-Track. We have developed a proprietary online tracking system, E-Track, in order to make the loan application process more open and convenient for consumers. We establish an E-Track account for each customer at the time an application is completed online. Each E-Track account is personalized and password-protected and contains important information, such as documentation requirements and deadlines, that pertain to the loan. All of this information is updated in real time as the loan application is processed. In addition to the E-Track system, our customer service representatives provide as much personal contact and information as the consumer desires.

Analytical Loan Recommendations. We provide borrowers with recommendations regarding available loan products. We formulate our recommendations by using powerful comparative and analytical tools designed to assist the borrower in determining the most suitable product available through E-LOAN. These recommendations are based solely on borrower-provided information and criteria.

Ongoing Mortgage Monitoring. We enable customers to obtain information in order to make refinance decisions by continuously comparing their existing loan to new products available through E-LOAN and alerting them to opportunities to save money over the life of their loan. Our monitoring algorithm takes into account the borrower's investment objectives, prospective hold period, risk profile and marginal tax rates. This capability promotes long-term relationships with our customers.

Proprietary Underwriting System. A mortgage and home equity loan application is immediately passed through an automated series of credit filters, and then, if credit qualified, immediately passed through our proprietary underwriting engine. Within approximately two minutes of customer submission -- and without any human effort or underwriting charges except for the cost of a credit report -- the loan is automatically underwritten and an email response is sent to the customer. At the same time, the output of our underwriting engine is passed on in an easy to read electronic format to a loan consultant for immediate follow up with the customer.

Online Disclosures. The disclosures that are required by various federal and state laws and regulations are accepted in electronic form by a majority of our mortgage and home equity customers, enabling fast and easily navigable access using our proprietary E-Track system. In addition, we now post federally required decline letters electronically, eliminating shipping and handling costs.

Flash Funding. For a majority of our mortgage loan sales, we use our flash funding process. Using this process, all of the information we have on the loan is sent across an electronic bridge to the loan purchaser, where it is automatically loaded into their servicing system, eliminating almost all of the manual effort required on their end. A handful of the key customer signed documents are mailed to the loan purchaser; the remainder of the loan file is immediately sent to storage. We receive the loan purchaser's electronic acknowledgment and payment for the loan in days, not weeks, enabling us to better manage interest rate spreads, hedge costs, and working capital.

Business Development

The following are key areas of focus to further develop our business:

Expanding Capital Markets Development and Consumer Debt Offerings. We believe that our ability to satisfy customers' specific borrowing requirements by offering a comprehensive selection of consumer debt products available online nationwide is one of our greatest competitive advantages. We intend to continue to seek ways to increase the breath of our capital market sources in order to expand the number and variety of product choices available for consumers while also improving our pricing flexibility.

Automating the Lending Process Comprehensively. We intend to further streamline and automate our processes in order to eliminate the inefficiencies and unnecessary steps that separate the origination and underwriting processes from the capital markets. By continually incorporating and upgrading automated underwriting techniques and technologies, we believe we will efficiently match borrowers with the loan best tailored to their needs, resulting in faster approval, lower pricing and reduced documentation. We are also positioned to take advantage of the trend to adopt automated property valuation modeling versus traditional appraisals as well as electronic signatures versus the traditional paper based process.

Achieving Direct Response Marketing Excellence. Our ability to effectively target prospective customers with timely and compelling offers will enable us to realize our market share growth potential. We will continue to invest in the analytical tools and specialized personnel to allow us to achieve substantial growth in our customer base .

Increase Relocation Mortgage Clients. Relocation mortgage loans are loans that are part of a Company's employee relocation program. The relocation mortgage market is ideally suited to our centralized online lending model with telephone support from loan professionals. Unlike the total mortgage market, this segment is primarily consolidated among three primary providers, Wells Fargo Bank, Cendent Mortgage, and Washington Mutual. Relocation loans are an attractive business as they represent consistent volume with fewer sales obstacles than a typical purchase mortgage transaction because of the inherent corporate endorsement. We currently have five Fortune 500 relocation clients, and believe that we have a significant opportunity to grow this segment of our business.

Helping Consumers Monitor and Manage Their Debt. Many borrowers receive little ongoing assistance in managing their debt after a loan is closed. Many direct lenders who also engage in mortgage servicing are not committed to proactive monitoring of their customers' loans because they risk losing servicing fees if customers refinance with other lenders. Multi-lender brokers have an incentive to pursue refinancing opportunities, but may lack the technological capability to proactively monitor the market changes of thousands of loan products in real time.

We recognize that consumers can lower their overall cost of capital by managing their loans as a portfolio, much as they manage their assets. We intend to provide tools and services to help our consumers create and manage these debt portfolios through personalized accounts within our online environment. We believe that our role in providing these tools and services will help us form and maintain strong, ongoing relationships with borrowers that will prompt them to use us to fulfill their future borrowing needs.

Our debt management services currently include loan monitoring and rate alerts that provide customers with assistance in mortgage loan origination and refinancing decisions. We intend to further develop tools that help our customers identify optimal financing opportunities available through E-LOAN for all of their debt types in order to lower their overall cost of capital.

Mortgage and Home Equity Loan Operations

Overview. As a direct-to-consumer lender we originate, underwrite, fund and promptly sell a variety of mortgage and home equity loans in the secondary capital markets, including long term and intermediate term mortgages, adjustable and fixed rate mortgages, no closing cost loans, and home equity loans and lines of credit. Originations are funded through our own warehouse lines of credit. Our loan originations are principally prime credit quality loans secured by single-family residences. All loans are underwritten pursuant to standards we establish to conform to the underwriting criteria of the ultimate purchasers of the loans. In this way, we minimize credit risk with our loan products. We engage in hedging activities to minimize interest rate risk during the brief time between rate-lock with our customer and sale of the loan.

Obtaining a Loan. The loan origination process begins when the customer completes a loan application online through our website or by telephone. Once the application is submitted, our proprietary underwriting system immediately analyzes the borrower's information and renders a credit decision. Generally, within minutes of submitting an application (or hours for weekend applications), customers receive a phone call from a loan professional welcoming them to E-LOAN, providing a credit decision, answering questions, verifying information in the application and telling them what to expect from the process. Customers then receive their required disclosures electronically or in the mail, based on the customer's preference.

An E-Track account is created shortly after a loan application is received and keeps the customer abreast of all pertinent information throughout the loan process. Customers are invited to visit their E-Track account frequently to review key steps in the loan process and receive updated information regarding their loan product, closing costs, and interest rate lock. They can also view loan disclosures and the progress of their loan approval.

Although the E-Track account is available 24 hours a day, seven days a week, a dedicated loan consultant also maintains telephone and/or email contact with borrowers throughout the loan process to communicate major events and answer questions. One-on-one personal service begins as soon as the online application has been received, and continues through approval and funding.

Most approved customers are invited to request an interest rate lock for their selected loan at time of application during the initial phone contact. Lock requests can be made by phone or online through their E-Track accounts. Once the requested rate has been confirmed, customers are notified and provided with all relevant product and execution conditions.

As additional loan documentation is received, data provided by the customer at the time of initial origination is validated. Where needed, appraisals, credit reports, and title and survey documents are ordered and reviewed by the loan consultant, who is supported by a loan processor.

Final loan approval is secured once all critical data elements have been validated and have been confirmed to satisfy the guidelines of the lending program sought by the borrower. If a borrower's loan does not satisfy loan program guidelines, the designated loan consultant will research additional loan programs for the customer. If a product cannot be secured for the customer, the customer will receive a letter stating the reasons that a loan could not be obtained.

After loans have been approved and all relevant conditions have been met, we prepare loan documents to be signed by the borrower. The assigned loan consultant will work with the borrower to obtain the necessary signatures for funding and schedule the closing of the loan. Often a mobile notary service is used to provide an added level of convenience for the borrower. Once the borrower has signed all documentation, the loan file is reviewed to identify any missing requirements. If complete, the loan is then funded and recorded as closed.

A quality control review of funded loans is performed prior to forwarding the loan documentation to the final mortgage loan purchaser or its designated custodian. An accounting audit is also performed to reconcile settlement information provided by escrow/attorney settlement agents with our internal information. Loan documentation relating to closed loans is then shipped to the mortgage loan purchaser or its designated custodian, and documentation is maintained to satisfy regulatory and company record retention requirements.

We also solicit customer feedback regarding the loan process to measure overall customer loyalty and to utilize in developing future product and service enhancements that are responsive to customer concerns.

Loan Underwriting . Our guidelines for underwriting conventional conforming loans comply with the underwriting criteria employed by Fannie Mae and/or Freddie Mac. Our underwriting guidelines and property standards for all other conventional non-conforming loans are based on the underwriting standards employed by the secondary mortgage loan purchasers.

We consider the following general underwriting criteria in determining whether to approve a loan application:

  • employment and income;
  • credit history;
  • property value and characteristics; and
  • available assets.

Automated Underwriting . Automated underwriting (AU) contributes significantly to our goal of increasing the efficiency of multi-source lending by providing customers faster, more cost-efficient credit reviews and decisions. AU may further offer efficiency enhancements through reduced costs in property appraisals. In addition, we believe customers also value the less onerous and time-consuming nature of AU relative to more traditional underwriting processes.

We have created our own proprietary underwriting engine that enables us to instantly underwrite loans at time of application at minimal cost. We are also approved as an originator under Fannie Mae's Desktop Originator and Desktop Underwriter system (DU), and Freddie Mac's Loan Prospector (LP). These systems help automate the lending process for all conforming loans.

We will continue to seek to enhance our AU capabilities and incorporate as many techniques and technologies as are warranted by our business needs and the needs of our major business partners.

Automated Appraisal . The use of automated property valuation models (AVMs) to replace the traditional physical appraisal process is starting to gain acceptance by our capital market sources. This trend is particularly evident with our home equity products where approximately 80% of loans are completed using AVMs versus physical appraisals. Our customers benefit through reduced costs (the cost of a typical appraisal normally exceeds $300) and time savings. Freddie Mac and Fannie Mae are both conducting pilot programs with no-appraisal loan products that use AVMs. Acceptance of AVMs is necessary for a true electronic loan offering.

Interest Rate Hedging . We attempt to minimize the interest rate risk associated with the time lag between when loans are rate-locked with the customer and when they are committed for sale or exchanged in the secondary market, through our hedging activities. Individual mortgage loan risks are aggregated by note rate, mortgage loan type and stage in the pipeline, and are then matched, based on duration, with the appropriate hedging instrument, thus mitigating basis risk until closing and delivery. We currently hedge our mortgage pipeline through mandatory forward sale of Fannie Mae mortgage-backed securities and non-mandatory forward sales agreements with the ultimate investor. We determine which alternative provides the best execution in the secondary market.

We believe that we have implemented a cost-effective hedging program to provide a level of protection against changes in the market value of rate-lock commitments. However, an effective strategy is complex and no hedging strategy can completely insulate us against such changes.

Warehouse credit facilities. We use warehouse credit facilities to fund our loans prior to their sale to capital market loan purchasers, typically within 30 days. We currently draw on warehouse credit facilities established with Greenwich Capital Financial Products, Inc. and GMAC Bank. We have committed and uncommitted funds available through these facilities aggregating approximately $350 million as of March 31, 2002. The interest rate charged on these borrowings range from LIBOR plus 0.75% to 2.0% depending on the loan type. The net of this expense and the interest income that we earn during the time loans are held for sale currently produces a positive interest spread.

Our agreements with our warehouse lenders require us to comply with various operating and financial covenants. These covenants restrict our ability to:

  • sell any of our material assets or merge or consolidate with another company;
  • issue additional shares of common stock without their consent;
  • pay dividends on our outstanding shares of common stock; and
  • amend our Certificate of Incorporation or Bylaws.

These covenants also require us to:

  • maintain a minimum cash and cash equivalents, and tangible net worth;
  • limit the amount of debt we incur relative to our net worth;
  • ensure that our current assets are equal to or greater than our current liabilities; and
  • maintain two warehouse facilities at all times with minimum credit limits.

Loan Production. We originate conventional mortgage loans (conforming and jumbo loans) and home equity loans and lines of credit. Approximately 78% of the conventional loans originated are conforming loans, which are eligible for sale in programs sponsored by Fannie Mae or Freddie Mac. The remainder of the conventional loans are non-conforming loans. These include loans with an original balance in excess of $300,700 that otherwise meet all other Fannie Mae or Freddie Mac guidelines (jumbo loans), and other loans that do not meet those guidelines.

Auto Operations

Overview. We are one of the leading online providers of auto loans for new or used vehicles. We can also refinance an auto loan for customers who have made at least three payments on an existing automobile installment loan. We primarily fund auto loans using a line of credit and then sell them to auto loan purchasers in a manner similar to that which we employ for mortgage and home equity loan sales. The loan underwriting criteria are similar to those of our mortgage and home equity loans, and are also based upon the guidelines established by the ultimate loan purchaser, thereby reducing our credit risk. We minimize our interest rate risk as the auto loan purchasers provide an interest rate commitment that covers our time to process and sell them the loan.

Obtaining a Loan. The process of obtaining a car loan involves fewer steps than a mortgage or home equity loan and occurs at a much faster pace. The process begins when a customer searches for a rate, then completes a short, online application at our website or by telephone. The application goes through an automated underwriting process that takes only minutes to complete.

If approved, a customer receives an email notification generally within two hours after submitting the application. At the time of approval, a documentary draft and two sets of sample loan documents are created (one for a used car and one for a new car), and are mailed or delivered overnight to the customer. The customer then takes the documentary draft and documents to any franchised auto dealership and negotiates the purchase price for a vehicle of their choice, with the same leverage in the transaction that a cash purchaser brings to a dealer.

When the customer selects a vehicle, and the purchase price is finalized, the customer signs the draft and presents it to the dealer as payment. The dealer is required to obtain a copy of the customer's driver's license as proof of identity and to forward this to us, along with any other documents required by the secondary market loan purchaser. In addition, the dealer ensures that the title is filed properly, with E-LOAN or the loan purchaser listed as the lien-holder, and that the purchase agreement is faxed to us. The dealer deposits the draft with its bank. Upon notification that the draft has been presented for payment, we verify that all of the documentation has been received and is in order before honoring the draft. When the documents have been verified, the bank is notified to honor the draft and a copy of the final loan contract is delivered to the customer.

Using our propriety E-Track system, we are electronically providing auto customers in test markets with their actual loan documents online immediately after they are approved. Customers are able to receive their final loan documents in minutes, instead of days, with a lower cost and better, faster borrower experience. In addition, the dealer is able to receive payment through an electronic transmission (ACH) versus the draft process. This is a significant advance in our goal to create an electronic loan. We anticipate rolling out this new process broadly over the coming year.

Line of credit facilities . We use a line of credit facility established with Bank One, NA to fund our loans prior to their sale to auto loan purchasers, typically within 10 days. We have $10 million in committed funds available through this facility as of April 1, 2002 at LIBOR plus 2.5% which expires on July 31, 2002. This agreement also requires us to comply with various operating and financial covenants. Bank One has indicated that they are exiting this component of their lending business, and therefore will not be renewing our line of credit after the expiration on July 31, 2002. We are in active discussions with multiple lending providers, and believe that we will be successful in securing an alternative source prior to expiration of our current facility.

Customer Service

We devote significant resources to providing personalized, timely customer service and support to minimize the potential uncertainty, anxiety and inconvenience of the loan process. By combining high-tech communications with highly personalized attention, we provide a level of customer service that often exceeds that experienced in the traditional loan application process.

In order to help prospective customers understand the lending process, our website provides a rich assortment of educational content, advisory tools and ancillary services. Prospective customers may call us toll-free with questions seven days a week or email us and receive prompt replies.

Once a mortgage or home equity application is submitted online, we assign the customer a loan professional that becomes the customer's primary point of contact, ensuring prompt and personalized attention. Similarly an auto loan consultant is available to assist the borrower in the loan process. The loan professional maintains regular email and phone communication with the borrower to answer questions, address any problems and generally facilitate closing the loan by coordinating with our underwriting and processing staff. After closing, we survey all borrowers to assess the quality of their experience both on the website and in terms of customer service and an award is presented to employees achieving the highest customer satisfaction standards. Customers who withdraw their applications are also surveyed to determine improvements that can minimize future withdrawals.

Every mortgage or home equity loan application also triggers the opening of a password-protected E-Track account. Using E-Track, customers can track the process of their loan applications online, at any time. Each event that occurs throughout the various stages of the loan process generates an automated email alert to the borrower. The information is also logged in E-Track so the borrower has a continuously updated record of all loan application developments. Borrowers can also view required disclosures electronically through E-Track.

TECHNOLOGY

Our technology systems use a combination of our own proprietary technologies, open source, and commercially available, licensed technologies from industry leading providers, including Sun Microsystems, Cisco Systems and Oracle. Our systems were designed around industry standard architecture to reduce downtime in the event of outages or catastrophic occurrences. These systems provide availability 24 hours a day, seven days a week, and have capacity for peak activity levels without requiring additional hardware or support.

User Interface . Our website is designed for fast downloads and compatibility with the most basic browsers. Pages are built with minimal graphics and do not require client-side plug-ins or Java to view.

Loan Application and Tracking . When a customer applies for a loan online, the application data is stored in a database server. As additional information, including credit reports, appraisal details and financial documentation, is obtained throughout the loan process and added to the borrower's file, e-mails are automatically sent to the borrower (and realtor, if applicable) to inform them of the current status of the loan application. At the same time, the borrower's E-Track account is updated.

Security . In order to safeguard borrowers' sensitive financial data, our systems provide secure online transaction capability. Customer information sent via the website is encrypted using a Secure Socket Layer ("SSL"). The network is protected with industry leading firewall software. The website itself is locked down, with only two people authorized to change the content on the production servers. E-Track is password-protected so that only the borrower may access the account. The servers containing borrower data are accessible only to authorized users within E-LOAN.

Server Hosting and Back-Up . Our website system hardware is hosted at the Verio NTT facilities located in San Jose, California, providing redundant communication lines and multiple emergency power back-up. We have implemented load balancing systems and our own redundant servers to provide for fault tolerance. Scheduled maintenance takes place without taking the website offline.

CUSTOMERS

We are a direct-to-consumer lender. Our customer's loan characteristics vary by product type. Our capital market loan purchaser's generally look at three areas to assess loan risk:

  • Credit reputation: credit score and history
  • Collateral: loan amount relative to the home or auto value
  • Capacity to pay: income, debt, cash reserves

A credit score summarizes credit reputation. Credit scores generally range from the mid 300s to the mid 800s, with scores above 700 representing good to excellent credit. The median credit score for our mortgage, home equity, and auto loans in 2001 were 750 , 733 and 684, respectively. Capital market loan purchasers look favorably upon loans with loan to value ratios ("LTV"s) below 80% and often pay a premium for those loans. The LTV of our mortgage and home equity loans in 2001 were 69% and 76%, respectively.

As all loans are underwritten pursuant to standards we establish to conform to the underwriting criteria of the ultimate purchasers of the loans, we minimize our credit risk with our loan products. We do warrant that we will perform the loan origination process - gather required documentation and perform the necessary steps - consistent with those underwriting guidelines. If we make an error in our process, we agree to correct the mistake or repurchase the loan if required. Since our inception, we have rarely repurchased loans and in all cases the loans were subsequently sold without a material discount in price.

GEOGRAPHIC INFORMATION

All of our revenue is generated from transactions originating in the United States. All of our fixed assets are located in the United States, principally at our headquarters in Dublin, California and at our auto operations site in Jacksonville, Florida.

MARKETING

Our brand and direct response marketing strategy is to attract home and auto loan applicants to our website by promoting the E-LOAN brand as a byword for trust, choice, open and honest competitive pricing and service for consumer loans. We rely on a variety of methods to promote our brand. By providing superior customer service, we promote referrals from satisfied borrowers. Offline marketing focuses on direct response vehicles (primarily direct mail and email campaigns) that target the demographic and geographic segments with the highest propensity to utilize an online loan provider. We plan to invest in new database and analysis systems and expand our staff of experienced direct marketers with the goal of achieving excellence in this area. Online marketing efforts are centered on partnerships with leading online companies and select use of banner advertising. We also intend to take advantage of both short and long term cross-selling opportunities across our product lines.

Mortgage and Home Equity Loan Marketing . We have an exclusive partnership to provide mortgage and home equity loans with Charles Schwab & Co., Inc. Strategic partnerships with such online websites as United Mileage Plus program and Bankrate.com drive applications through mortgage loan centers on those websites. We have also partnered with RE/MAX Realty, the nation's second-largest real estate agency. We also engage in marketing activities at realtor and relocation trade shows and other events in the real estate industry in order to encourage realtors and relocation consultants to promote our website to homebuyers. A minority of our mortgage and home equity applications are derived from our online marketing partnerships.

Auto Loan Marketing. Strategic partnerships with leading automotive sites, including Microsoft's CarPoint, Autobytel.com, and Bankrate.com, drive applications from Internet savvy auto buyers through auto loan centers on those websites. The majority of our auto applications are derived from online marketing partnerships.

COMPETITION

Primary Competition

Our primary sources of competition remain the traditional offline lenders in the loan market and to a lesser extent online providers of consumer loans. The largest competitors by product are: mortgage brokers for mortgage loans, the consumer's bank for home equity loans, and auto dealers for auto loans.

Mortgage Loan Competition. Our largest competition for mortgage loans is mortgage brokers. Mortgage brokers continue to originate the majority of all mortgage loans. The popularity of using brokers is indicative of consumers desire to obtain a competitive price from among multiple lenders. While the common perception is that a broker performs extensive research to ensure the customer achieves the right loan at the right price, the reality is often that consumers are guided into loans that provide the greatest commission to the broker. Brokers are also middlemen in the transaction and as a result they cannot control the fulfillment process, and overall customer experience, in contrast to a direct-to-consumer lender. The brokers' key competitive advantage is their existing relationship with real estate agents who refer customers to them.

We offer the choice advantages of a broker through our lower cost capital markets access to multiple loan purchasers, with the transaction fulfillment advantages of a direct-to-consumer lender such as rapid credit decisions and streamlined processes. We believe real estate agents will gain confidence in our solution over time and want their customers to realize the benefits of lower rates and fast service.

Home Equity Loan Competition . There is an under-developed competitive market for home equity loans as compared to mortgage loans. Because of this, consumers tend to apply for home equity loans with their primary bank because of its familiarity.

Auto Loan Competition. Our largest competition for auto loans is the auto dealership's finance salesperson. By separating the auto financing from the purchasing transactions, we effectively remove dealer control over financing terms and permit consumers to receive rates that are based upon their credit background and not their negotiating skills. We can typically offer our customers a lower loan rate than auto dealerships offer.

Online Competition

Online Direct Lender Competition. Traditional single source lenders such as Washington Mutual, Countrywide Home Loans, Citibank and Bank of America have created websites which offer mortgage and home equity loans directly online as an alternative to the traditional process. These sources, however, normally do not offer the consumer a selection of loan products from multiple capital market loan purchasers or comparisons of products, and they may be reluctant to reduce fees due to the risk of cannibalizing their existing offline distribution channels. In addition, these lenders often hold loans for servicing income and therefore may face a potential conflict of interest in promoting refinance opportunities for their customers. If they refinance an existing customer into a lower interest rate loan, they may lose money.

The online lenders with the most comparative business models and product offerings are; Quicken Loans, E-Trade Mortgage, and Ditech.com for mortgage and home equity loans, and Peoplefirst.com for auto loans.

Loan Marketplace Websites. A number of consumer loan websites act much like traditional loan brokers, offering multi-lender distribution channels for banks and other financing sources. Among these providers are Lending Tree and Providian's GetSmart. These websites are a marketplace that operate on an advertising model but do not actually make loans; they simply provide a conduit between borrower and lender. They do not offer complete transaction fulfillment for customers, and therefore, add additional steps and fees to the lending process. Our control over the fulfillment process allows us to remove the redundant or unnecessary steps and related costs involved in getting a loan, and to pass savings onto the consumer. Our capital markets access to multiple loan purchasers further enables us to provide consumers with highly competitive rates.

We believe that a significant market opportunity exists for an online direct-to-consumer lender that combines a broad selection of loan products from different capital market sources with complete transaction fulfillment. Our model offers a compelling value proposition based on saving borrowers money, time and effort.

LICENSING AND REGULATION OF MORTGAGE AND AUTO LOAN BUSINESS

We are licensed as a mortgage banker and/or mortgage broker, or are otherwise authorized to originate mortgage loans in all states and the District of Columbia. We have obtained available licenses in every state that requires such licensing for our online operations and originate auto loans in most, but not all, states. In a few states where licensing would provide rate relief for certain loans, but is not available for our particular online lending operations, we limit our product offerings to comply with state law.

The mortgage and auto loan businesses are highly regulated. In order to offer our mortgage and auto loan services, we must comply with federal and state laws and regulations relating to licensing, advertising, loan disclosures and servicing, rate and fee limits, use of credit reports, notification of action taken on loan applications, privacy, discrimination, unfair and deceptive business practices, payment or receipt of kickbacks, referral fees or unearned fees in connection with the provision of real estate settlement services, and other requirements.

Current laws, and those enacted or interpreted to deal with Internet transactions and other aspects of our business, may be revised or interpreted in ways that adversely affect our business. We believe we are in substantial compliance with the laws applicable to our business, and have taken prudent steps to mitigate risks associated with offering loan services through the Internet.

CUSTOMER PRIVACY

We believe that the privacy of customer information is important to uphold both online and offline. We disclose our information handling practices in a detailed privacy policy, which is prominently accessed from every page of our website. Our policy is based on industry best practices, fair information practices and privacy law.

The recently enacted Gramm-Leach-Bliley Act ("GLBA"), among other things:

  • Restricts financial institutions from disclosing nonpublic personal information about a consumer, subject to certain exceptions;
  • Requires financial institutions to disclose its privacy policies and practices with respect to information sharing;
  • Does not preempt any state law that provides greater protection than provided for in the GLBA; and
  • Requires that financial institutions provide a means for consumers to opt out of information sharing with third parties.

We engage the services of an independent firm, which reviews our online and offline privacy practices regularly and provides us with a certificate of compliance that can be viewed by accessing our privacy policy. We believe independent third party verification of our privacy practices is an essential means of validation for our customers.

EMPLOYEES

As of December 31, 2001, we employed 436 full-time employees, of whom 227 were in mortgage loan operations, 46 were in home equity loan operations, 70 were in auto loan operations, 40 were in administration, 17 were in marketing and business development, and 36 were in engineering. As we continue to grow and introduce more products, we expect to hire more personnel, particularly in the area of loan operations. None of our employees are represented by a labor union or are the subject of a collective bargaining agreement. We believe that relations with our employees are good.

EDGAR® is a federally registered trademark of the U.S. Securities and Exchange Commission. EDGAR®Online is not affiliated with or approved by the U.S. Securities and Exchange Commission.