Fair Value of Financial Instruments

9 Months Ended

Sep. 30, 2015

Assets and Liabilities Measured at Fair Value on a Recurring Basis Using Significant Unobservable Inputs (Level 3)

We evaluate our financial assets and liabilities subject to fair value measurements on a recurring basis to determine the appropriate level at which to classify them for each reporting period. Due to the lack of transparency and quantity of transactions related to trades of servicing rights of comparable loans, we utilize an income valuation technique to estimate fair value. We utilize industry-standard modeling, such as discounted cash flow models, to arrive at an estimate of fair value and may utilize independent service providers to assist in the valuation process. This determination requires significant judgment.

The following tables present information about our assets and liabilities that are measured at fair value on a recurring basis as of September 30, 2015 (in thousands):



	September 30, 2015
Description	Level 1		Level 2		Level 3		Total
Assets:
Servicing assets	$	—	$	—	$	2,252	$	2,252
Total assets	$	—	$	—	$	2,252	$	2,252

There were no transfers between levels during the nine months ended September 30, 2015.

The following tables presents quantitative information about the significant unobservable inputs used for certain of our Level 3 fair value measurement at September 30, 2015.

Servicing Rights



	September 30, 2015
	Unobservable input	Weighted Average
Servicing assets	Discount rate	30.00	%
	Cost of service⁽¹⁾	0.07	%
	Renewal rate	43.44	%
	Default rate	6.43	%
⁽¹⁾Estimated cost of servicing a loan as a percentage of unpaid principal balance.

The weighted averages above are indicative of the range for discount rate, cost of service and default rate. The renewal rate had a range of 35.44% to 50.91% during the three months ended September 30, 2015. The above unobservable inputs were consistent during the three months ended September 30, 2015 when servicing right assets were initially recognized.

Changes in certain of the unobservable inputs noted above may have a significant impact on the fair value of our servicing asset. The following table summarizes the effect adverse changes in estimate would have on the value of the servicing asset that we carry at fair value as of September 30, 2015 given a hypothetical changes in default rate and cost to service (in thousands):



	Servicing Assets
Default rate assumption:
Default rate increase of 25%	(92	)
Default rate increase of 50%	(182	)
Cost to service assumption:
Cost to service increase by 25%	(53	)
Cost to service increase by 50%	(106	)

We had no servicing assets or liabilities as of December 31, 2014.

Warrant Liability

The following table presents the changes in the Level 3 instruments measured at fair value on a recurring basis for the three and nine months ended September 30, 2014 (in thousands):



	Three Months Ended September 30, 2014			Nine Months Ended September 30, 2014
Warrant liability balance - beginning of period	$	13,272		$	4,446
Exercise of warrants	(10,770		)	(10,766		)
Change in fair value	300			9,122
Warrant liability balance - end of period	$	2,802		$	2,802

The warrant liability is classified within Level 3 due to the liability being valued using significant unobservable inputs. Fair value of these warrants is based on a valuation of our common stock. As the valuation of our common stock was determined prior to our initial public offering, we used a combination of the inputs including option pricing models, secondary transactions with third-party investors and an initial public offering scenario to determine the valuation of our common stock.

A hypothetical increase or decrease in assumed asset volatility of 10% in the option pricing model would result in an immaterial impact to the fair value of the warrants as of September 30, 2014. In the unaudited consolidated statements of operations, changes in fair value are included in warrant liability fair value adjustment.

Assets and Liabilities Disclosed at Fair Value

As loans are not measured at fair value, the following discussion relates to estimating the fair value disclosure under ASC Topic 825. The fair value of loans is estimated by discounting scheduled cash flows through the estimated maturity. The estimated market discount rates used for loans are our current offering rates for comparable loans with similar terms.

The carrying amounts of certain of our financial instruments, including loans and loans held for sale, approximate fair value due to their short-term nature and are considered Level 3. The carrying amount of our financing obligations, such as fixed-rate debt, approximates fair value, by considering the borrowing rates currently available to us for financing obligations with similar terms and credit risks.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

+ References + Details