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LendingTree Sued for Lending

Lawsuit filed in California

November 10, 2006

WASHINGTON correspondent for MortgageDaily.com

A lawsuit recently filed in California's state court claims LendingTree operates as a lender even though it claims otherwise. But the online giant says the lawsuit is only retaliation from a disgruntled former employee.

A group of California homeowners say the ubiquitous company uses its Web site to secretly generate leads for the direct-lending division it purchased a couple of years ago, not to field lender quotes on consumers' behalf.

"LendingTree's lucrative business, however, is built upon lies, deception, and false advertising," the plaintiffs claim in court documents. Mark Teuton, the plaintiffs' California-based attorney, said in a telephone interview that more than 70,000 consumers each month submit their personal and financial information to LendingTree through its Web site.

The lawsuit could be enormous.

Teuton estimated that 20,000 to 40,000 plaintiffs nationwide will be eligible to participate. He said a significant number of people have already contacted him via e-mail and telephone with an eye toward participating in the court action. And consumers aren't the only ones paying attention.

Teuton said several lenders that are part of LendingTree's network of 240 lenders have also contacted him and have indicated concern about the allegations made in the complaint.

LendingTree denies the allegations.

"The claim that LendingTree engages in any illegal, deceptive, or misleading business practices is simply false, and we are prepared to defend against this lawsuit vigorously," LendingTree spokeswoman Rebecca Anderson said in an e-mailed statement.

"This suit arises out of the termination of a disgruntled LendingTree employee who was let go after working with the company for nine months. LendingTree provides consumers with multiple loan offers from either retail or wholesale lenders, and we experience customer satisfaction of over 90%. We provide appropriate disclosures throughout the loan process," she continued.

LendingTree has not yet filed a response with the court.

The borrowers say the alleged deception arose from LendingTree's purchase of HomeLoanCenter.com in December 2004 after LendingTree became dissatisfied with sitting on the sidelines of the then booming real estate financing market. The newly acquired company's name was later changed to LendingTreeLoans, they say. The plaintiffs claim that because disclosing the purchase would reduce LendingTree to nothing more than a traditional mortgage broker in consumers' minds, LendingTree concealed the transaction.

The lawsuit charges that LendingTree markets itself as a referral service that is not a lender but, rather is a neutral third party that facilitates loan shopping by submitting borrower information to a network of lenders that compete for the borrowers' business. As a result, LendingTree leads consumers to believe that up to four independent lenders from its network will contact them and submit competitive loan proposals.

However, the homeowners say, in many cases, LendingTree is the bank, sells the loan as a direct lender and profits on both the front end and back end of the sales process through inflated fees made possible by the intentional removal of competition through deception. Teuton said LendingTree insiders have told him that the company also sells loans at inflated interest rates, sometimes charging consumers three percentage points more than they could have gotten elsewhere.

"It is nothing more than a traditional mortgage/broker/banker that has, through intentional deception and false advertising, removed the biggest obstacle to selling loans at unfair prices -- competition," the plaintiffs said.

But LendingTree disputes those claims.

Anderson explained LendingTree operates two models that provide competing loan offers to consumers.

One model involves consumers receiving offers from different retail lenders, speaking directly with loan officers at each lender, and then closing a loan with the third-party lender they choose -- the "retail lender network," she explained.

In the second Lending Tree model, that Anderson called the "wholesale lender network," a LendingTree affiliate provides consumers with multiple offers from wholesale lenders and investors in the secondary market. The consumer only has to speak to one loan officer to choose between the loan alternatives, rather than to multiple parties, she said.

The plaintiffs say the deception extends to LendingTree making false misrepresentations in the disclosures section of its Web site. For example, LendingTree says it is not a lender and does not make loans or credit decisions in connection with loans; however, according to the homeowners, LendingTree performs those functions through HomeLoanCenter.com.

Anderson said customers who are served by their direct lending affiliate, are provided with appropriate disclosures throughout the loan request process, both before they submit the loan request, and again after they are matched. The process that is disclosed to them is the process that the consumer experiences -- the consumer speaks with one loan officer and receives multiple offers, she said.

Teuton said the plaintiffs are claiming false advertising and they are going to seek to prove that LendingTree is intentionally lying to borrowers, especially on the phone, about the company's role. Teuton said he believes the name change from HomeLoanCenter. com to LendingTreeLoans is part of the deception maintained by LendingTree. Teuton said that when consumers get a phone call from someone identifying themselves as being from LendingTree, providing information on the best rate they have received, that people assume they are getting quoted loan terms from a neutral party, not a lender.

Teuton said the lawsuit is based on inside knowledge, a former LendingTree employee who had worked in for LendingTreeLoans. Teuton's law firm is representing him in the wrongful termination lawsuit he has brought against the company. Teuton said the class action lawsuit against LendingTree arose from the information the former employee provided his firm. The employee is not involved in the class action lawsuit bought by the homeowners.

The plaintiffs have asked for attorneys' fees and costs, injunctive relief, restitution and that all profit obtained by unlawful or fraudulent means be returned to the public.

Lisa D. Burden is a legal analyst for MortgageDaily.com and holds a law degree from the University of Maryland. She is currently a freelance journalist who previously wrote for Institutional Investor publications and the Baltimore Daily Record.

e-mail Lisa at: [email protected]

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