INVESTMENTS IN CONSUMER LOANS

Consumer Loan Companies

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 and instead recorded distributions from the Consumer Loan Companies as Gain on consumer loans investment.

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 Consolidated Statements of Income. Equity method investments were included in “Investments in consumer loans, equity method investees” on the 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 for an aggregate purchase price of $111.6 million (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.

New Residential has consolidated all of the assets and the related liabilities of the Consumer Loan Companies assuming a gross purchase price of $237.5 million. This gross purchase price is representative of the fair value of 100% of the net assets of the Consumer Loan Companies, which was used to derive the $111.6 million purchase price for an aggregate 47.0% of the equity ownership acquired by the SpringCastle Buyers. New Residential previously held a 30% equity method investment in the Consumer Loan Companies, which had a basis of zero, and a fair value of $71.3 million based on 30% of the gross purchase price of $237.5 million, immediately prior to the SpringCastle Transaction. Therefore, the remeasurement of New Residential’s previously held equity method investment resulted in a gain of $71.3 million, which was recorded to Gain on Remeasurement of Consumer Loans Investment.

New Residential has performed an allocation of the purchase price to the Consumer Loan Companies’ assets and liabilities, as set forth below.



Total Consideration ($ in millions)	$	237.5
Assets
Consumer loans, held-for-investment	$	1,934.7
Cash and cash equivalents	0.3
Restricted cash	74.6
Other assets	35.9
Total Assets Acquired	2,045.5

Liabilities
Notes and bonds payable	$	1,803.2
Accrued expenses and other liabilities	4.8
Total Liabilities Assumed	1,808.0

Net Assets	$	237.5

The acquisition of the Consumer Loan Companies resulted in no goodwill because the total consideration transferred was equal to the fair value of the net assets acquired.

Unaudited Supplemental Pro Forma Financial Information - The following table presents unaudited pro forma combined Interest Income and Income Before Income Taxes for the years ended December 31, 2016 and 2015 prepared as if the SpringCastle Transaction had been consummated on January 1, 2015.



	Year Ended December 31,
	2016		2015
	(unaudited)		(unaudited)
Pro Forma
Interest Income	$	1,163,648	$	1,030,522
Income Before Income Taxes	581,925		466,915
Noncontrolling Interests in Income of Consolidated Subsidiaries	96,852		92,413

The 2016 unaudited supplemental pro forma financial information has been adjusted to exclude, and the 2015 unaudited supplemental pro forma financial information has been adjusted to include, (i) the gain on remeasurement of New Residential’s Consumer Loans investment of $71.3 million and (ii) approximately $1.5 million of acquisition related costs incurred by New Residential in 2016. The unaudited supplemental pro forma financial information does not include any other anticipated benefits of the SpringCastle Transaction and, accordingly, the unaudited supplemental pro forma financial information is not necessarily indicative of either future results of operations or results that might have been achieved had the SpringCastle Transaction occurred on January 1, 2015.

New Residential’s Consolidated Statements of Income include Interest Income and Income Before Income Taxes of the Consumer Loan Companies for the period from April 1, 2016 through December 31, 2016 of $226.0 million and $82.0 million, respectively.

Other

In 2016, New Residential agreed to purchase newly originated consumer loans from a third party (“Consumer Loan Seller”). 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 Consumer Loan Seller. These loans are not held in the Consumer Loan Companies and have been designated as performing consumer loans, held-for-investment. In addition, see “Equity Method Investees” below.

Upon acquisition, 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)
December 31, 2017
Consumer Loan Companies
Performing Loans	$	1,005,570	53.5	%	$	1,052,561	18.7	%	3.7	6.0	%
Purchased Credit Deteriorated Loans^(C)	282,540		53.5	%	236,449		16.2	%	3.3	12.5	%
Other - Performing Loans	89,682		100.0	%	85,253		14.1	%	1.0	4.5	%
Total Consumer Loans, held-for-investment	$	1,377,792			$	1,374,263	17.9	%	3.5	7.3	%
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:



December 31, 2017
Days Past Due	Delinquency Status^(A)
Current	94.0	%
30-59	2.5	%
60-89	1.4	%
90-119^(B)	0.8	%
120+^{(B) (C)}	1.3	%
	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, 2015	$	—
SpringCastle Transaction	1,539,569
Purchases	176,107
Additional fundings^(A)	49,289
Proceeds from repayments	(239,236		)
Accretion of loan discount and premium amortization, net	7,728
Net charge-offs	(47,065		)
Allowance for loan losses	(3,438		)
Balance at December 31, 2016	$	1,482,954
Purchases
Additional fundings^(A)	56,321
Proceeds from repayments	(329,843		)
Accretion of loan discount and premium amortization, net	4,891
Gross charge-offs	(73,842		)
Additions to the allowance for loan losses, net	(2,667		)
Balance at December 31, 2017	$	1,137,814


(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 March 31, 2016 (date of SpringCastle Transaction)	$	—		$	—	$	—
Provision for loan losses	49,506			997		50,503
Net charge-offs^(C)	(47,065		)	—		(47,065		)
Balance at December 31, 2016	$	2,441		$	997	$	3,438
Provision (reversal) for loan losses	65,059			679		65,738
Net charge-offs^(C)	(63,071		)	—		(63,071		)
Balance at December 31, 2017	$	4,429		$	1,676	$	6,105


(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 December 31, 2017, there are $10.9 million in UPB and $9.4 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 $10.8 million and $8.1 million in recoveries of previously charged-off UPB in 2017 and 2016, respectively.

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, 2015	$	—
SpringCastle Transaction	395,129
Allowance for Loan Losses^(A)	(3,013		)
Proceeds from repayments	(112,222		)
Accretion of loan discount and other amortization	36,638
Balance at December 31, 2016	$	316,532
(Allowance) reversal for loan losses^(A)	3,013
Proceeds from repayments	(123,932		)
Accretion of loan discount and other amortization	40,836
Balance at December 31, 2017	$	236,449


(A)	An allowance represents the present value of cash flows expected at acquisition that are no longer expected to be collected. A reversal results from an increase to expected cash flows that reverses a prior allowance.

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
December 31, 2017	$	282,540	$	236,449
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, 2015	$	—
SpringCastle Transaction	176,387
Accretion	(36,638		)
Reclassifications from (to) non-accretable difference^(A)	28,179
Balance at December 31, 2016	$	167,928
Accretion	(40,836		)
Reclassifications from (to) non-accretable difference^(A)	5,199
Balance at December 31, 2017	$	132,291


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

Noncontrolling Interests

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



	December 31,
	2017			2016
Total Consumer Loan Companies equity	$	74,071		$	75,311
Others’ ownership interest	46.5		%	46.5		%
Others’ interests in equity of consolidated subsidiary	$	34,466		$	35,020

Others’ interests in the Consumer Loan Companies’ net income (loss) is computed as follows:



	Year Ended December 31,
	2017			2016
Net Consumer Loan Companies income (loss)	$	98,692		$	81,992
Others’ ownership interest as a percent of total	46.5		%	46.5		%
Others’ interest in net income (loss) of consolidated subsidiaries	$	45,892		$	38,127

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 December 31,
	2017		2016
Assets
Consumer loans, held-for-investment	$	1,289,010	$	1,638,357
Restricted cash	11,563		13,393
Accrued interest receivable	19,360		24,528
Total assets^(A)	$	1,319,933	$	1,676,278
Liabilities
Notes and bonds payable^(B)	$	1,284,436	$	1,648,488
Accounts payable and accrued expenses	4,007		951
Total liabilities^(A)	$	1,288,443	$	1,649,439


(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.


(B)	Includes $121.0 million face amount of bonds retained by New Residential issued by these VIEs.

Equity Method Investees

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 Consumer Loan Seller over a two year term. New Residential, along with three co-investors, each acquired 25% membership interests in LoanCo. New Residential accounts for its investment in LoanCo pursuant to the equity method of accounting because it can exercise significant influence over LoanCo but the requirements for consolidation are not met. New Residential’s investment in LoanCo is recorded as Investment in Consumer Loans, Equity Method Investees. LoanCo has elected to account for its investments in consumer loans at fair value. New Residential has elected to record LoanCo’s activity on a one month lag.

In addition, New Residential and the LoanCo co-investors agreed to purchase warrants to purchase up to 177.7 million shares of Series F convertible preferred stock in the Consumer Loan Seller’s parent company (“ParentCo”), which were valued at approximately $75.0 million in the aggregate as of February 2017, through a newly formed entity, PF WarrantCo Holdings, LP (“WarrantCo”). New Residential acquired a 23.57% interest in WarrantCo, the remaining interest being acquired by three co-investors. WarrantCo has agreed to purchase a pro rata portion of the warrants each time LoanCo closes on a portion of its consumer loan purchase agreement from Consumer Loan Seller. The holder of the warrants has the option to purchase an equivalent number of shares of Series F convertible preferred stock in ParentCo at a price of $0.01 per share. WarrantCo is vested in the warrants to purchase an aggregate of 70.1 million Series F convertible preferred stock in ParentCo as of November 30, 2017. The Series F convertible preferred stock holders have the right to convert such preferred stock to common stock at any time, are entitled to the number of votes equal to the number of shares of common stock into which such shares of convertible preferred stock could be converted, and will have liquidation rights in the event of liquidation. New Residential accounts for its investment in WarrantCo pursuant to the equity method of accounting because it can exercise significant influence over WarrantCo but the requirements for consolidation are not met. New Residential’s investment in WarrantCo is recorded as Investment in Consumer Loans, Equity Method Investees. WarrantCo has elected to account for its investments in warrants at fair value. New Residential has elected to record WarrantCo’s activity on a one month lag.

The following tables summarize the investment in LoanCo and WarrantCo held by New Residential:



	December 31, 2017^(A)
Consumer loans, at fair value	$	178,422
Warrants, at fair value	80,746
Other assets	46,342
Warehouse financing	(117,944		)
Other liabilities	(13,059		)
Equity	$	174,507
Undistributed retained earnings	$	—
New Residential’s investment	$	42,473
New Residential’s ownership	24.3		%



	Year Ended
	December 31, 2017^(A)
Interest income	$	35,912
Interest expense	(8,144		)
Change in fair value of consumer loans and warrants	56,324
Gain on sale of consumer loans^(B)	26,400
Other expenses	(4,623		)
Net income	$	105,869
New Residential’s equity in net income	$	25,617
New Residential’s ownership	24.2		%


(A)	Data as of, and for the periods ended, November 30, 2017, as a result of the one month reporting lag.


(B)	During the year ended December 31, 2017, LoanCo sold, through securitizations which were treated as sales for accounting purposes, $1.7 billion in UPB of consumer loans. LoanCo retained $178.4 million of residual interests in the securitizations and distributed them to the LoanCo co-investors, including New Residential.

The following is a summary of LoanCo’s consumer loan investments:



	Unpaid Principal Balance		Interest in Consumer Loans		Carrying Value		Weighted Average Coupon		Weighted Average Expected Life (Years)^(A)	Weighted Average Delinquency^(B)
December 31, 2017^(C)	$	178,422	25.0	%	$	178,422	15.1	%	1.4	0.4	%


(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)	Data as of November 30, 2017 as a result of the one month reporting lag.

New Residential’s investment in LoanCo and WarrantCo changed as follows:



Balance at December 31, 2016	$	—
Contributions to equity method investees	470,344
Distributions of earnings from equity method investees	(6,240		)
Distributions of capital from equity method investees	(438,309		)
Earnings from investments in consumer loans, equity method investees	25,617
Balance at December 31, 2017	$	51,412