Sub-Prime Lender Banking on Internet Play.

Only a year ago, officials at WMC Mortgage Co. had envisioned a vast network of retail outlets to handle their lending business.

Today, after a revolutionary change in WMC's business model, clicks have replaced the bricks the company once intended to build. WMC now makes all of its loans over the Internet, using a proprietary technology it developed in-house. And it deals exclusively with mortgage brokers, rather than directly with borrowers.

WMC's business-to-business program is believed to be the only one of its kind for sub-prime lenders -- banks that lend to people with troubled credit histories and other problems. It has helped the Woodland Hills-based company slash in half the cost of supplying loans, and provided an important competitive edge.

"Last month I got a loan approval back in five minutes," said Jeff Dahlgren, president of Transcend Financial Corp., a Scottsdale, Ariz.-based home mortgage broker that has been working with WMC since the company went online about a year ago. "Their program is the best for transmitting data back and forth."

Other lenders have turned to the Internet to supplement their business, but few have gone online to the extent of WMC. That's mainly because government regulations limit the kinds of transactions that can be conducted over the Internet, making it impossible to complete a mortgage loan without at least some face-to-face interaction. WMC avoids those limitations by working with mortgage brokers, who, in turn, interact with the actual borrowers.

"Our industry really entered some tough times back in mid '98," said Scott McAfee, chief executive of WMC. "We decided back then it wasn't going to be acceptable just to survive the tough times. So we invested very heavily in developing some unique technology."

WMC and other sub-prime lenders once found ample financing on Wall Street. They bundled and sold their loans to investors who were willing to pay handsomely for the high-yield packages. (Sub-prime loans charge interest rates averaging 2 to 5 percentage points above "A" quality loans because lenders run the risk that the loans may not be repaid.)

But beginning around October 1998, severe losses in global financial markets dampened Wall Street's enthusiasm for these high-risk investments. Many stopped buying the bundled loans altogether, and those who remained cut the prices they were willing to pay, squeezing profit margins for lenders.

Initially, WMC began building a retail channel in hopes of competing with much larger players like The Money Store. The company planned to install about 80 storefronts from which it would deal directly with borrowers.

But to run a retail lending operation WMC had to brand its name, and the company estimated that would cost anywhere from $17 million to $70 million in marketing expenditures.

"When they (consultants) started telling me how much I would have to spend on marketing to establish a brand name, I said, 'This doesn't make sense,'" said McAfee. "It doesn't work to establish a brand name for a product people only use once every seven years."

Instead, WMC invested about $20 million to develop its Internet technology, a state-of-the-art system compatible with just about any computer system a broker might use.

The company has also slashed its workforce from 800 to 200 employees.