DISCONTINUED OPERATIONS

On May 12, 2011, the Company entered into an asset purchase agreement, later amended on February 7, 2012, that provided for the sale of substantially all of the operating assets of its LendingTree Loans business to Discover. The sale was completed on June 6, 2012. Discover has participated as a network lender since the closing of the transaction. An evaluation of the facts and circumstances of the transaction and the applicable accounting guidance for discontinued operations indicates that the LendingTree Loans business should be reflected as discontinued operations in the accompanying consolidated financial statements for all periods presented. The continuing cash flows related to this transaction are not significant and, accordingly, are not deemed to be direct cash flows of the divested business.

The Company agreed to indemnify Discover for a breach or inaccuracy of any representation, warranty or covenant made by it in the asset purchase agreement, for any liability of LendingTree Loans that was not assumed, for any claims by its stockholders against Discover and for its failure to comply with any applicable bulk sales law, subject to certain limitations. Discover submitted a claim for indemnification relating to the sale prior to the closing of certain loans that were listed in the asset purchase agreement as to be conveyed to Discover at closing. In May 2013, this indemnification claim and other miscellaneous items were settled by agreeing to credit Discover for $1.3 million in future services. A majority of these credits were applied against services during the year ended December 31, 2013. The remaining credits were exhausted in the first quarter of 2014.

The revenue and net loss reported as discontinued operations in the accompanying consolidated statements of operations are as follows (in thousands):



	Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2013			2014			2013
Revenue	$	114		$	(37	)	$	118		$	(1,523	)

Loss before income taxes	$	(175	)	$	(526	)	$	(3,676	)	$	(3,908	)
Income tax benefit (expense)	1			(3		)	(3		)	(54		)
Gain from sale of discontinued operations, net of tax	—			—			—			10,101
Net income (loss)	$	(174	)	$	(529	)	$	(3,679	)	$	6,139

The assets and liabilities of discontinued operations in the accompanying consolidated balance sheets are as follows (in thousands):



	September 30, 2014			December 31, 2013
Current assets	$	125		$	521
Non-current assets	100			129
Current liabilities	(31,782		)	(32,004		)
Non-current liabilities	(215		)	(254		)
Net liabilities	$	(31,772	)	$	(31,608	)

Significant Assets and Liabilities of LendingTree Loans

Upon closing of the sale of substantially all of the operating assets of the LendingTree Loans business on June 6, 2012, LendingTree Loans ceased to originate consumer loans. The remaining operations are being wound down. These wind-down activities have included, among other things, selling the balance of loans held for sale to investors, paying off and then terminating the warehouse lines of credit and settling derivative obligations, all of which have been completed. Liability for losses on previously sold loans will remain with LendingTree Loans and are discussed below.

Loan Loss Obligations

LendingTree Loans sold loans it originated to investors on a servicing-released basis, so the risk of loss or default by the borrower was generally transferred to the investor. However, LendingTree Loans was required by these investors to make certain representations and warranties relating to credit information, loan documentation and collateral. These representations and warranties may extend through the contractual life of the loan. Subsequent to the loan sale, if underwriting deficiencies, borrower fraud or documentation defects are discovered in individual loans, LendingTree Loans may be obligated to repurchase the respective loan or indemnify the investors for any losses from borrower defaults if such deficiency or defect cannot be cured within the specified period following discovery. In the case of early loan payoffs and early defaults on certain loans, LendingTree Loans may be required to repay all or a portion of the premium initially paid by the investor.

HLC, a subsidiary of the Company, continues to be liable for these indemnification obligations, repurchase obligations and premium repayment obligations following the sale of substantially all of the operating assets of its LendingTree Loans business in the second quarter of 2012. As of September 30, 2014, approximately $19.3 million is being held in escrow pending resolution of certain of these contingent liabilities. The Company has been negotiating with certain secondary market purchasers to settle any existing and future contingent liabilities, but it may not be able to complete such negotiations on acceptable terms, or at all. Because LendingTree Loans does not service the loans it sold, it does not maintain nor generally have access to the current balances and loan performance data with respect to the individual loans previously sold to investors. Accordingly, LendingTree Loans is unable to determine, with precision, its maximum exposure for breaches of the representations and warranties it made to the investors that purchased such loans.

During the fourth quarter of 2013, the Company revised its estimation process for evaluating the adequacy of the reserve for loan losses to use a settlement discount framework. This model estimates lifetime losses on the population of remaining loans originated and sold by LendingTree Loans using actual defaults for loans with similar characteristics and projected future defaults. It also considers the likelihood of claims expected due to alleged breaches of representations and warranties made by LendingTree Loans and the percentage of those claims investors estimate LendingTree Loans may agree to repurchase. A settlement discount factor is then applied to the result of the foregoing to reflect publicly-announced bulk settlements for similar loan types and vintages, as well as LendingTree Loans' non-operating status, in order to estimate a range of potential obligation.

The estimated range of remaining loan losses using this settlement discount framework was determined to be $16.3 million to $29.4 million as of September 30, 2014. The reserve balance recorded as of September 30, 2014 was $28.4 million. Management has considered both objective and subjective factors in the estimation process, but given current general industry trends in mortgage loans as well as housing prices and market expectations, actual losses related to LendingTree Loans' obligations could vary significantly from the obligation recorded as of the balance sheet date or the range estimated above.

Additionally, Tree.com has guaranteed certain loans sold to two investors in the event that LendingTree Loans is unable to satisfy its repurchase and warranty obligations related to such loans.

The following table represents the loans sold for the periods shown and the aggregate loan losses through September 30, 2014:



	September 30, 2014
Period of Loan Sales	Number of Loans Sold	Original Principal Balance		Number of Loans with Losses	Original Principal Balance of Loans with Losses		Amount of Aggregate Losses
		(in billions)			(in millions)		(in millions)
2014	—	$	—	—	$	—	$	—
2013	—	—		—	—		—
2012	9,200	1.9		—	—		—
2011	12,500	2.7		1	0.3		0.1
2010	12,400	2.8		4	1.1		0.1
2009	12,800	2.8		5	1.2		0.2
2008	11,000	2.2		33	6.9		2.2
2007	36,300	6.1		160	22.1		8.2
2006	55,000	7.9		207	24.5		13.4
2005 and prior years	86,700	13.0		89	12.3		5.0
Total	235,900	$	39.4	499	$	68.4	$	29.2

In the second quarter of 2014, LendingTree Loans completed settlements with two buyers of previously purchased loans. The settlement amounts were included in charge-offs to the reserve in the second quarter of 2014. The settlement amounts for these settlements were not determined on an individual loan basis and are, therefore, not included in the loss amounts disclosed above for the years such loans were sold.

Based on historical experience, it is anticipated that LendingTree Loans will continue to receive repurchase requests and incur losses on loans sold in prior years.

The activity related to loss reserves on previously sold loans is as follows (in thousands):



	Three Months Ended September 30,				Nine Months Ended September 30,
	2014		2013		2014			2013
Loan loss reserve, beginning of period	$	28,390	$	28,675	$	28,543		$	27,182
Provisions	—		38		—			1,531
Charge-offs to reserves	—		—		(153		)	—
Loan loss reserve, end of period	$	28,390	$	28,713	$	28,390		$	28,713

The liability for losses on previously sold loans is presented as current liabilities of discontinued operations in the accompanying consolidated balance sheet as of September 30, 2014 and December 31, 2013.