E-Loan Inc., battling market skepticism over its online mortgage strategy, said Tuesday that it has secured $40 million in new funding and struck a marketing partnership with Charles Schwab & Co.

"It's a powerful one-two punch," said Tim P. Butler, an analyst for Pacific Crest Securities in Portland, Ore. "Not only did they get a patient and cooperative investor, they also gain access to a very demographically attractive customer base."

The capital injection will help E-Loan, of Dublin, Calif., achieve profitability, and the deal with Schwab - whose parent is providing some of the $40 million - gives it a strong distribution partner: Schwab has 3.7 million online accounts.

San Francisco-based Schwab, meanwhile, gets another weapon in its battle with commercial banks in brokerage and wealth management.

"Our goal is to demystify the mortgage process, put customers in control, and bring it all together online," said Schwab spokesman Morrison Shafroth. He said customers had asked Schwab to offer mortgages over its Web site. "It's the right time and the right cultural fit. E-Loan shares our commitment to customer service and they has technology that will grow with us."

In the equity infusion, Abbey National, FT Ventures, and Charles Schwab Corp. - parent of the brokerage - are each making $10 million investments. Benchmark Capital and Technology Partners, both previous investors, have pledged $5 million each. Officials said E-Loan would use the new funding for working capital and general corporate purposes.

Under the alliance with Schwab, E-Loan will offer mortgage products through Schwab.com. E-Loan will provide the back-end technology, which will be branded and integrated into Schwab.com.

E-Loan officials acknowledged in February that they needed a final round of funding of close to $50 million to see it through to profitability.

Several analysts and banking executives contend that Internet consumer lending is unworkable. The evidence includes companies such as Mortgage.com and FiNet.com, which switched to business to business strategies this year after losing millions of dollars in the consumer marketplace. E-Loan chief executive officer Chris Larsen questioned his competitors' commitment.

Concerns over profitability and E-Loan's cash burn-rate had pummeled its stock price, which soared 130% Tuesday to close at $9.3438.

By the time E-Loan reaches profitability, however, it may have sold almost two-thirds of itself.

In exchange for the new round of funding alone, E-Loan passed out approximately 20% of its shares. Schwab, Abbey, and FT Ventures will each receive 2.7 million shares, or 5% of the company. Benchmark Capital and Technology Partners will each add 1.3 million shares, or 2.5%, to their existing investment: Benchmark will own about 19.7% of the company and Technology Partners 11.5%.

Schwab will also get a seat on E-Loan's board - Daniel O. Leemon, its executive vice president for business strategy, will be nominated - and warrants totaling 13.1 million shares in two tranches.

The first tranche of 6.5 million shares has a three-year term and is exercisable at a strike price of $3.75. The second consists of 6.6 million shares, has a three-and-a-half-year term, and is exercisable at $15 a share.

Depending on how its warrants are exercised, Schwab could eventually own almost 25% of E-Loan.

Several analysts said that given the market - both in technology and mortgages - the deals make sense for E-Loan.

"The most important thing is that now E-Loan has a chance without pressure on capital needs to try to execute on its strategy," said Michael S. Hodes, e-finance analyst for Goldman Sachs. "At the same time, they have received the endorsement from Schwab and the other backers that sends a reassuring sign to the market."

However, Mr. Hodes said those benefits come at the cost to the existing shareholders. E-Loan essentially sold 20% of the company for $3.75 a share, he noted.

E-Loan went public in late June 1999. Its shares traded as high as $63 the next month but plunged below $4 April 17.

Observers are still skeptical about E-Loan include Robert F. Sterling, an analyst with Jupiter Communications.

"The fact that mortgages are complex products and are involved in a more complex process of buying a home makes it hard for a pure-play [Internet lender] to succeed in a high rate environment," he said.

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