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.
|