The second acquisition of a U.S. financial services business by Sir Richard Branson's Virgin Group PLC has put the British conglomerate in a field that many lenders have quit or pulled back from: mortgage lending through brokers.
Virgin Money USA, the Waltham, Mass., unit that bought the assets of Lendia LLC last week, said it sees the purchase as a way to broaden distribution of the peer-to-peer loans it arranges, in addition to getting a foothold in actual lending.
"We had to find a way to distribute through the broker channel knowing that well over half of all purchase money transactions are originated through brokers," Asheesh Advani, Virgin Money's chief executive, said in an interview Monday, the day the Lendia purchase was announced.
The quality of mortgages produced by brokers and correspondents is the reason lenders have usually cited for discontinuing or curtailing such channels. But Virgin Money says Lendia is different from most wholesale originators. The Marlborough, Mass., outfit had conceived of itself not as a wholesaler, but as a back-office outsourcing company that kept a tight grip on the origination process — and, therefore, the customer experience.
Mr. Advani said his unit chose to enter the channel through the Lendia purchase because of the importance of the "processing piece" in broker originations, and because Lendia's back-office system offered exceptional "control" over the "customer experience" and "the quality of the asset."
Greg O'Connor, who co-founded Lendia in 1999 and continues to run the operation as a Virgin Money executive vice president, said, "Our view historically has been that, anecdotally, if a lot of … traditional wholesalers had focused more on the process, they might still be focused on the broker space today."
Mr. Advani started CircleLending Inc. in 2001. Virgin Group bought a majority stake in CircleLending and renamed it last year.
At the time of that transaction, Mr. Advani said Virgin Money wanted to create an offering that would blend its core peer-to-peer product with a direct loan. The combination product would be cheaper than a loan from an institution alone because it would still involve funds typically extended from friends and family.
On Monday Mr. Advani would not give an update on that plan, except to say that the Lendia purchase gives Virgin the capacity to develop a blended product.
At the time of Virgin Group's purchase, CircleLending had arranged a total of about $190 million of loans. Mr. Advani said his unit passed the $300 million mark "about a month ago." He attributed the accelerated volume to disruption in the availability of alternative products because of the credit crisis, and to the Virgin brand, which he said attracts "self-directed people who want to try new things, and that's effectively the type of demographic we're going after."
(Mr. O'Connor said foregrounding the Virgin brand in the wholesale space is part of the plan, though specifics are still being worked out.)
The mix of volume has also shifted since Virgin acquired CircleLending — where mortgages accounted for about half the volume, the split is now even among mortgages, business loans, and unsecured personal loans. Mr. Advani attributed this change to factors such as the credit crisis, "the brand, our partnerships, our marketing."
Virgin Money markets the peer-to-peer service through its Web site and through financial planners. Adding "the broker channel is essential to our success" in building scale in that arena, Mr. Advani said. The company also plans to expand traditional loan volume in the newly acquired business.
Mr. O'Connor said he was interested in the sale in part because of a "unique opportunity to leverage social products to augment traditional mortgage products" as subprime and other loans have been choked off.
He would not provide absolute figures for Lendia's volume, but said that "over the course of the last two years" it had "grown at better than 80%" a year on average.
Lendia "historically" funded or purchased about 70% of the loans originated using its system, but did not view itself as a wholesaler, Mr. O'Connor said. "We're focused on how assets are created and assembled. We do not employ account executives" who "go out and just hunt for loans."
Rather, "a second set of eyes and hands" participate in the process, creating a much higher-quality asset, he said.
The business tries to improve "the customer experience" by "setting proper expectations, and having a high degree of predictability around" events "in the life cycle of a mortgage," such as appraisals and the arrival of a preapproval letter, Mr. O'Connor said.
"By being very up front … and communicating those major milestones to customers, you can set the experience and deliver on the promises."
At the time of the sale, Lendia had about 400 mortgage brokers registered to use its technology in about 30 states, Mr. O'Connor said, and Virgin Money is working on securing licenses across the rest of the country.
