INVESTMENTS IN CONSUMER LOANS

In April 2013, New Residential completed, through newly formed limited liability companies (together, the “Consumer Loan Companies”), a co-investment in a portfolio of consumer loans. The portfolio included personal unsecured loans and personal homeowner loans originated through subsidiaries of HSBC Finance Corporation. New Residential acquired 30% membership interests in each of the Consumer Loan Companies. Of the remaining 70% of the membership interests, OneMain acquired 47% and funds managed by Blackstone Tactical Opportunities Advisors L.L.C. acquired 23%. OneMain acted as the managing member of the Consumer Loan Companies. OneMain is the servicer of the loans and provides all servicing and advancing functions for the portfolio.

In 2014, the Consumer Loan Companies refinanced the portfolio, resulting in proceeds in excess of the refinanced debt which were distributed to the respective co-investors. This reduced New Residential’s basis in the consumer loans investment to $0.0 million and resulted in a gain. Subsequent to this refinancing, New Residential discontinued recording its share of the underlying earnings of the Consumer Loan Companies.

Prior to March 31, 2016, New Residential accounted for its investment in the Consumer Loan Companies pursuant to the equity method of accounting because it could exercise significant influence over the Consumer Loan Companies, but the requirements for consolidation were not met. New Residential’s share of earnings and losses in these equity method investees was included in “Earnings from investments in consumer loans, equity method investees” on the Condensed Consolidated Statements of Income. Equity method investments were included in “Investments in consumer loans, equity method investees” on the Condensed Consolidated Balance Sheets.

On March 31, 2016, certain of New Residential’s indirect wholly owned subsidiaries (collectively, the “NRZ SpringCastle Buyers”) entered into a Purchase Agreement (the “SpringCastle Purchase Agreement”) primarily with (i) certain direct or indirect wholly owned subsidiaries of OneMain (the “SpringCastle Sellers”), (ii) BTO Willow Holdings II, L.P. and Blackstone Family Tactical Opportunities Investment Partnership - NQ - ESC L.P. (together, the “Blackstone SpringCastle Buyers,” and the Blackstone SpringCastle Buyers together with the NRZ SpringCastle Buyers, collectively, the “SpringCastle Buyers”). Pursuant to the SpringCastle Purchase Agreement, the SpringCastle Sellers sold their collective 47% limited liability company interests in the Consumer Loan Companies to the SpringCastle Buyers (the “SpringCastle Transaction”).

Pursuant to the SpringCastle Purchase Agreement, the NRZ SpringCastle Buyers collectively acquired an additional 23.5% limited liability company interest in the Consumer Loan Companies (representing 50% of the limited liability company interests being sold by the SpringCastle Sellers in the SpringCastle Transaction) and the Blackstone SpringCastle Buyers acquired the other 50% of the limited liability company interests being sold in the SpringCastle Transaction.

Following the SpringCastle Transaction, New Residential, through the NRZ SpringCastle Buyers, owns 53.5% of the limited liability company interests in the Consumer Loan Companies and the Blackstone SpringCastle Buyers, collectively with their affiliates, own the remaining 46.5% interests in the Consumer Loan Companies. As a result of the SpringCastle Transaction, New Residential obtained a controlling financial interest in, and consolidates, the Consumer Loan Companies.

In 2016, New Residential agreed to purchase newly originated consumer loans from a third party. In the aggregate, as of December 31, 2016, New Residential had purchased $177.4 million UPB of loans for an aggregate purchase price of $176.2 million from this seller. These loans are not held in the Consumer Loan Companies and have been designated as performing consumer loans, held-for-investment.

In February 2017, New Residential completed a co-investment, through a newly formed entity, PF LoanCo Funding LLC (“LoanCo”), to purchase up to $5.0 billion worth of newly originated consumer loans from a third party over a two year term. New Residential, along with three co-investors, each acquired 25% membership interests in LoanCo. New Residential will account for its investment pursuant to the equity method of accounting because it can exercise significant influence over LoanCo, but the requirements for consolidation are not met. As of March 31, 2017, New Residential has a net investment of $41.3 million recorded within Other Assets (Note 2).

Upon acquisition, the consumer loans are accounted for based on New Residential’s strategy for the loan, and on whether the loan was credit impaired at the date of acquisition. New Residential determined that it has the intent and ability to hold the consumer loans for the foreseeable future and accounts for consumer loans based on the following categories:


•	Loans Held-for-Investment:


◦	Performing Loans


◦	PCD Loans

The following table summarizes the investment in consumer loans, held-for-investment held by New Residential:



	Unpaid Principal Balance		Interest in Consumer Loans		Carrying Value		Weighted Average Coupon		Weighted Average Expected Life (Years)^(A)	Weighted Average Delinquency^(B)
March 31, 2017
Consumer Loan Companies
Performing Loans	$	1,197,647	53.5	%	$	1,244,661	18.7	%	4.1	6.2	%
Purchased Credit Deteriorated Loans^(C)	345,804		53.5	%	291,693		16.5	%	3.5	13.8	%
Other - Performing Loans	146,149		100.0	%	143,464		14.2	%	1.3	1.8	%
Total Consumer Loans, held-for-investment	$	1,689,600			$	1,679,818	17.9	%	3.8	7.4	%
December 31, 2016
Consumer Loan Companies
Performing Loans	$	1,275,121	53.5	%	$	1,321,825	18.7	%	4.2	6.3	%
Purchased Credit Deteriorated Loans^(C)	371,261		53.5	%	316,532		16.6	%	3.6	14.0	%
Other - Performing Loans	163,570		100.0	%	161,129		14.2	%	1.5	0.3	%
Total Consumer Loans, held-for-investment	$	1,809,952			$	1,799,486	17.9	%	3.8	7.3	%


(A)	Represents the weighted average expected timing of the receipt of expected cash flows for this investment.


(B)	Represents the percentage of the total unpaid principal balance that is 30+ days delinquent. Delinquency status is the primary credit quality indicator as it provides early warning of borrowers who may be experiencing financial difficulties.


(C)	Includes loans with evidence of credit deterioration since origination where it is probable that New Residential will not collect all contractually required principal and interest payments, which are accounted for as PCD loans.

See Note 11 regarding the financing of consumer loans.

Performing Loans

The following table provides past due information regarding New Residential’s performing consumer loans, held-for-investment, which is an important indicator of credit quality and the establishment of the allowance for loan losses:



March 31, 2017
Days Past Due	Delinquency Status^(A)
Current	94.7	%
30-59	2.1	%
60-89	1.1	%
90-119^(B)	0.7	%
120+^{(B) (C)}	1.4	%
	100.0	%


(A)	Represents the percentage of the total unpaid principal balance that corresponds to loans that are in each delinquency status.


(B)	Includes loans more than 90 days past due and still accruing interest.


(C)	Interest is accrued up to the date of charge-off at 180 days past due.

Activities related to the carrying value of performing consumer loans, held-for-investment were as follows:



	Performing Loans
Balance at December 31, 2016	$	1,482,954
Purchases	—
Additional fundings^(A)	12,877
Proceeds from repayments	(88,152		)
Accretion of loan discount and premium amortization, net	1,406
Gross charge-offs	(20,762		)
Additions to the allowance for loan losses, net	(198		)
Balance at March 31, 2017	$	1,388,125


(A)	Represents draws on consumer loans with revolving privileges.

Activities related to the allowance for loan losses on performing consumer loans, held-for-investment were as follows:



	Collectively Evaluated^(A)			Individually Impaired^(B)			Total
Balance at December 31, 2016	$	2,441		$	997		$	3,438
Provision (reversal) for loan losses	18,549			(46		)	18,503
Net charge-offs^(C)	(18,305		)	—			(18,305		)
Balance at March 31, 2017	$	2,685		$	951		$	3,636


(A)	Represents smaller-balance homogeneous loans that are not individually considered impaired and are evaluated based on an analysis of collective borrower performance, key terms of the loans and historical and anticipated trends in defaults and loss severities, and consideration of the unamortized acquisition discount.


(B)	Represents consumer loan modifications considered to be troubled debt restructurings (“TDRs”) as they provide concessions to borrowers, primarily in the form of interest rate reductions, who are experiencing financial difficulty. As of March 31, 2017, there are $6.3 million in UPB and $5.4 million in carrying value of consumer loans classified as TDRs.


(C)	Consumer loans, other than PCD loans, are charged off when available information confirms that loans are uncollectible, which is generally when they become 180 days past due. Charge-offs are presented net of $2.5 million in recoveries of previously charged-off UPB.

Purchased Credit Deteriorated Loans

A portion of the consumer loans are considered PCD loans. Activities related to the carrying value of PCD consumer loans, held-for-investment were as follows:



Balance at December 31, 2016	$	316,532
Allowance for loan losses^(A)	(1,384		)
Proceeds from repayments	(34,415		)
Accretion of loan discount and other amortization	10,960
Balance at March 31, 2017	$	291,693


(A)	Represents the present value of cash flows expected at acquisition that are no longer expected to be collected.

The following is the unpaid principal balance and carrying value for consumer loans, for which, as of the acquisition date, it was probable that New Residential would be unable to collect all contractually required payments:



	Unpaid Principal Balance		Carrying Value
March 31, 2017	$	345,804	$	291,691
December 31, 2016	371,261		316,532

The following is a summary of the changes in accretable yield for these loans:



Balance at December 31, 2016	$	167,928
Accretion	(10,960		)
Reclassifications to non-accretable difference^(A)	(4,314		)
Balance at March 31, 2017	$	152,654


(A)	Represents a probable and significant decrease in cash flows previously expected to be collectible.

Noncontrolling Interests

Others’ interests in the equity of the Consumer Loan Companies is computed as follows:



	March 31, 2017			December 31, 2016
Total Consumer Loan Companies equity	$	75,153		$	75,311
Others’ ownership interest	46.5		%	46.5		%
Others’ interests in equity of consolidated subsidiary	$	34,946		$	35,020

Others’ interests in the Consumer Loan Companies’ net income (loss) is computed as follows for the three months ended March 31, 2017:



Net Consumer Loan Companies income (loss)	$	21,420
Others’ ownership interest as a percent of total	46.5		%
Others’ interest in net income (loss) of consolidated subsidiaries	$	9,960

Variable Interest Entities

The Consumer Loan Companies consolidate certain entities that issued securitized debt collateralized by the consumer loans (the “Consumer Loan SPVs”). The Consumer Loan SPVs are VIEs of which the Consumer Loan Companies are the primary beneficiaries. The following table presents information on the combined assets and liabilities related to these consolidated VIEs.



	As of
	March 31, 2017
Assets
Consumer loans, held-for-investment	$	1,536,354
Restricted cash	12,898
Accrued interest receivable	22,493
Total assets^(A)	$	1,571,745
Liabilities
Notes and bonds payable	$	1,549,877
Accounts payable and accrued expenses	901
Total liabilities^(A)	$	1,550,778


(A)	The creditors of the Consumer Loan SPVs do not have recourse to the general credit of New Residential, and the assets of the Consumer Loan SPVs are not directly available to satisfy New Residential’s obligations.