10-K 1 jgwe12311710-k.htm 10-K - DECEMBER 31, 2017 JGWEQ 12.31.17 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-K
  
 
(Mark One)
 
ý
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
 
 
EXCHANGE ACT OF 1934
 
 
For the fiscal year ended December 31, 2017
 
 
 
 
 
Or
 
 
 
 
o
TRANSITION REPORT PURSUANT TO SECTION 13
 
 
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
 
 
For the transition period from                      to                     
 
 
Commission File Number: 001-36170
 
THE J.G. WENTWORTH COMPANY
 
 
(Exact name of registrant as specified in its charter)
 
 
Delaware
 
46-3037859
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
1200 Morris Drive,
Suite 300
Chesterbrook, Pennsylvania
 
19087
(Address of principal executive offices)
 
(Zip Code)
(484) 434-2300
(Registrant's telephone number, including area code)
 
Securities registered pursuant to Section 12(b) of the Act:
None
 
 
 
Securities registered pursuant to Section 12(g) of the Act:
None


Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. o Yes ý No
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. ý Yes o No
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. o Yes ý No
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ý Yes o No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer o
Accelerated filer o
Non-accelerated filer  o (Do not check if smaller reporting company)
Smaller reporting company   ý
Emerging growth company   ý
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in rule 12b-2 of the Exchange Act). o Yes ý No
 
As of June 30, 2017, the last business day of the registrant's most recently completed second fiscal quarter, the aggregate market value of common stock held by non-affiliates was approximately $3.8 million, based on a closing price of $0.24.

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d)
of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. o Yes ý No
 
Immediately prior to the Effective Date (as defined in this Annual Report), there were outstanding 15,810,703 shares of the registrant's Class A common stock, par value $0.00001 per share, which were publicly traded. Immediately prior to the Effective Date, there were outstanding 8,629,738 shares of the registrant's Class B common stock, par value $0.00001 per share.

As of February 28, 2018, there were outstanding 24,913,370 shares of the registrant's New Class A common stock (as defined in this Annual Report), par value $0.00001 per share, which are not publicly traded. As of February 28, 2018, there were outstanding 141,384 shares of the registrant's New Class B common stock (as defined in this Annual Report), par value $0.00001 per share.
 
DOCUMENTS INCORPORATED BY REFERENCE

None



TABLE OF CONTENTS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
EXHIBIT INDEX
 

 

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CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements which reflect management's expectations regarding our future growth, results of operations, operational and financial performance and business prospects and opportunities. These forward looking statements are within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended ("the Exchange Act"), and the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical fact, are forward-looking statements. You can identify such statements because they contain words such as "plans," "expects" or "does not expect," "budget," "forecasts," "anticipates" or "does not anticipate," "believes," "intends," and similar expressions or statements that certain actions, events or results "may," "could," "would," "might," or "will," be taken, occur or be achieved. Although the forward-looking statements contained in this Annual Report on Form 10-K reflect management's current beliefs based upon information currently available to management and upon assumptions which management believes to be reasonable, actual results may differ materially from those stated in or implied by these forward-looking statements.
Forward-looking statements necessarily involve significant known and unknown risks, assumptions and uncertainties that may cause our actual results, performance and achievements in future periods to differ materially from those expressed or implied by such forward-looking statements. Although we have attempted to identify important risk factors that could cause actual actions, events or results to differ materially from those described in or implied by our forward-looking statements, a number of factors could cause actual results, performance or achievements to differ materially from the results expressed or implied in the forward-looking statements. We cannot assure you that forward-looking statements will prove to be accurate, as actual actions, results and future events could differ materially from those anticipated or implied by such statements.
These forward-looking statements are made as of the date of this Annual Report on Form 10-K and except for our ongoing obligations to disclose material information under the federal securities laws, we undertake no obligation to publicly revise any forward-looking statements to reflect circumstances or events after the date of this Annual Report on Form 10-K, or to reflect the occurrence of unanticipated events. These factors should be considered carefully and readers should not place undue reliance on forward-looking statements. You should, however, review the factors and risks we describe in the reports we file from time to time with the Securities and Exchange Commission after the date of this Annual Report on Form 10-K. As set forth more fully under "Part I, Item 1A. 'Risk Factors'" in this Annual Report on Form 10-K, these risks and uncertainties include, among other things:

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our ability to execute on our business strategy;
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our ability to successfully compete in the industries in which we operate;
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our dependence on the effectiveness of direct response marketing;
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our ability to retain and attract qualified senior management;
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any improper use of or failure to protect the personally identifiable information of past, current and prospective customers to which we have access;
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our ability to upgrade and integrate our operational and financial information systems, maintain uninterrupted access to such systems and adapt to technological changes in the industries in which we operate;
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our dependence on third parties, including our ability to maintain relationships with such third parties and our potential exposure to liability for the actions of such third parties;
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damage to our reputation and increased regulation of our industries which could result from negative commentary on social media and unfavorable press reports about our business model;
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infringement of our trademarks or service marks;
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changes in, and our ability to comply with, any applicable federal, state and local laws and regulations governing us, including any applicable federal consumer financial laws enforced by the Consumer Financial Protection Bureau;
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our ability to maintain our state licenses or obtain new licenses in new markets;
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our ability to continue to purchase structured settlement payments and other financial assets;
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our business model being susceptible to litigation;
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our ability to remain in compliance with the terms of our substantial indebtedness and to refinance our term debt;
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our ability to obtain sufficient working capital at attractive rates or obtain sufficient capital to meet the financing requirements of our business;
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our ability to renew or modify our warehouse lines of credit;
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changes in prevailing interest rates and our ability to mitigate interest rate risk through hedging strategies;
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the accuracy of the estimates and assumptions of our financial models;
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the public disclosure of the identities and information of structured settlement holders maintained in our proprietary database;
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our dependence on the opinions of certain credit rating agencies of the credit quality of our securitizations;
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our ability to complete future securitizations, other financings or sales on favorable terms;
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the insolvency of a material number of structured settlement issuers;
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adverse changes in the residential mortgage lending and real estate markets, including any increases in defaults or delinquencies, especially in geographic areas where our loans are concentrated;
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our ability to grow our loan origination volume, acquire mortgage servicing rights ("MSRs") and recapture loans that are refinanced;
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changes in the guidelines of the applicable government-sponsored enterprises ("GSEs"), or any discontinuation of, or significant reduction in, the operation of the applicable GSEs;
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the effect of our recent emergence from bankruptcy on our business and relationships.


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PART I 
Item 1. Business
Our Company
The J.G. Wentworth Company (“we,” “us,” “our,” or the “Company”) is a Delaware holding company that was incorporated on June 21, 2013. The Company is focused on providing direct-to-consumer access to financing solutions through a variety of avenues, including: mortgage lending, structured settlement, annuity and lottery payment purchasing, prepaid cards, and access to providers of personal loans. Our direct-to-consumer businesses use digital channels, television, direct mail, and other channels to offer access to financing solutions. We warehouse, securitize, sell or otherwise finance the financial assets that we purchase in transactions that are structured to ultimately generate cash proceeds to us that exceed the purchase price we paid for those assets.
We manage our company through the following two business segments:
(i) Structured Settlement Payments ("Structured Settlements") - Structured Settlements provides liquidity to individuals with financial assets such as structured settlements, annuities and lottery winnings by either purchasing these financial assets for a lump-sum payment, issuing installment obligations payable over time, or serving as a broker to other purchasers of those financial assets. The Company engages in warehousing and subsequent resale or securitization of these various financial assets. Structured Settlements also includes corporate activities, payment solutions, pre-settlements and providing (i) access to providers of personal lending and (ii) access to providers of funding for pre-settled legal claims.
(ii) Home Lending ("Home Lending") - Home Lending is primarily engaged in retail mortgage lending, originating primarily Federal Housing Administration ("FHA"), U.S. Department of Veterans Affairs ("VA"), and conventional mortgage loans, and is approved as a Title II, non-supervised direct endorsement mortgagee with the U.S. Department of Housing and Urban Development ("HUD"). In addition, Home Lending is an approved issuer with the Government National Mortgage Association ("Ginnie Mae"), Federal Home Loan Mortgage Corporation ("Freddie Mac"), and U.S. Department of Agriculture ("USDA"), as well as an approved seller and servicer with the Federal National Mortgage Association ("Fannie Mae").
We had revenue of $428.7 million for the year ended December 31, 2017, of which $313.9 million was from our Structured Settlements segment and $114.8 million was from our Home Lending segment. See Note 29 in the Notes to the Consolidated Financial Statements under "Part II, Item 8 'Financial Statements and Supplementary Data'" and "Part II, Item 7 'Management's Discussion and Analysis of Financial Condition and Results of Operations-Results of Operations'" for additional financial information for each of our reportable segments.
In the first half of 2017, we focused on improving the performance of our Structured Settlements business, maintaining adequate liquidity through funding source optimization and rigorous expense controls while continuing to grow our Home Lending business and enhance the value of our mortgage servicing rights.
During the second half of 2017, we entered into a consensual restructuring agreement with our lenders, which is further discussed below. The restructuring was completed in January 2018 and significantly reduced our debt and strengthened our balance sheet. Under the terms of the restructuring, we extinguished $449.5 million of our senior credit facility and obtained a new secured revolving credit facility of $70.0 million which is utilized for general corporate purposes and working capital. In addition to reducing the Company's annual debt service from $32.0 million to less than $5.0 million, we reconstituted our Board of Directors to reflect the new ownership of the Company and consequently, all previously issued and held equity interests were canceled without recovery. The restructuring was accomplished, and became effective on January 25, 2018, through a voluntary, pre-packaged, in-court process whereby the Company's operating entities, including those serving employees, customers, vendors and suppliers, were unaffected. We also continued to access the capital markets through the execution of a securitization of our structured settlements assets to extract what we believe was the maximum profitability based on current market conditions and underlying economics.
At our Home Lending business, we concentrated on continuing to grow our business through operational scale while focusing on capital market execution and anticipating changes in the interest rate environment.
Reorganization Plan under Chapter 11 and Bankruptcy Proceedings
On December 12, 2017, the Corporation, together with certain of its subsidiaries (the “Debtors”) filed voluntary cases (the “Chapter 11 Cases”) under Chapter 11 of title 11 of the United States Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”) to pursue the previously announced Joint Pre-Packaged Plan of Reorganization of Orchard Acquisition Company, LLC and its Debtor Affiliates, dated December 1, 2017 (as amended, the “Plan”). Only the Debtors filed the Chapter 11 Cases. Accordingly, the direct and indirect subsidiaries of Orchard Acquisition Company, LLC, including the entities which conduct all of the Company's consolidated operations, have not filed for bankruptcy.

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On January 17, 2018, the Bankruptcy Court entered an order approving and confirming the Plan (the “Confirmation Order”). On January 25, 2018 (the “Effective Date”), the Debtors satisfied the conditions to effectiveness of the Plan and the Plan became effective in accordance with its terms and the Debtors emerged from bankruptcy.
Pursuant to the Plan, (a) all claims arising under the Debtors’ pre-petition secured term loan facility and related guarantees were terminated and released, and each holder of such claims received its pro rata share of (i) cash consideration (the “Term Lender Cash Consideration”) and (ii) new common equity of the reorganized Company (the “New Common Equity”), subject to dilution by the Management Incentive Plan adopted on the Effective Date; (b) all pre-petition equity interests in The J.G. Wentworth Company, LLC (the “Partnership”) were canceled and in exchange each holder of such equity interests (the “Existing Partnership Equity holders”) received its pro rata share of (i) New Common Equity or (ii) cash consideration (the “Partnership Cash Consideration”), or a mix of both the Partnership Cash Consideration and New Common Equity (collectively, the “Partnership Consideration”); (c) all pre-petition claims against the Company (“TRA Claims”) arising under that certain Tax Receivable Agreement, dated as of November 14, 2013 (the “TRA”), were canceled and, in consideration, each TRA claimant received its pro rata share of the New Class A common stock and the New Class B common stock of the Company or cash consideration, at the sole election of each holder of a TRA claim. Consequently, as of January 25, 2018, the TRA claimants now hold, in the aggregate, 161,961 shares of New Class A common stock and 141,384 shares of New Class B common stock and received $4.8 million of cash consideration. The aggregate fair value of the total settlement was $6.6 million.
Pursuant to the Plan all previously issued and held equity interests were canceled without recovery.
Furthermore, the Company terminated the effectiveness of its registration statements and removed from registration any securities that remained unsold under Section 12 of the Exchange Act and suspended its reporting obligations under Sections 13(a) and 15(d) of the Exchange Act.
On the Effective Date, we entered into a New Revolving Credit Facility Agreement (the “New RCF Agreement”) among Orchard Acquisition Company, LLC, as Parent Borrower (the “Parent Borrower”), J.G. Wentworth, LLC (“JGW LLC”), the lending institutions from time to time party thereto, and HPS Investment Partners, LLC, a related party, as administrative agent (the “Administrative Agent”). We utilized borrowings under the New RCF Agreement to fund the fees and expenses of the restructuring transactions contemplated by the Plan, the Partnership Cash Consideration, a portion of the Term Lender Cash Consideration, and working capital and other general corporate purposes. The New RCF Agreement provides for a new four-year revolving credit facility (the “New RCF”) with an aggregate borrowing availability of $70.0 million.
As a result of the foregoing, the Company’s corporate structure otherwise remained substantially the same as prior to the Chapter 11 Cases. The Company amended and restated its certificate of incorporation to provide for, among other things, the authorization of 225,000,000 shares of new Class A common stock, (the "New Class A common stock") and 25,000,000 shares of new Class B common stock, (the "New Class B common stock" and, together with the New Class A common stock, the "New Common Stock"). The Company is not authorized to issue any shares of preferred stock under its amended and restated certificate of incorporation.
Pursuant to the Plan, the members of the Board of Directors of the Company were replaced with new members, as set forth in Part III, Item 10 "Directors, Executive Officers and Corporate Governance" of this Form 10-K.
In connection with the implementation of the Plan and as a result of the change in control effectuated by the Plan, the Debtors sought and obtained certain required regulatory approvals related to Home Lending prior to the effective date of the Plan.
For additional information related to the Debtors’ emergence from bankruptcy and the terms of the New RCF, see Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Structured Settlements
Structured Settlements, Annuities and Lottery Receivables
Through our Structured Settlements segment, we serve the needs of our customers by providing them with cash in exchange for a certain number of their fixed scheduled future payments. Customers desire liquidity for a variety of reasons, including costs related to debt reduction, housing, automotive, business opportunities, education and healthcare. We provide liquidity to our customers through:
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Purchasing Structured Settlement Payments. Structured Settlements are financial tools used by insurance companies to settle claims on behalf of their customers. They are contractual arrangements under which an insurance company agrees to make periodic payments to an individual as compensation for a claim typically arising out of personal injury. These payments fall into two categories: guaranteed structured settlement payments, which are paid out until maturity regardless of the status of the beneficiary, and life contingent structured settlement payments, which cease upon the death of the beneficiary. Often, due to changes in their life circumstances, these individuals prefer a cash payment up front rather than such periodic payments, and we offer them that liquidity. We purchase all or part of these structured settlement payments at a discount to the

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aggregate face amount of the future payments in exchange for a single up-front payment. These future structured settlement payments are generally disbursed to us directly by an insurance company. The structured settlement payments we purchase have long average lives of more than ten years and cannot be prepaid. Since the enactment of the federal Victims of Terrorism Tax Relief Act of 2001 (the "Tax Relief Act"), every one of our structured settlement payment stream purchases has been reviewed and approved by a judge. Based on information provided by the National Association of Settlement Purchasers, we believe we are the largest purchaser of structured settlement payments in the United States.
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Purchasing Annuities. Annuities are insurance products purchased or inherited by individuals from insurance companies that entitle the beneficiary to receive a pre-determined stream of periodic payments. Often these individuals would prefer a cash payment up front rather than such periodic payments, and we offer them that liquidity. We purchase all or part of the annuity payments at a discount to the aggregate face amount of future payments in exchange for a single up-front payment.
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Purchasing and Brokering Lottery Receivables. Lotteries are prizes that generally have periodic payments and are typically backed by state lottery commission obligations or insurance company annuities. Some lottery winners may prefer a cash payment up front rather than such periodic payments, and we offer them that liquidity. We purchase or broker to a third party all or part of the lottery receivables at a discount to the aggregate face amount of future payments in exchange for a single up-front payment to the lottery winners. As in the case of structured settlement payments, every one of our purchases and brokered deals of lottery receivables is reviewed and approved by a judge.
We act as an intermediary that identifies, underwrites and purchases individual payment streams from our customers, aggregates the payment streams and then finances them in the institutional market, principally at financing rates that are below our cost to purchase the payment streams. We purchase future payment streams from our customers for a single up-front cash payment that is negotiated with each of our customers. We fund our purchases of payment streams with short and long-term non-recourse financing. We initially fund our purchase of structured settlement payments and annuities through committed warehouse lines. Our guaranteed structured settlement and annuity warehouse facilities totaled $225.0 million at December 31, 2017. We regularly assess our financing sources and adjust the nature and amount of our committed warehouse lines in light of current and projected market conditions. We may seek to amend our warehouse facilities to better reflect our financing needs. We also intend to undertake a sale or securitization of these assets multiple times per year, subject to our discretion, in transactions that are designed to generate excess cash proceeds over the purchase price we paid for those assets and the amount of warehouse financing used to fund that purchase price. We finance the purchase of other payment streams using a combination of other committed financing sources, cash on hand and our operating cash flow.
We refer to undiscounted total receivable balances that we have purchased as TRB. TRB purchases for the years ended December 31, 2017 and 2016 were $719.5 million and $713.4 million, respectively. Because our purchase and financing of periodic payment streams is undertaken on a positive cash flow basis, we view our ability to purchase payment streams as key to our business model. We continuously monitor the efficiency of marketing expenses and the hiring and training of personnel engaged in the purchasing process. Another key feature of our business model is our ability to aggregate payment streams from many individuals and from a diversified base of payment counterparties. We have reviewed the TRB which we purchase directly or purchase from third parties and have discontinued our focus on less profitable TRB.
We operate with multiple brands, two of which are highly recognizable brands in the segment, J.G. Wentworth and Peachtree, each of which generates a significant volume of inbound inquiries. Brand awareness is critical to our marketing efforts, as there are no readily available lists of holders of structured settlements, annuities or, in many cases, lotteries. Since 1995 we have invested significant resources in marketing to establish our brand names and increase customer awareness through multiple media outlets. As a result of our substantial marketing investment, we believe our two core brands are two of the most recognized brands in their product category. Additionally, since 1995, we have been building proprietary databases of current and prospective customers, which we continue to grow through our marketing efforts and which we consider a key differentiator from our competitors.
Payment Solutions and Personal Lending
As part of our diversification strategy, we entered into the payment solutions business and have set up relationships to provide inquiring individuals access to providers of personal loans. We do not lend to customers in these product lines and are not exposed to credit or default risk. Rather, we earn fees by leveraging our direct-to-consumer marketing channels and brand recognition to connect lenders and consumers.

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Payment Solutions - Prepaid Cards
A prepaid card is a card that can be used to access money that has been paid to the card account in advance. There are a number of different types of prepaid cards. We have launched a General Purpose Reloadable ("GPR") card and a Consumer Incentive card. In each case, we act as a program manager and distributor of the card and have chosen to partner with third-party service providers to serve as the card-issuer, card-processor and as our network partner. A GPR card can be reloaded by a consumer to add more money after the funds originally loaded to the card account have been exhausted. We have branded our proprietary, bank-issued GPR card as The J.G. Wentworth Cash Now™ Visa® Card. GPR cards have features similar to a typical bank checking account, including fee-free direct deposit, in-store and on-line purchasing capability wherever Visa is accepted, bill payment and ATM cash access. Fees are charged to consumers for monthly account maintenance and other transactions, some of which are waived if certain conditions are met. We also sell customizable GPR cards to third party businesses.
A Consumer Incentive card is non-reloadable and can only be funded for a single load by a corporate entity, in this case, us. We have branded our proprietary, bank-issued Consumer Incentive card as The J.G. Wentworth Visa® Reward Card. We use The J.G. Wentworth Visa® Reward Card to support our structured settlement consumer acquisition and retention efforts by using the cards in place of paper checks. We also sell customizable Consumer Incentive cards to third-party businesses. In connection with our GPR and Consumer Incentive cards, we earn account maintenance and other transaction fees based on consumers' use of the cards. We also earn fees when we sell GPR and Consumer Incentive cards to third-party businesses. As of December 31, 2017, our payment solutions group had not generated significant revenues.
Personal Lending
Personal loans are unsecured loans, for which borrowers do not have to provide collateral. We have created a personal lending platform where consumers seeking personal loans can access third parties or their intermediaries online or on the phone. We do not lend to consumers and are not exposed to credit or default risk. We do not charge consumers for the use of our platform. Our revenue is generated from the up-front match fees paid by the lender on delivery of a lead and the closing of the loan.
Pre-Settlement Funding
Pre-settlement funding is a transaction with a plaintiff that has a pending personal injury claim to provide liquidity while awaiting settlement. These are not loans; rather, there is an assignment of an interest in the settlement proceeds of the claim and, if and when a settlement occurs, payment is made to us directly via the claim payment waterfall, not from the claimant. If the plaintiff's claim is unsuccessful, the purchase price and accrual of fees thereon are written off. In April 2015, we stopped purchases of finance receivables associated with pre-settlement funding transactions. We do, however, continue to broker such transactions to third parties in exchange for broker or referral fees. We also continue to service $24.4 million in gross finance receivables (at cost) related to pre-settlement funding transactions that we purchased prior to the cessation of related funding activities.
Home Lending 
Through our Home Lending segment, we serve our customers by originating and servicing U.S. residential mortgage loans. We originate primarily conventional, FHA and VA mortgage loans. We transfer mortgage loans into pools of Ginnie Mae and Fannie Mae mortgage-backed securities ("MBSs"), and sell whole mortgage loans to third party investors in the secondary market. Our principal revenue channels include: (i) gains on the sale of mortgage loans from loan securitizations and whole loan sales; (ii) fee income from mortgage originations; (iii) service income from loan servicing and (iv) interest income on mortgage loans held for sale. We currently offer the following mortgage loan products:
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Conforming Mortgage Loans. Conforming mortgage loans are prime credit quality first-lien mortgage loans secured by a residential property that meet or "conform" to the underwriting standards established by Fannie Mae and Freddie Mac for inclusion in their guaranteed mortgage securities programs.
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Non-conforming Mortgage Loans. Non-conforming mortgage loans are prime credit quality first-lien mortgage loans that conform to the underwriting standards established by Fannie Mae and Freddie Mac, except they have original principal amounts exceeding Fannie Mae and Freddie Mac limits.
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Government Mortgage Loans. Government mortgage loans are first-lien mortgage loans secured by owner occupied residences that are insured by the FHA or U.S. Department of Agriculture ("USDA"), or guaranteed by the VA and, in each case, securitized into Ginnie Mae MBSs.
Our Home Lending segment operates through our wholly-owned subsidiary, J.G. Wentworth Home Lending, LLC. Home Lending is a residential mortgage lender with active licenses in 45 states and the District of Columbia and is an approved Title II, non-supervised direct endorsement mortgagee with HUD. In addition, Home Lending is an approved issuer with Ginnie Mae, Freddie Mac, the USDA and the VA, as well as an approved seller/servicer with Fannie Mae, Freddie Mac and Ginnie Mae. All of Home Lending's underwriting, closing, funding, and corporate functions are managed centrally at its headquarters in Woodbridge, Virginia. However, we rely on sales and sales support staff (including loan officers, processors, and administrative staff) located throughout the country.

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Our loan origination operations primarily consist of distributed retail and direct-to-consumer operations. In our distributed retail channel, we generate leads and originate loans from business and personal referrals as well as from previous customers via our 24 branch locations that are located in 15 states. Our direct-to-consumer channel consists of affinity relationships and other marketing initiatives. Through affinity relationships we generate program leads and originate mortgage loans directly with borrowers through our telephone call centers or the Internet. Our direct-to-consumer marketing initiatives generate refinance and purchase mortgage leads through a variety of marketing channels including direct mail, paid search and search engine optimization. For the year ended December 31, 2017 and 2016, 11.3% and 13.8%, respectively, of our originations were through our distributed retail operations and 88.7% and 86.2%, respectively, were through our direct-to-consumer operations. After originating loans, we transfer those mortgage loans into pools of Ginnie Mae and Fannie Mae MBSs, and/or sell whole mortgage loans to third party investors in the secondary market.
Servicing primarily involves loan administration, payment processing, mortgage escrow account administration, collection of insurance premiums, response to homeowner inquiries, loss mitigation solutions, including loan modifications, and supervision of foreclosures and property dispositions on behalf of the owners of the loans. These activities generate recurring revenues and cash flows. Revenues primarily consist of servicing fees, which are generally expressed as basis points of the outstanding unpaid principal balance, and ancillary revenues such as late fees, modification fees and incentive fees. Our servicing portfolio includes mortgage servicing rights, which are rights we own and record as assets to service traditional residential mortgage loans for others either as a result of a purchase transaction or from the sale and securitization of loans we originate. We have elected to account for our MSR portfolio at fair value. Due principally to servicer advance requirements, MSRs require capital and liquidity; however, such advances are generally financeable. We sub-contract the actual servicing to a third-party provider. As of December 31, 2017, we serviced 21,974 loans with an aggregate outstanding principal balance of $5.3 billion.
Industry Overview
As a direct-to-consumer marketer, we originate consumer interest in a variety of cash related products across multiple channels.
Structured Settlements
In our Structured Settlements segment, we purchase structured settlement payments from consumers. The use of structured settlements was established in 1982 when the U.S. Congress passed the Periodic Payment Settlement Act of 1982 (the "Settlement Act"), which allows periodic payments made as compensation for a personal injury to be free of all federal taxation to the payee, provided certain conditions are met. By contrast, the investment earnings on a single up-front payment are generally taxable, leading structured settlements to proliferate as a means of settling lawsuits. Following the emergence of structured settlements, a secondary market developed in response to the changing financial needs of the holders of structured settlements over time, with many requiring short-term liquidity for a variety of reasons. Purchasers in the structured settlement secondary market provide an up-front cash payment in exchange for an agreed-upon stream of periodic payments from a holder of a structured settlement. To avoid the imposition of a federal excise tax, since 2002, each purchased structured settlement payment stream requires court approval by a judge, who must rule that the transfer of the Structured Settlements and its terms are in the best interests of the payee, taking into account the welfare and support of the payee's dependents.
A portion of structured settlements may have a life contingent component. Life contingent structured settlements are similar to guaranteed structured settlements, however, unlike guaranteed structured settlements, which pay out until maturity regardless of the status of the beneficiary, life contingent structured settlement payments cease upon death of the beneficiary. We have developed a financing model that allows us to purchase these life contingent structured settlement payments without assuming any mortality risk.
We also purchase annuities. Annuities are most often purchased to provide a reliable cash flow or a financial cushion for unexpected expenses during retirement or received by individuals via inheritance. The secondary market for annuities provides liquidity to holders, regardless of how they obtained their annuity. The purchasing and underwriting process for annuities is substantially similar to that for structured settlements. However, purchases of annuities do not require court approval.
In addition to structured settlements and annuities, we also purchase and act as a broker for lottery receivables. According to the North American Association of State and Provincial Lotteries ("NASPL"), 44 states and the District of Columbia currently offer government-operated lotteries. For those lottery winners that have either elected or have been required to receive their lottery prize payout in the form of periodic payments, the secondary market provides liquidity and payment flexibility not otherwise provided by their current payment schedule. Twenty-six states have enacted statutes that permit lottery winners to voluntarily assign all or a portion of their future lottery prize payments. Similar to structured settlements, the voluntary assignment of a lottery prize requires a court order.
The results of our payment solutions business and access fees from third party providers of personal loans are included within the results of our Structured Settlements segment. Prepaid cards have emerged as an attractive product within the electronic payments industry. They are generally easy for consumers to understand and use because they work in a manner similar to traditional

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debit cards, allowing the cardholder to use a conventional plastic card (and in some cases a virtual card) linked to an account established at a financial institution. In most cases, the consumer can access the funds on the card at ATMs and/or the point of sale in retail locations using signature identification technologies or a personal identification number. Prepaid cards and related services offer consumers flexibility, convenience and spending control.
The personal lending online market is changing the traditional brick and mortar banking system. By providing a platform where borrowers can connect with lenders, personal lending online marketplaces are making credit more affordable and available through a medium often overlooked by traditional banks.
Prior to April 2015, we provided consumers with pre-settlement funding, which provides a plaintiff with a pending personal injury claim with immediate cash, which can be used by the plaintiff to fund out of pocket expenses, allowing the plaintiff to continue their lawsuit. In April 2015, we stopped conducting pre-settlement funding transactions. We do, however, continue to broker leads for such transactions to third parties in exchange for broker or referral fees, and continue to service our existing pre-settlement funding transaction portfolio.
Home Lending
Our Home Lending segment conducts business in the residential mortgage lending industry in the United States. We participate in two distinct, but related, sectors of the mortgage industry: residential mortgage loan originations and residential mortgage loan servicing.
The U.S. residential mortgage market consists of a primary mortgage market that links borrowers and lenders and a secondary mortgage market that links lenders and investors. In the primary mortgage market, residential mortgage lenders such as mortgage banking companies, commercial banks, savings institutions, credit unions and other financial institutions originate or provide mortgage loans to borrowers. Lenders obtain liquidity for originations in a variety of ways, including by selling mortgage loans into the secondary mortgage market or by securitizing mortgage loans into MBSs. Banks that originate mortgage loans also have access to customer deposits to fund their originations business. The secondary mortgage market consists of institutions engaged in buying and selling mortgage loans in the form of whole loans, which represent mortgage loans that have not been securitized and MBSs. The GSEs (Fannie Mae & Freddie Mac), and Ginnie Mae participate in the secondary mortgage market by purchasing mortgage loans and MBSs for investment and by issuing guaranteed MBSs.
Each mortgage loan must be serviced by a loan servicer. Master servicers, which are loan servicers that own the MSRs they service, generally earn a contractual per loan fee on the unpaid principal balance of loans serviced, as well as incentive fees and associated ancillary fees, such as late fees.
Loan servicing predominantly involves the calculation, collection and remittance of principal and interest payments, the administration of mortgage escrow accounts, the collection of insurance claims, the administration of foreclosure procedures and the disbursement of required advances.
Government Regulation
We are subject to federal, state and, in some cases, local regulation in the jurisdictions in which we operate. These regulations govern and/or affect many aspects of our overall business. Certain government regulations may cover both of our business segments while certain other government regulations may cover specific business segments only.
In order to comply with the laws and regulations applicable to our businesses, we have policies, standards and procedures in place for our business activities and with our third-party vendors and providers. Laws, regulations, and related guidance evolve regularly, requiring us to adjust our compliance program on an ongoing basis. This will be particularly true of the next few months and years if the government overhauls much of the current regulatory landscape, which is the expectation of many professionals in the financial services industry. As a result, this regulatory disclosure should be viewed as a snapshot in time that is and will continue to be subject to future modification. Any future regulatory modifications could have a substantial impact on our profitability in the short, medium and long terms.

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Regulatory Aspects of Our Overall Business
Dodd-Frank Act
Title X of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 ("Dodd-Frank") established the Consumer Financial Protection Bureau ("CFPB"), which has regulatory, supervisory and enforcement powers over providers of consumer financial products and services. Included in the powers afforded to the CFPB is the authority to adopt rules declaring specific acts and practices to be "unfair," "deceptive" or "abusive," and hence unlawful. The CFPB could adopt rules imposing new and potentially burdensome requirements and limitations with respect to our lines of business. However, on November 25, 2017, Mick Mulvaney was appointed acting Director of the CFPB following the resignation of Director Richard Cordray. Acting Director Mulvaney has publicly stated that the way the new leadership will interpret and enforce Dodd-Frank will be “dramatically different,” however the precise changes are as yet unknown.
In addition to Dodd-Frank's grant of regulatory powers to the CFPB, Dodd-Frank gives the CFPB authority to pursue administrative proceedings or litigation for violations of fourteen federal consumer financial laws. In these proceedings, the CFPB can obtain cease and desist orders (which can include orders for restitution, reformation or rescission of contracts, payment of damages, refund or disgorgement, as well as other kinds of affirmative relief) and civil monetary penalties ranging from $5,437 per day for violations of federal consumer financial laws (including the CFPB's own rules) to $27,186 per day for reckless violations and $1,087,450 per day for knowing violations. Also, where a company has violated Title X of Dodd-Frank or CFPB regulations under Title X, Dodd-Frank empowers state attorneys general and state regulators to bring civil actions for the kind of cease and desist orders available to the CFPB. Pursuant to CFPB Bulletin 2016-02, supervised banks and non-banks could be held liable for actions of their service providers, such as sub-servicers. Additional information regarding the Civil Investigative Demands ("CIDs") from the CFPB relating to our structured settlement and annuity payment purchasing activities is included in Part I, Item III "Legal Proceedings" of Form 10-K.
Dodd-Frank directs the federal banking agencies and the Securities and Exchange Commission ("SEC"), to adopt rules requiring an issuer or other entity creating an asset-backed security (including the securitizations of our payment streams and MBSs) to retain an economic interest in a portion of the credit risk for the assets underlying the security, subject to certain exceptions, including for qualified residential mortgages. In 2014, the Board of Governors of the Federal Reserve System, HUD, the Federal Deposit Insurance Corporation (the "FDIC"), the Federal Housing Finance Agency, the Office of the Comptroller of the Currency, and the SEC approved a credit risk retention rule that became effective on December 24, 2016 and requires sponsors of securitizations to retain not less than 5% of the credit risk of the assets. This risk retention requirement applies to securitizations of the payment streams we purchase in our Structured Settlements segment and will decrease the amount of cash that we receive in connection with each such securitization as we will not be able to sell the entire pool of bonds as we have done previously. We have analyzed this rule and we believe we have structured the securitizations of our payments streams to be in accordance with the rule.
Anti-Money Laundering Laws
Federal anti-money laundering laws make it a criminal offense to own or operate a money transmitting business without the appropriate state licenses and registration with the Financial Crimes Enforcement Network ("FinCEN"), of the U.S. Department of the Treasury (the "Treasury Department"). In addition, the USA PATRIOT Act of 2001 and the Treasury Department's implementing federal regulations require "financial institutions" to establish and maintain an anti-money-laundering program. Such a program must include: (i) internal policies, procedures and controls designed to identify and report money laundering; (ii) a designated compliance officer; (iii) an ongoing employee-training program; and (iv) an independent audit function to test the program.
In addition, federal regulations require the reporting of suspicious transactions of at least $2,000 to FinCEN. Relevant federal regulations generally describe the three classes of reportable suspicious transactions as follows: transactions that a business knows, suspects, or has reason to suspect (i) involve funds derived from illegal activity or funds intended to hide or disguise such activity, (ii) are designed to evade the requirements of the Bank Secrecy Act, or (iii) appear to serve no business or lawful purpose.
In connection with its administration and enforcement of economic and trade sanctions based on U.S. foreign policy and national security goals, the Treasury Department's Office of Foreign Assets Control ("OFAC") publishes a list of individuals and companies owned or controlled by, or acting for or on behalf of, targeted countries. It also lists individuals, groups, and entities, such as terrorists and narcotics traffickers, designated under programs that are not country-specific. Collectively, such individuals and companies are called "Specially Designated Nationals" ("SDNs"). Assets of SDNs are blocked, and we are generally prohibited from dealing with them. In addition, OFAC administers a number of comprehensive sanctions and embargoes that target certain countries, governments and geographic regions. We are generally prohibited from engaging in transactions involving any country, region or government that is subject to such comprehensive sanctions.

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In addition, the Bank Secrecy Act requires financial institutions to keep records of cash purchases of negotiable instruments and other suspicious activity that might denote money laundering, tax evasion or other criminal activity and requires financial institutions to remain in compliance with state and federal anti-money laundering laws.
Privacy and Information Safeguard Laws
In the ordinary course of our business, we collect certain types of data, which subjects us to certain privacy and information security laws in the United States, including, for example, the Gramm-Leach-Bliley Act of 1999 and other laws or rules designed to regulate consumer information and mitigate identity theft. We are also subject to privacy laws of various states. These state and federal laws impose obligations with respect to the collection, processing, storage, disposal, use and disclosure of personal information, and require that financial institutions have in place policies regarding information privacy and security. In addition, under federal and certain state financial privacy laws, we must provide notice to consumers of our policies and practices for sharing nonpublic information with third parties, provide advance notice of any changes to our policies and, with limited exceptions, give consumers the right to prevent use of their nonpublic personal information and disclosure of it to unaffiliated third parties. Certain state laws may, in some circumstances, require us to notify affected individuals of security breaches of computer databases that contain their personal information. These laws may also require us to notify state law enforcement, regulators or consumer reporting agencies in the event of a data breach, as well as businesses and governmental agencies that own data. Furthermore, if enacted as proposed, California Senate Bill 297 would require lead generators to comply with the same legal requirements for information privacy and security as what applies to state licensed lenders.
Escheatment Laws
Unclaimed property laws of every U.S. jurisdiction require that we track certain information on our products and if qualifying customer funds are unclaimed at the end of an applicable statutory abandonment period, the proceeds of the unclaimed property be remitted to the appropriate jurisdiction. Statutory abandonment periods potentially applicable to certain of our products typically range from three to seven years.
Other Federal Regulations
In addition to the regulations discussed above, depending upon the particular business segment and the line of business therein, we may have to comply with a number of additional federal consumer protection laws, including, among others:
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The Truth-in-Lending Act ("TILA") and Regulation Z, which implements TILA, require disclosure to customers or mortgagors of uniform, understandable information concerning certain terms and conditions of their loan and credit transactions. TILA also regulates the advertising of credit and gives borrowers, among other things, certain rights regarding updated disclosures and the treatment of credit balances.
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The Fair Credit Reporting Act ("FCRA") regulates the use and reporting of information related to the credit history of consumers. FCRA requires a permissible purpose to obtain a consumer credit report, and requires persons to report loan payment information to credit bureaus accurately. FCRA also imposes disclosure requirements on creditors who take adverse action on credit applications based on information contained in a credit report.
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The Fair Debt Collection Practices Act ("FDCPA") regulates the timing and content of debt collection communications. The FDCPA limits certain communications with third parties, imposes notice and debt validation requirements, and prohibits threatening, harassing or abusive conduct in the course of debt collection.
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The Equal Credit Opportunity Act ("ECOA") prohibits discrimination on the basis of age, race and certain other characteristics in the extension of credit. Regulation B, which implements ECOA, restricts creditors from requesting certain types of information from applicants and from making statements that would discourage on a prohibited basis a reasonable person from making or pursuing an application. ECOA also requires creditors to provide consumers with timely notices of adverse action taken on credit applications.

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Structured Settlements
The operations of our Structured Settlements segment are subject to specific federal and state regulation regarding the transfer of such payment streams and the tax implications of such transfers. In addition, our payment solutions and personal lending business lines operate within this segment and are subject to federal and state regulation relating to protection of consumer information, prepaid card fees, electronic funds transfers and escheatment of property.
Transfer Statutes
To protect the interests of individuals who wish to sell their rights to receive structured settlement payments, federal and state governments have instituted laws and regulations governing the transferability of these interests. Currently, the assignment of structured settlement payments from one party to another is subject to federal and, in most cases, state statutory and regulatory requirements. Most states have adopted transfer statutes to provide certainty as to who structured settlement payments are to be made and to ensure that individuals who wish to sell structured settlement payments are treated fairly. Under these transfer statutes, an individual who wishes to sell his/her right to receive payment must receive court approval that the transfer is in the individual's best interest before a transfer can take place. Under federal law, if court approval is not previously obtained, the acquirer of the structured settlement payments is subject to a significant excise tax on the transaction. To comply with these federal and state laws, there are a significant number of compliance items that must be completed before a transfer of structured settlement payment rights can take place.
While structured settlement transfer statutes vary from state to state, most are based upon model legislation regarding transfers of settlement payments, referred to as the Model Act, which was developed by various market participants, including the National Association of Settlement Purchasers and the National Structured Settlements Trade Association. A transfer statute typically sets forth, at a minimum, the following requirements that must be satisfied before a court will issue a transfer order approving a sale of structured settlement payments: (i) the court must find that the sale of the structured settlement payments is in the seller's best interest, taking into account the welfare and support of the seller's dependents; (ii) the settlement purchaser must have given notice of the proposed sale and related court hearing to the related obligor and issuer of the payments and certain other interested parties, if any; and (iii) the settlement purchaser must have provided to the seller a disclosure statement that (a) indicates, among other things, the discounted present value of the structured settlement payments in question and any expenses or other amounts to be deducted from the purchase amount received by the seller, and (b) advises the seller to obtain or at least consider obtaining independent legal, tax and accounting advice in connection with the proposed transaction. Any transfer statute may place additional affirmative obligations on the settlement purchaser, require more extensive findings on the part of the court issuing the transfer order, contain additional prohibitions on the actions of the purchaser or the provisions of a settlement purchase agreement, require shorter or longer notice periods, or impose other restrictions or duties on settlement purchasers. In particular, many transfer statutes specify that, if a transfer of structured settlement payments contravenes the terms of the underlying settlement contract, the settlement purchaser will be liable for any taxes and, in some cases, other costs incurred by the related obligor and issuer of the payments in connection with such transfer. Also, transfer statutes vary as to whether a transfer order issued under the statute constitutes definitive evidence that the related assignment complies with the terms of the applicable transfer statute. While many transfer statutes require a court to issue a finding at the time of the issuance of a transfer order that the related assignment complies with the terms of the applicable transfer statute, under several transfer statutes the issuance of a transfer order is only one of several factors used to determine compliance with the applicable transfer statute.
Most of the settlement agreements giving rise to the structured settlement receivables that we purchase contain anti-assignment provisions that purport to proscribe assignments or encumbrances of structured settlement payments due thereunder. Anti-assignment provisions give rise to the risk that a claimant or a payor could invoke the anti-assignment provision in a settlement agreement to invalidate a claimant's transfer of structured settlement payments to the purchaser, or force the purchaser to pay damages. In addition, at least one appellate court in Illinois has determined that the state transfer statute does not apply to certain transfers where an anti-assignment provision is applicable. Under certain circumstances, interested parties other than the related claimant or payor can also challenge, and potentially invalidate, an assignment of structured settlement payments made in violation of an anti-assignment provision. Whether the presence of an anti-assignment provision in a settlement agreement can be used to invalidate a prior transfer depends on various aspects of state and federal law, including case law and the state's particular adoption of Article 9 of the Uniform Commercial Code (the "UCC"). Ultimately, the decision of whether an anti-assignment provision is enforceable is made by the courts.
Many state courts have differing views as to whether the state court or a bankruptcy court must issue the final court order approving the sale of periodic payments where certain of the assets proposed for sale are subject to bankruptcy proceedings. In an Illinois ruling, the state court found no conflict between the Illinois transfer statute and the Bankruptcy Code that would necessitate pre-emption of the Bankruptcy Code over the transfer statute. In New Jersey, however, the state court refused to hear a trustee's petition for approval of a sale on the grounds that the sale involved property subject to bankruptcy proceedings and that such proceedings were beyond the jurisdiction of the state court.

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Many states have enacted transfer statutes with respect to lottery payments. While there are differences among the various lottery prize transfer statutes, such statutes typically require compliance with the following criteria before a court will approve the sale of a lottery winner's prize payments: (i) the assignment must be in writing and state that the lottery winner has a statutorily specified number of business days within which to cancel the assignment; (ii) the lottery winner must be provided with a written disclosure statement setting forth, among other things, (a) the payments being assigned, by amounts and payment dates, (b) the purchase price being paid, (c) the discount rate applied by the purchaser to the lottery prize payments and (d) the amount of any origination or closing fees to be charged to the lottery winner; (iii) written notice of the proposed assignment and any court hearing concerning the assignment must be provided to the applicable lottery commission's counsel prior to the date of any court hearing; and (iv) the lottery winner must provide a sworn affidavit attesting that (a) he is of sound mind, in full command of his faculties and not acting under duress and (b) has been advised regarding the assignment by his own independent legal counsel. A lottery prize transfer statute may: (i) place additional affirmative or negative obligations on the purchaser of the lottery receivable(s); (ii) impose additional prohibitions on the actions of the lottery originator and/or its assignors; (iii) override provisions of lottery purchase agreements; and (iv) require shorter or longer payment periods. Most state lottery commissions will acknowledge the transfer order in writing, either by means of a written acknowledgment, counter-execution of the transfer order or an affidavit of compliance with the soon-to-be-issued transfer order.
The failure on the part of a structured settlement payment purchaser or a lottery prize payment purchaser to comply with the terms of any applicable transfer statutes may have several adverse consequences, including, but not limited to, a court decision declaring any related receivable purchases invalid, which would, in the case of a structured settlement payment transfer, enable the Internal Revenue Service (the "IRS"), to impose an excise tax thereon.
Additional Restrictions on Annuity Transfers
Annuity contracts are usually assignable by the annuitant. In order to effect an assignment, providers of annuities must acknowledge the annuitant's sale of the annuity to the purchaser in writing and then redirect payments to the purchaser. In many states, annuities are excluded from the scope of Article 9 of the UCC, and therefore the UCC concept of "perfection" may not apply with respect to such assignments. Nevertheless, a precautionary UCC-1 financing statement can be filed against the annuitant. Many states restrict the procurement of an annuity contract with the sole intent to assign it. Consequently, it is often necessary to wait for at least six months after the issuance of the annuity contract in order to purchase any annuity payments streams arising thereunder. In some cases, it is sufficient for a prospective purchaser to obtain certain documentation affirming that the annuitant (or, if applicable, its predecessor in interest) did not procure the annuity contract with the intent to assign it.
Federal Tax Relief Act
Several provisions of the Internal Revenue Code (the "Code"), impact our structured settlement and annuity purchasing business.
Generally, an assignee of a structured settlement obligation may exclude from gross income the settlement amounts received from the defendant to the extent that such amounts do not exceed the aggregate cost of any qualified funding asset (such as an annuity contract), pursuant to section 130 of the Code. Further, when a taxpayer receives a distribution payment from an annuity before attaining the age of 59 ½, the distribution is generally subject to a 10% penalty. However, such a penalty does not generally apply if the distribution is made under an annuity provided by suit or settlement as compensatory damages for personal injury or illness.
Section 5891 of the Code, as set forth by the Tax Relief Act, levies an excise tax upon those people or entities that acquire structured settlement payments from a seller, unless certain conditions are satisfied. The excise tax is equal to 40% of the discount imposed by the purchaser of the structured settlement payments. However, no such tax is levied if the transfer of such structured settlement payments is approved in a qualified court order. A qualified court order under the Tax Relief Act means a final order, judgment or decree that finds that the transfer does not contravene any federal or state law or the order of any court or administrative authority and is in the best interest of the payee, taking into account the welfare and support of the payee's dependents. The order must be issued under the authority of an applicable state statute of the state in which the seller is domiciled, or, if there is no such statute, under the authority of an applicable state statute of the state in which the payment obligor or annuity provider has its principal place of business, or by the responsible administrative authority (if any) that has exclusive jurisdiction over the underlying action or proceeding.
The IRS issued regulations that provide guidance on the reporting requirements for those paying the excise tax under Section 5891. The regulations require individuals liable for the excise tax to file a return and pay the tax no later than 90 days after the individual receives payments under the structure.
In July 2015, the Treasury Department, as part of its continuing effort to reduce paperwork and respondent burden, invited the general public and other federal agencies to comment on proposed and/or continuing information collection procedures with respect to the excise tax on structured settlement factoring transactions. In September 2015, the IRS published a Structured Settlement Factoring Audit Technique Guide ("ATG") that expands upon the factoring issue. The ATG outlines the process for

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reporting the excise tax and discusses a number of valuation techniques. On December 1, 2015, the IRS solicited comments in the Federal Register regarding Form 8876, Excise Tax on Structured Settlement Factoring Transactions. The comments were due on February 1, 2016. No formal action has been taken by the IRS to date based on the comments received. 
Credit Card Accountability, Responsibility and Disclosure Act
The Credit Card Accountability, Responsibility and Disclosure Act (the "Card Act") establishes comprehensive legislation regarding fair and transparent practices relative to credit cards, gift certificates, store gift cards and general-use prepaid cards. The Card Act regulates certain dormancy, inactivity and service fees chargeable by issuers of prepaid cards and related disclosures.
Other Federal Regulations
In addition to compliance with the regulations summarized above, in the Structured Settlements segment we must also continue to monitor developments relating to, and our possible required compliance with, a number of federal consumer protection laws and security standards, including, among others:
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the Telemarketing and Consumer Fraud and Abuse Prevention Act, which requires that telemarketers maintain an internal data base of consumers who do not wish to be contacted and not to call such customers;
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the Payment Card Industry Data Security Standard, a proprietary information security standard for organizations that handle branded credit cards from the major card issuers including Visa, MasterCard, American Express, Discover, and JCB; and
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the Controlling the Assault of Non-Solicited Pornography and Marketing Act of 2003, which was designed to stop the deluge of unsolicited junk mail and regulates commercial email, establishes standards for commercial messages, gives recipients the right to opt out of receiving emails, and provides penalties for violations.
Dodd-Frank
Dodd-Frank directs the federal banking agencies and the SEC, to adopt rules requiring an issuer or other entity creating an asset-backed security (including the securitizations of our payment streams and MBSs) to retain an economic interest in a portion of the credit risk for the assets underlying the security, subject to certain exceptions, including for qualified residential mortgages. In 2014, the Board of Governors of the Federal Reserve System, HUD, the FDIC, the Federal Housing Finance Agency, the Office of the Comptroller of the Currency, and the SEC approved a credit risk retention rule that became effective on December 24, 2016 and requires sponsors of securitizations to retain not less than 5% of the credit risk of the assets. This risk retention requirement applies to securitizations of the payment streams we purchase in our Structured Settlements segment and will decrease the amount of cash that we receive in connection with each such securitization as we will not be able to sell the entire pool of bonds as we have done previously. We have analyzed this rule and we believe we have structured the securitizations of our payments streams to be in accordance with the rule.
Electronic Funds Transfers Act
Regulation E, which implements the Electronic Funds Transfer Act, imposes requirements for the issuance and sale of gift cards. The requirements mandate that certain clear and conspicuous disclosures be provided to consumers at the point of sale and on the card itself, including with respect to any service, inactivity or dormancy fees that may be assessed. In addition, the regulation places certain restrictions and prohibitions on such fees.
On October 5, 2016, the CFPB issued a final rule providing consumer protections for general prepaid accounts that are not marketed as gift cards. The rule finalized new Regulation E requirements, implementing the Electronic Funds Transfer Act, for prepaid accounts. The new Regulation E requirements create tailored provisions governing disclosures, limited liability and error resolution rules, requirements for periodic statements and the posting of account agreements. The CFPB rule finalized further requirements for prepaid accounts under Regulation Z, implementing the Truth In Lending Act. Pursuant to the new Regulation Z rules, issuers of prepaid accounts must provide protections similar to those for credit cards if they allow consumers to use credit to make purchases in excess of the amount prepaid.
On January 25, 2018, the CFPB issued a final rule postponing the effective date of the revised final rule to April 1, 2019 from the previous effective date of April 1, 2018.
As the Company moves further into the gaming application for its payment solutions products, it will have to evaluate certain additional regulatory requirements and their application to these products. In addition to any application of the previously noted prepaid card rules promulgated by the CFPB under its Dodd-Frank authority, to be eligible to participate in payments solutions for the gaming industry, the Company, its related and applicable subsidiaries and the managers thereof may have to apply for and be approved to provide the intended services to the industry or seek any applicable exemption from licensing. This application and licensing process may occur on the state level or the local jurisdictional regulatory level, such as with tribal authorities. This process may require submission and regulatory administrative review of various items of information with respect to the Company and its principals and may include background checks. The level of licensing and associated review is expected

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to vary by jurisdiction, but will require the Company to provide additional information in connection with annual reviews conducted by the applicable regulatory authorities in order for the Company to be able to continue to provide the services for these payment solutions products. These requirements will impose additional regulatory and ongoing costs to comply.  
Personal Lending
We have created a personal lending platform where consumers seeking personal loans can access third parties or their intermediaries online or on the phone. We do not lend to consumers and are not exposed to credit or default risk. We do not charge consumers for the use of our platform. Our revenue is generated from the up-front match fees paid by the lender on delivery of a lead and the closing of the loan. The business of providing consumer leads to third-party lenders has been the subject of increasing scrutiny by state and federal authorities. On July 4, 2017, Blue Global LLC, a lead generator for payday and other short-term small loans, installment loans, and auto loans, was fined $104 million by the FTC. In addition, on September 19, 2017, the CFPB fined lead generator Zero Parallel $350,000 for steering consumers to lenders that were unlicensed or otherwise offered unlawful loans. Our practices do not resemble the practices engaged in by Blue Global or Zero Parallel. However, the activities of bad actors in the lead generation industry have spurred intensified regulatory scrutiny and may result in increased regulation. For example, if enacted, proposed California Senate Bill 297 would require lead generators to register with the state; comply with legal requirements for the privacy and security of personal information; and refrain engaging in false, misleading or deceptive business or advertising practices.
Home Lending
Home Lending is subject to extensive federal, state and local regulation. Our mortgage originations and mortgage servicing operations are primarily regulated at the state level by state licensing, supervisory and administrative agencies. We, along with certain of our employees who engage in regulated activities, must apply for licensing (or licensing exemption) as a mortgage banker or lender, loan servicer, mortgage loan originator and/or debt default specialist, pursuant to applicable state law. These laws typically require that we file applications and pay certain processing fees to be approved to operate in a particular state, and that our principals and loan originators be subject to background checks, administrative review and continuing education requirements. Home Lending is actively licensed (or maintains an appropriate statutory exemption) to originate and service mortgage loans in 45 states and the District of Columbia. From time to time, we receive requests from states and other agencies for records, documents and information regarding our policies, procedures and practices regarding our mortgage originations and mortgage servicing business activities, and we are subject to periodic examinations by state regulatory agencies. We incur ongoing costs to comply with these licensing and examination requirements.
SAFE Act
The federal Secure and Fair Enforcement for Mortgage Licensing Act of 2008 ("SAFE Act"), requires all states to enact laws requiring each individual who takes mortgage loan applications, or who offers or negotiates terms of a residential mortgage loan, to be individually licensed or registered as a mortgage loan originator. Employees of Home Lending, as a non-depository lender, must be licensed. These laws require each mortgage loan originator to enroll in the Nationwide Mortgage Licensing System ("NMLS"), apply for individual licenses with the state where they operate, complete a minimum number of hours of pre-licensing education and an annual minimum number of hours of continuing education, and successfully complete exams at both the national and state level.
Home Lending is also required to be registered with the NMLS and receive an NMLS identification number to use in attesting to the employment of its mortgage loan originators, and for other SAFE Act-related purposes.
Other Federal Regulations
In addition to licensing requirements and SAFE Act compliance, we must comply with a number of federal consumer protection laws in our Home Lending segment, including, among others:
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the Real Estate Settlement Procedures Act ("RESPA") and Regulation X, which govern certain mortgage loan origination activities and practices and the actions of servicers related to escrow accounts, loan servicing transfers, lender-placed insurance, loss mitigation, error resolution and other customer communications;
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the federal Servicemembers Civil Relief Act, which allows military members to suspend or postpone certain civil obligations so that the military member can devote his or her full attention to military duties and requires us to adjust the interest rate of borrowers who qualify for and request relief to 6% for the duration of the borrower's active duty;
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the Homeowners Equity Protection Act, which requires, among other things, the cancellation of mortgage insurance once certain equity levels are reached;
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the Home Mortgage Disclosure Act and Regulation C thereunder, which require mortgage lenders to report certain public loan data;

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the Fair and Accurate Credit Transactions Act, which permits consumers one copy of each of the three major credit reporting agency credit reports annually and contains provisions to reduce identity theft;
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the Fair Housing Act, which prohibits discrimination in housing on the basis of race, sex, national origin, and certain other characteristics; and
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certain provisions of Dodd-Frank (discussed above and in further detail below), including the Consumer Financial Protection Act.
Dodd-Frank
The CFPB directly influences the regulation of residential mortgage loan originations and servicing in a number of ways. First, the CFPB has rulemaking authority with respect to many of the federal consumer protection laws applicable to mortgage originators and servicers, including TILA, RESPA and the FDCPA. Second, the CFPB has supervision, examination and enforcement authority over consumer financial products and services offered by certain non-depository institutions, including Home Lending, and large insured depository institutions. The CFPB's jurisdiction includes those persons originating, brokering or servicing residential mortgage loans and those persons performing loan modification or foreclosure relief services in connection with such loans.
As discussed above, in 2014, the Board of Governors of the Federal Reserve System, HUD, the FDIC, the Federal Housing Finance Agency, the Office of the Comptroller of the Currency, and the SEC approved a credit risk retention rule that requires sponsors of securitizations to retain not less than 5% of the credit risk of the assets. However, because substantially all of our mortgage loans are sold to, or pursuant to programs sponsored by, Fannie Mae or Ginnie Mae, the approved rule exempts these mortgage loans from the risk-retention requirements with regard to MBSs backed by such mortgage loans.
On January 10, 2013, the CFPB issued a final rule, effective January 10, 2014, for the "ability to repay" requirement in Dodd-Frank. The rule, among other things, requires lenders to consider a consumer's ability to repay a mortgage loan before extending credit to the consumer, and limits prepayment penalties. The rule also establishes certain protections from liability for mortgage lenders with regard to the "qualified mortgages" they originate. For this purpose, the rule defines a "qualified mortgage" to include a loan with a borrower debt-to-income ratio of less than or equal to 43% or, alternatively, a loan eligible for purchase by Fannie Mae or Freddie Mac while they operate under federal conservatorship or receivership, and loans eligible for insurance or guarantee by the FHA, VA or USDA. The VA has issued additional rules regarding the definition of "qualified mortgage" for a VA insured and guaranteed loan. Under the rule, all purchase money origination loans and refinances other than certain interest rate reduction refinance loans guaranteed or insured by the VA are defined as safe harbor qualified mortgage loans. The rule also designates as a qualified mortgage: (1) any loan that the VA makes directly to a borrower; (2) Native American direct loans; and (3) vendee loans, which are made to purchasers of properties the VA acquires as a result of foreclosures in the guaranteed loan program. Additionally, a qualified mortgage may not: (i) contain excessive up-front points and fees; (ii) have a term greater than 30 years; or (iii) include interest-only, negative amortization or balloon payments. To the extent we originate non-"qualified mortgages", either inadvertently or purposefully, and we are found to have failed to make a reasonable and good faith determination of a borrower's ability to repay any such loan, we could be subject to additional civil or criminal penalties including substantial fines, imprisonment for individual responsible parties, and statutory penalties payable to the borrower equal to the sum of the borrower's actual damages, twice the amount of the related finance charges up to $4,000, the actual amount of finance charges or fees paid by the borrower (unless we show our failure to comply is not material), and the borrower's attorney's fees and other costs in connection with the related litigation.
On October 3, 2015, the CFPB implemented a final rule combining the mortgage disclosures consumers previously received under TILA and RESPA. For more than 30 years, the TILA and RESPA mortgage disclosures had been administered separately by, respectively, the Federal Reserve Board and HUD. The final rule generally applies to most closed-end residential mortgage loans for which the creditor or mortgage broker receives an application on or after October 3, 2015.
On January 1, 2018, significant revisions to Regulation C, which implements the Home Mortgage Disclosure Act (“HMDA”), became effective. Under the revised regulation, the number of data points that must be collected and reported is more than double what was previously required (i.e., from 23 to 48). New or revised data points include applicant or borrower age, credit score, unique loan identifier, property value, application channel, points and fees, borrower-paid origination charges, discount points, lender credits, loan term, prepayment penalty, non-amortizing loan features, interest rate, and loan originator identifier. In addition, the revised rules for identifying borrower race and ethnicity under the revised regulation are more complex. For example, borrowers who identify themselves as Hispanic now have the option of indicating whether they are Mexican, Puerto Rican, Cuban or other, which could include any ethnicity.
The CFPB's Loan Estimate combines some of the disclosures that were provided in the initial Truth in Lending statement with the disclosures that were provided in the RESPA Good Faith Estimate. The form also incorporates other disclosures that are required by Dodd-Frank or are currently provided separately. The Loan Estimate must be delivered or placed in the mail not more than three business days after receipt of an application and not less than seven business days before consummation of the transaction.

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The Loan Estimate must provide a "good faith estimate of the closing costs." An estimate is in good faith if the charge paid by or imposed on the consumer does not exceed the amount originally disclosed, with certain exceptions.
The CFPB's Closing Disclosure combines the disclosures that were provided in the final Truth in Lending statement with the disclosures that were provided in the RESPA HUD-1 or HUD-1A settlement statement. Like the Loan Estimate, the form also incorporates other disclosures. The Closing Disclosure generally must state the actual terms of the credit transaction, and the actual costs associated with the settlement of that transaction. The final rule requires that the consumer receive the Closing Disclosure no later than three business days before consummation of the transaction.
Title XIV of Dodd-Frank imposes a number of additional requirements on servicers of residential mortgage loans by amending certain existing provisions and adding new sections to TILA and RESPA. The penalties for noncompliance with TILA and RESPA are also significantly increased by Dodd-Frank and could lead to an increase in lawsuits against mortgage servicers. To that end, on January 10, 2014, the CFPB implemented final rules creating uniform standards for the mortgage servicing industry. The rules increase requirements for communications with borrowers, address requirements around the maintenance of customer account records, govern procedural requirements for responding to written borrower requests and complaints of errors, and provide guidance around servicing of delinquent loans, foreclosure proceedings and loss mitigation efforts, among other measures. On August 4, 2016, the CFPB issued an additional rule to provide certain borrowers with foreclosure protections more than once over the life of a loan, require servicers to provide important information to borrowers in bankruptcy, and provide protections to surviving family members and others who inherit property, and the CFPB issued an interpretive rule to provide servicers with certain safe harbors under the FDCPA. Since becoming effective, these rules have increased costs to service loans across the mortgage industry, including our costs.
Settlement and Enforcement Consent Orders
Several state agencies overseeing the mortgage industry have entered into settlements and enforcement consent orders with mortgage servicers regarding certain foreclosure practices. These settlements and orders generally require servicers, among other things, to: (i) modify their servicing and foreclosure practices, for example, by improving communications with borrowers and prohibiting dual-tracking, which occurs when servicers continue to pursue foreclosure during the loan modification process; (ii) establish a single point of contact for borrowers throughout the loan modification and foreclosure processes; and (iii) establish robust oversight and controls of third party vendors, including outside legal counsel, that provide default management or foreclosure services on their behalf. Many of these practices are considered by regulators, investors and consumer advocates as industry "best practices." As such, we must continually review and consider appropriate adoption of many of these practices as well.
Competition
We operate across several highly competitive and diverse industries, across which we believe our key competitive strengths are our established brand names, well developed direct-to-consumer channels and depth of operating management experience in each of our business segments. In addition, in our Home Lending segment, we believe we have a competitive advantage given that we operate in two distinct channels - distributed retail and direct-to-consumer. There are a limited number of competitors that successfully operate utilizing each of these unique channels on a national level. 
Structured Settlements Competition
The various market participants focused on the purchase of structured settlement, annuity and lottery payment streams are generally small, and competition is primarily based upon marketing, referrals, price and quality of customer service. We compete with established purchasers and, as a result of the relatively low barriers to entry in the industry (low cost of capital, ease of online lead generation, etc.); we also compete with numerous smaller market entrants who enter the market from time to time, particularly when interest rates decrease.
Many of our competitors with respect to our payment solutions business are larger banks and card providers with diversified consumer bases and strong name recognition, and competition is primarily based upon ATM withdrawal fees and monthly service fees. In our personal lending business, we compete with other lead aggregators, including online intermediaries that operate network-type arrangements, and competition is primarily based upon interest rates and service. We also face competition from lenders that source consumer loan originations directly through their owned and operated websites, by phone or by direct mail.
Home Lending Competition
The mortgage originations industry is a highly competitive industry. Our competitors include banks, credit unions, mortgage brokers and mortgage banking companies. We compete directly with many large financial institutions, regional or local banking institutions and very organized and branded direct lending or retail lending mortgage loan originators. Competitors can vary by state and region. Competition can take on a variety of levels with competition based on rates, service levels, products, existing customer base and fees.
Employees

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As of December 31, 2017, we had approximately 751 employees, of which 740 were full-time employees. We believe that our relations with our employees are good. None of our employees are covered by collective bargaining agreements or represented by an employee union.
Seasonality
Structured Settlements' business is not generally subject to seasonal fluctuations. Home Lending's purchase originations business is generally subject to seasonal fluctuations, as activity tends to diminish somewhat in the months of December, January and February, when home sales volume and loan originations volume are at their lowest. This may result in seasonal fluctuations in Home Lending's revenue.
Intellectual Property
We own or have rights to trademarks, service marks or trade names that we use in connection with the operation of our business. In addition, our names, logos and website names and addresses are our service marks or trademarks. Some of the trademarks we own or have the right to use include "J.G. Wentworth" and "Peachtree Financial Solutions." Many of our trademarks are highly recognizable and important to our multi-channel direct response marketing platform.
Corporate Information
Our principal executive offices are located at 1200 Morris Drive, Suite 300, Chesterbrook, Pennsylvania 19087-5148 and our telephone number at that address is (484) 434-2300. The J.G. Wentworth Company's corporate website is located at http://corporate.jgwentworth.com/about/. The content on our website is available for information purposes only. It should not be relied upon for investment purposes, nor is it incorporated by reference into this Annual Report on Form 10-K, unless expressly noted.
Implications of being an Emerging Growth Company
We qualify as an "emerging growth company" as defined in the Jumpstart Our Business Startups Act of 2012 ("JOBS Act"). As a result, we are permitted to, and have opted to, rely on exemptions from certain disclosure requirements that are applicable to other companies that are not emerging growth companies. In particular, we can take advantage of an extended transition period for complying with new or revised accounting standards which allows us to delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We took advantage of the extended transition period as permitted under the JOBS Act. Following the filing of this Annual Report on Form 10-K, we will no longer file reports with the SEC because we no longer have a class of securities registered under the Exchange Act.
Item 1A. Risk Factors
You should carefully consider each of the following risk factors and all of the other information set forth in this Annual Report on Form 10-K. The risk factors generally have been separated into seven groups: (1) risks related to our overall business operations; (2) risks related to our legal and regulatory environment; (3) risks related to our financial position; (4) risks related to our Structured Settlements segment; (5) risks related to our Home Lending segment; (6) risks related to emergence from bankruptcy; and (7) risks related to ownership of our common stock. Based on the information currently known to us, we believe that the following information identifies the most significant risk factors affecting us. However, the risks and uncertainties we face are not limited to those set forth in the risk factors described below. In addition, past financial performance may not be a reliable indicator of future performance and historical trends should not be used to anticipate results or trends in future periods.
Risks Related To Our Overall Business Operations
Failure to execute on our business strategy could materially adversely affect our business, financial condition, results of operations and cash flows.
We have recently experienced losses in our Structured Settlements segment. Our future viability is dependent on management's ability to execute our business strategy to return this segment to profitability as well as increase results in the Home Lending segment.
The following are some of the elements of our business strategy:
•
implementing enhanced customer retention and loyalty strategies to improve conversion rates of leads into completed transactions and improve customer satisfaction;
•
revising our direct response marketing programs to be more digital focused to increase efficiency at lower spend levels;
•
effectively reorganizing our production activities;
•
increasing the volume of transactions completed; and
•
continuing to access securitization or other financing markets on favorable terms.

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If a return to profitability and cash flow generation do not occur within the time frame that we anticipate, or if we continue to incur losses in our Structured Settlements segment without significantly increasing Home Lending revenues and cash flows to offset these losses, we may not be able to renew our warehouse lines of credit and may not have sufficient working capital to fund our business, which would have a material adverse impact on our business, financial condition, results of operations and cash flows.
Competition in the industries in which we operate is intense and may adversely affect our business, financial condition, results of operations and cash flows.
Competition in the industries in which we operate is intense. In the structured settlement and annuity payments purchasing industry, we compete with other purchasers of those payment streams. It is possible that some competitors may have a lower cost of funds or access to funding sources that may not be available to us. In addition, some of our competitors may have higher risk tolerances or different risk assessments, which could allow them to consider a wider variety of asset purchases and establish relationships with our customers. Furthermore, competition for purchases of structured settlement, annuity and lottery payment streams may lead to the price of such assets increasing, which may further limit our ability to generate desired returns. We also face competition from insurance companies that have recently begun offering payees the option to accelerate payments (at a stated discount rate) from structured settlements that the specific insurance company has issued to that payee.
Many of our competitors with respect to our payment solutions business are larger banks and card providers with diversified consumer bases and strong name recognition. In personal lending, we compete with other lead aggregators, including online intermediaries that operate network-type arrangements and also face competition from lenders that source consumer loan originations directly through their owned and operated websites, by phone or by direct mail.
In our Home Lending segment, our competitors include banks, credit unions, mortgage brokers and mortgage banking companies. We compete directly with many large financial institutions, regional or local banking institutions, and direct lending or retail lending mortgage loan originators. Many of our competitors enjoy advantages, including greater financial resources and access to capital, as well as lower origination and operating costs. To compete effectively, we strive to have a high level of operational, technological, and managerial expertise, as well as access to capital at a competitive cost.
The competitive pressures we face may have a material adverse effect on our business, financial condition, results of operations and cash flows.
We are heavily dependent on direct response marketing and if we are unable to reach prospective customers and borrowers in a cost-effective manner, it would have a material adverse effect on our business, financial condition, results of operations and cash flows.
We use direct response marketing to generate the inbound communications from prospective customers that are the basis of our payment purchasing, home lending, referral and payment solutions program management activities. As a result, we have spent considerable money and resources on advertising to reach prospective customers. We have recently scaled back the spending in our direct response marketing program and have revised the program to more efficiently reach prospective customers while operating at a lower spend level. Our reorganized marketing efforts may not be successful or cost-effective and if we are unable to reach prospective customers in a cost-effective manner, it would have a material adverse effect on our business, financial condition, results of operations and cash flows. In addition, we are heavily dependent on television and digital advertising and a change in television viewing habits or Internet usage patterns could adversely impact our business. For example, the use of digital video recorders that allow viewers to skip commercials reduces the efficacy of our television marketing. There has also been a recent proliferation of new marketing platforms, including cellphones, personal computers and tablets, as well as an increasing use of social media. If we are unable to adapt to these new marketing platforms, this may reduce the success and/or cost-effectiveness of our marketing efforts and have a material adverse effect on our business, financial condition, results of operations and cash flows. Further, an event that reduces or eliminates our ability to reach potential customers or interrupts our telephone system could substantially impair our ability to generate revenue.
We are dependent on our senior management team, and if we lose any member of that team or are unable to attract additional qualified talent to that team, our business will be adversely affected.
Our future success depends to a considerable degree on the skills, experience and effort of our senior management team. If we lose the services of any member of our senior management team, it could have an adverse effect on our business, especially if we are unable to attract a qualified replacement. We do not carry "key man" insurance for any of the members of our senior management team. Competition to hire personnel possessing the skills and experience we require is intense, and we may not successfully attract qualified personnel to fill vacancies in our management team or to expand our management team, which could have an adverse effect on our business, financial condition, results of operations and cash flows.
We have access to personally identifiable confidential information of current and prospective customers and the improper use of or failure to protect that information could adversely affect our business and reputation. Furthermore, any significant

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security breach of our software applications or technology that contains personally identifiable confidential information of current customers could adversely affect our business and reputation.
Our business often requires that we handle personally identifiable confidential information, the use and disclosure of which is significantly restricted under federal and state privacy laws. As part of our normal operations, we rely on secure processing, storage, and transmission of confidential customer information through computer software systems and networks. Our information technology infrastructure is potentially vulnerable to security breaches, and a party able to circumvent our security measures could misappropriate private customer information. We maintain and rely on external and internal cybersecurity solutions as part of our internal controls that are designed to provide reasonable assurance that unauthorized access to our customers' confidential data is prevented or detected in a timely manner. However, although we have not had any occurrences of a breach of our cybersecurity solutions, these internal controls may not continue to prevent unauthorized access to our software systems and networks.
In addition, our employees, vendors and business partners may have access to such confidential information. It is not always possible to deter misconduct by our employees, vendors and business partners, and the precautions we take to prevent disclosure of confidential information by our employees, vendors and business partners may not be effective in all cases. If our employees, vendors or business partners improperly use or disclose such confidential information, we could be subject to legal proceedings or regulatory sanctions.
Loss or misappropriation of confidential information of our customers may result in a loss of confidence in our transactions, may greatly harm our reputation, may adversely affect our ability to maintain current or potential customer relationships, and may have a material adverse effect on our business, financial condition and results of operations and cash flows. We maintain insurance coverage for certain losses associated with a cybersecurity breach, but we cannot guarantee that our insurance policies will fully protect us against all such losses and liabilities.
If we are unable to upgrade and/or integrate our operational and financial information systems or expand, train, manage and motivate our workforce, our business may be adversely affected.
Our diversification has placed, and will continue to place, increased demands on our information systems and other resources and further expansion of our operations will require substantial financial resources. To compete effectively in light of our diversification, we will need to continue to upgrade and integrate our information systems and expand, train, manage and motivate our workforce. Any failure to upgrade and integrate our operational and financial information systems, or to expand, train, manage or motivate our workforce, may adversely affect our business.
We depend on uninterrupted computer access and the reliable operation of our information technology systems; any prolonged delays due to data interruptions, caused by third-party service providers or otherwise, or revocation of our software licenses could adversely affect our ability to operate our business and cause our customers to seek alternative service providers.
Many aspects of our business are dependent upon our ability to store, retrieve, process and manage data and to maintain and upgrade our data processing capabilities. Our success is dependent on high-quality and uninterrupted access to our computer systems, requiring us to protect our computer equipment, software and the information stored on servers against damage by fire, natural disaster, power loss, telecommunications failures, unauthorized intrusion and other catastrophic events. Interruption of data processing capabilities for any extended length of time, loss of stored data, programming errors or other technological problems could impair our ability to provide certain products. Some of our proprietary computer systems and back-up systems are deployed, operated, monitored and supported by third parties whom we do not control. We also rely on third-party service providers for software development and system support. A system failure, if prolonged, could result in reduced revenues, loss of customers and damage to our reputation, any of which could cause our business to materially suffer. In addition, due to the highly automated environment in which we operate our computer systems, any undetected error in the operation of our business processes or computer software may cause us to lose revenues or subject us to liabilities for third party claims. While we carry property and business interruption insurance to cover operations, the coverage may not be adequate to compensate us for losses that may occur.
We depend on a number of third parties for the successful and timely execution of our business strategy and the failure of any of those parties to meet certain deadlines could adversely impact our ability to generate revenue.
Our ability to operate our business depends on a number of third parties, including rating agencies, notaries, outside counsel, insurance companies, investment banks, the court system, servicers, sub-servicers, collateral custodians and entities that participate in the capital markets to buy the related debt. We do not control these third parties and a failure to perform according to our requirements or acts of fraud by such parties could materially impact our business.
For example, there have in the past and may be in the future deficiencies in court orders obtained on our behalf by third parties that result in those court orders being invalid, including as a result of failures to perform according to our requirements and acts of gross negligence or fraud, in which case we would need to take additional steps to attempt to cure the deficiencies. We may or may not be successful in curing these deficiencies and, if successful, there may nonetheless be a delay in our receipt of payment streams pursuant to the court orders and, if unsuccessful, we may have to repurchase such payment streams from our securitization

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facilities. Any delay in the receipt of, or the invalidation of, a significant number of court orders or any delay in the closing of a securitization would significantly and adversely affect our earnings.
With respect to third parties engaged to perform activities required by servicing criteria, we are responsible for assessing compliance with the applicable servicing criteria for the applicable vendor and are required to have procedures in place to provide reasonable assurance that the third party's activities comply in all material respects with servicing criteria applicable to the vendor, including, but not limited to, monitoring compliance with our predetermined policies and procedures and monitoring the status of payment processing operations. In the event that a vendor's activities do not comply with the servicing criteria, it could negatively impact our compliance with our servicing agreements.
If our current third-party partners were to stop providing services to us on acceptable terms, we may be unable to procure services from alternative vendors in a timely and efficient manner and on acceptable terms, or at all. In our Home Lending segment, we currently use one third party for sub-servicing, and changing to another third party would take considerable time and effort. We may incur significant costs to resolve any disruptions in service and this could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Additionally, in April 2012, the CFPB issued CFPB Bulletin 2012-03 which states that supervised banks and non-banks could be held liable for actions of their service providers. This bulletin was reissued substantially unchanged as Bulletin 2016-02 on October 31, 2016. As a result of Bulletin 2016-02, we could be exposed to liability, CFPB enforcement actions or other administrative penalties in certain of our business lines if the third parties with whom we do business violate consumer protection laws. In particular, as a result of our use of a sub-servicer in our Home Lending segment, regulators could conclude that we have not exercised adequate oversight and control over our sub-servicer or that our sub-servicer has not performed appropriately, and as a result we could be subject to enforcement actions, including civil money penalties or other administrative or judicial penalties or fines as well as requirements for customer remediation, any of which could have a material adverse effect our business, financial condition, results of operations and cash flows.
Use of social media to disseminate negative commentary may adversely impact our reputation or subject us to fines or other penalties.
There has been a substantial increase in the use of social media platforms, including blogs, social media websites, and other forms of Internet-based communications, which allow individuals access to a broad audience of consumers and other interested persons. Negative commentary regarding us or our brands may be posted on social media platforms at any time and may be adverse to our reputation or business. Consumers value readily available information and often act on such information without further investigation and without regard to its accuracy. The harm may be immediate without affording us an opportunity for redress or correction. In addition, social media platforms provide users with access to such a broad audience that collective action, such as boycotts, can be more easily organized. If such actions were organized against us, we could suffer damage to our reputation, which could have an adverse effect on our business, financial condition, results of operations and cash flows.
We also use social media platforms as marketing tools. For example, our brands maintain Facebook and Twitter accounts. As laws and regulations rapidly evolve to govern the use of these platforms and devices, the failure by us, our employees or third parties acting at our direction to abide by applicable laws and regulations in the use of these platforms and devices could adversely impact our business, financial condition, results of operations and cash flows or subject us to fines or other penalties.
Unfavorable press reports about us or the industries in which we operate may make prospective customers less willing to use us for their financial needs, lead to increased regulation or make third party vendors less willing to work with us.
The structured settlement, annuity and lottery purchasing and mortgage lending industries are periodically the subject of negative press reports from the media and consumer advocacy groups. The structured settlement, annuity and lottery purchasing industry is relatively new and is susceptible to confusion about the role of purchasers of structured settlement, annuity and lottery payment streams and other alternative financial assets.
We depend upon direct response marketing and our reputation to attract prospective customers and maintain existing customers. A sustained campaign of negative press reports about us or the industries in which we participate could adversely affect the public's perception of us and these industries as a whole, as well as the willingness of prospective customers to use us for their financial needs. In addition, such unfavorable press reports can gain the attention of law makers and lead to additional regulation or reform in the industries in which we operate. For example, in August 2015, the Washington Post and several other media outlets published stories about the structured settlement payment purchasing industry, certain industry practices and the activities of one industry participant in the Maryland area. These articles gained national attention as well as the attention of members of Congress and state legislatures. Third party vendors also could potentially terminate their relationships with the Company due to perceived negative connotations resulting from unfavorable press reports.
If people are reluctant to sell structured settlement, annuity and lottery payment streams and other assets to us or to originate mortgages with us due to negative public perception, if our compliance costs are increased due to increased regulation

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of the industries in which we operate, or if third party vendors terminate their relationship with us, our business, financial condition, results of operations and cash flows could be negatively impacted.
Our business may suffer if our trademarks, service marks or domain names are infringed.
We rely on trademarks, service marks and domain names to protect our brands. Many of these trademarks, service marks and domain names have been a key part of establishing our business. We believe these trademarks, service marks and domain names have significant value and are important to the marketing of our products. We cannot be certain that the steps we have taken or will take to protect our proprietary rights will be adequate to prevent misappropriation of our rights or the use by others of features based upon, or otherwise similar to, ours. In addition, although we believe we have the right to use our trademarks, service marks and domain names, we cannot guarantee that our trademarks, service marks and domain names do not or will not violate the proprietary rights of others, that our trademarks, service marks and domain names will be upheld if challenged, or that we will not be prevented from using our trademarks, service marks and domain names, any of which occurrences could materially harm our business.
We operate primarily at two main locations, and any disruption at these facilities could harm our business.
Our principal executive offices are located in Chesterbrook, Pennsylvania, and our Structured Settlements segment, including customer and technical support and management and administrative functions, operates principally out of that location. The majority of our Home Lending segment's underwriting, closing, funding, and corporate functions are managed centrally at its headquarters in Woodbridge, Virginia. We take precautions to safeguard our facilities, including acquiring insurance, employing back-up generators, adopting health and safety protocols and utilizing off-site storage of computer data. Notwithstanding these precautions, any disruptions to our operations at these facilities, including from power outage, systems failure, vandalism, terrorism or a natural or other disaster, such as severe weather, hurricane, fire or flood, could significantly impair our operations for a substantial period of time, result in the loss of key information and cause us to incur additional expenses. Our insurance may not cover our losses in any particular case. In addition, most of our employees live in the areas surrounding our principal offices, and any natural or other disaster in those areas will likely also affect our employees, causing them to be unable to occupy our facilities, work remotely or communicate with or travel to other locations. Such damage to our facilities and operations could have a material adverse impact on our business, financial condition, results of operations and cash flows.
The success and growth of our business will depend upon our ability to adapt to and implement technological changes.
Our business is dependent upon our ability to interface effectively with our customers and other third parties and to process transactions efficiently. The asset purchase and loan and mortgage origination processes are becoming more dependent upon technological advancement, such as the ability to process applications over the Internet, interface with customers and other third parties through electronic means and underwrite loan applications using specialized software. Implementing new technology and maintaining the efficiency of the current technology used in our operations may require significant capital expenditures. As these requirements increase in the future, we will have to develop these technological capabilities fully to remain competitive or our business will be significantly harmed.
Risks Related To Our Legal And Regulatory Environment
We are subject to extensive federal, state and local laws and regulations. Failure to comply with these laws and regulations and changes in the laws and regulations could have a material adverse effect on our business, financial condition, results of operations and cash flows.
The industries in which we operate are subject to extensive and evolving federal, state and local laws and regulations, and we are subject to extensive and increasing regulation by a number of governmental entities at the federal, state and local levels. These regulations directly impact our business and require constant compliance, monitoring and internal and external audits. In the event that we fail to comply with any of these laws or regulations, the CFPB and applicable federal and state agencies may have the power to levy fines or file suits against us or compel settlements with monetary penalties and operational requirements. In addition, a material failure to comply with any state laws or regulations could result in the loss or suspension of our licenses in the applicable jurisdictions where such violations occur. Any of these outcomes could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Changes to statutory, licensing and regulatory regimes could result in the enforcement of stricter compliance measures or adoption of additional measures on us or on the third parties, with whom we conduct our business, could restrict our ability to originate, finance, acquire or securitize financial assets or could lead to significantly increased compliance costs and operating expenses. For example, the implementation of the TILA-RESPA Integrated Disclosure rule (the "TRID"), which became effective on October 3, 2015, required additional technological changes and additional implementation costs for us as a mortgage loan originator and servicer. Any future changes in laws or regulations which increase our compliance costs, or otherwise restrict our ability to conduct our business as currently conducted, could have a material adverse impact on our business, financial condition, results of operations and cash flows.

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Dodd-Frank continues to have the potential to increase our regulatory compliance burden and associated costs and place restrictions on certain originations and servicing operations.
Dodd-Frank represents a comprehensive overhaul of the financial services industry in the United States. Dodd-Frank includes, among other things: (i) the creation of a Financial Stability Oversight Council to identify emerging systemic risks posed by financial firms, activities and practices, and to improve cooperation among federal agencies; (ii) the creation of the CFPB, which is authorized to promulgate and enforce consumer protection regulations relating to consumer financial products; (iii) the establishment of strengthened capital and prudential standards for banks and bank holding companies; (iv) enhanced regulation of financial markets, including the derivatives and securitization markets; and (v) amendments to the TILA aimed at improving consumer protections with respect to asset backed securities and mortgage originations, including originator compensation, minimum repayment standards and prepayment considerations.
The CFPB has adopted, and may continue to adopt, rules imposing new and potentially burdensome requirements and limitations with respect to our lines of business. Since 2011, under former Director Richard Cordray’s leadership, the CFPB implemented certain provisions of Dodd-Frank relating to mortgage originations and mortgage servicing. In 2014, a risk retention requirement was adopted under Dodd-Frank that requires sponsors of securitizations to retain at least 5% of the credit risk relating to the assets that underlie asset backed securities sold through a securitization, including MBSs and the securitizations of the payment streams that we purchase, absent certain exemptions, including a qualified residential mortgage ("QRM") exemption. The risk retention requirement became effective on December 24, 2016 and applies to securitizations created after the effective date. The risk retention requirement may result in higher costs of certain of our securitizations and origination operations and could impose on us additional compliance requirements to meet servicing and origination criteria for QRMs, which could have a material adverse effect on our business, financial condition, results of operations and cash flows. While the mortgages that we originate in our Home Lending segment will generally qualify for the QRM exemption and securitizations of these loans will not be subject to the risk retention requirement, securitizations of payment streams purchased in our Structured Settlements segment will be subject to the risk retention requirement, which will decrease the amount that cash that we receive in connection with each such securitization. In addition, on October 5, 2016, the CFPB finalized new Regulation E requirements, implementing the Electronic Funds Transfer Act, for prepaid accounts. The new Regulation E rules require financial institutions to limit consumers’ losses when funds are stolen or cards are lost, investigate and resolve errors, and increase the amount of account information that must be provided to consumers. The rules also include new "Know Before You Owe" disclosures that are designed to give consumers clear, upfront information about fees and other costs. Also on October 5, 2016, the CFPB finalized further requirements for prepaid accounts under Regulation Z, implementing the TILA. Pursuant to the new Regulation Z rules, issuers of prepaid accounts must provide protections similar to those for credit cards if they allow consumers to use credit to make purchases in excess of the amount prepaid.
In addition, on January 25, 2018, the CFPB issued a final rule postponing the effective date of the revised final rule to April 1, 2019 from the previous effective date of April 1, 2018.
The ongoing implementation of Dodd-Frank, including the implementation of the securitization, origination and servicing rules by the CFPB, the implementation of the integrated disclosures under the TRID, and the CFPB's continuing examination of our structured settlement and annuity payment purchasing business, will likely increase our regulatory compliance burden and associated costs and may place restrictions on our originations, servicing and financing operations, which could in turn have a material adverse effect on our business, financial condition, results of operations and cash flows.
Failures in our compliance systems could subject us to significant legal and regulatory costs. Furthermore, if our risk management methods are not effective, our business, reputation and financial results may be adversely affected.
Our ability to comply with all applicable laws and rules is largely dependent on our compliance, audit, risk and reporting systems and procedures. However, any compliance and risk management system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. These limitations include the reality that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by an unauthorized override of the controls. Thus, our policies and procedures may not be fully effective, and we may not always be successful in monitoring or evaluating the risks to which we are or may be exposed. As a result, we may be subject to significant legal and regulatory costs in the event that our systems fail to prevent violations of laws or regulations, and our business, financial condition, results of operations and cash flows may be materially adversely affected.
We may be subject to liability for potential violations of predatory lending and ability to repay laws in our Home Lending segment.
Various federal, state and local laws have been enacted that are designed to discourage predatory lending practices. The federal Home Ownership and Equity Protection Act of 1994 ("HOEPA") prohibits inclusion of certain provisions in residential mortgage loans that have mortgage rates or origination costs in excess of prescribed levels and requires that borrowers be given

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certain disclosures prior to origination. Some states have enacted, or may enact, similar laws or regulations, which in some cases impose restrictions and requirements greater than those in HOEPA. Additionally, the CFPB has implemented a rule that requires lenders to make a reasonable, good faith determination of a consumer's ability to repay a mortgage loan. This rule defines certain types of loans as "qualified mortgages" and creates a presumption that qualified mortgages satisfy the ability to repay standard. Non-qualified mortgages do not receive a presumption of a consumer's ability to repay. In addition, under the anti-predatory lending laws of some states, the origination of certain residential mortgage loans, including loans that are not classified as "high-cost" loans under applicable law, must satisfy a net tangible benefits test with respect to the related borrower. This test may be highly subjective and open to interpretation. As a result, a court may determine that a residential mortgage loan does not meet the test even if the related originator reasonably believed that the test was satisfied. If any of our production loans are found to have been originated in violation of predatory, ability to repay or abusive lending laws, we could incur penalties, fines and other expenses, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Adverse judicial developments could have an adverse effect on our business, financial condition, results of operations and cash flows.
Adverse judicial developments have occasionally occurred and could occur in the future in the industries in which we do business. In the structured settlement payment purchasing industry, adverse judicial developments have occurred with regard to anti-assignment concerns and issues associated with non-disclosure of material facts and associated misconduct. Most of the settlement agreements that give rise to the structured settlement receivables that we purchase contain anti-assignment provisions that purport to prohibit assignments or encumbrances of structured settlement payments due under the agreement. If anti-assignment provisions are included in an agreement, a claimant or a payor could attempt to invoke the anti-assignment provision to invalidate a claimant's transfer of structured settlement payments to the purchaser, or to force the purchaser to pay damages. In addition, under certain circumstances, interested parties other than the related claimant or payor could challenge, and potentially invalidate, an assignment of structured settlement payments made in violation of an anti-assignment provision. Whether the presence of an anti-assignment provision in a settlement agreement can be used to invalidate a prior transfer depends on various aspects of state and federal law, including case law and the form of Article 9 of the Uniform Commercial Code adopted in the applicable state. Any adverse judicial developments calling into doubt laws and regulations related to structured settlements, annuities, lotteries or mortgage originations, financings or foreclosures could materially and adversely affect our investments in such assets and our financing.
State or federal governmental examinations, legal proceedings, enforcement actions or tax rulings and related costs could have a material adverse effect on our business, financial condition, results of operations and cash flows.
We are routinely involved in regulatory reviews and legal proceedings concerning matters that arise in the ordinary course of our business. In recent years, both federal and state government agencies have increased civil and criminal enforcement efforts relating to consumer protection in the specialty finance industry. This heightened enforcement activity increases our potential exposure to damaging lawsuits, investigations and other enforcement actions. An adverse result in regulatory actions or examinations or private lawsuits may adversely affect our financial results. Defense of any lawsuit, even if successful, could require substantial time and attention of our senior management that would otherwise be spent on other aspects of our business and could require the expenditure of significant amounts for legal fees and other related costs. Settlement of, or adverse results in, lawsuits may also result in significant payments and modifications to our operations.
In addition, a number of participants in our industries have been the subject of purported class action lawsuits and regulatory actions by state regulators and other industry participants have been the subject of actions by state Attorneys General. Regulatory investigations, both state and federal, can be either formal or informal. The costs of responding to the investigations can be substantial. Furthermore, government-mandated changes to disclosure requirements and business practices could lead to higher costs and additional administrative burdens, in particular regarding record retention and informational obligations.
We could also suffer monetary losses or restrictions on our operations from interpretations of state laws in regulatory proceedings or lawsuits, even if we are not a party. For example, the federal and state agencies overseeing certain aspects of the mortgage market have entered into settlements and enforcement consent orders with other mortgage servicers regarding foreclosure practices that primarily relate to mortgage loans originated during the credit crisis. Although we are not a party to any of these settlements and enforcement consent orders and lack the legacy loans that gave rise to these settlements and enforcement consent orders, the practices set forth in those settlements and consent orders have been adopted by the industry as a whole and are also required by the CFPB's mortgage servicing rule, forcing us to comply with them in order to follow standard industry practices and regulatory requirements. While we have made and continue to make changes to our operating policies and procedures in light of these settlements and consent orders, further changes could be required.

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We have been the subject of Civil Investigative Demands from the CFPB with respect to our Structured Settlements segment and could be subject in the future to enforcement actions by the CFPB.
Dodd-Frank grants regulatory powers to the CFPB and gives the CFPB authority to pursue administrative proceedings or litigation for violations of federal consumer financial laws. In these proceedings, the CFPB can obtain cease and desist orders and civil monetary penalties. Also, where a company has violated Title X of Dodd-Frank or CFPB regulations under Title X, Dodd-Frank empowers state Attorneys General and state regulators to bring civil actions for the kind of cease and desist orders available to the CFPB (but not for civil penalties).
We have, since March 2014, been served with several CIDs from the CFPB relating to our structured settlement and annuity payment purchasing activities. The CIDs have requested various information and documents, including oral testimony, for the purpose of determining our compliance with federal consumer financial laws, and we have provided documents and oral testimony relating to requests in these CIDs. On February 1, 2018, the CFPB issued a letter to JGW LLC noting that it had completed its review as to JGW LLC and that the Office of Enforcement was not intending to recommend that the CFPB take any enforcement action. Thus, JGW LLC considers this matter closed.
While we believe that the our practices are fully compliant with applicable law, if the CFPB or one or more state officials believe we have violated the foregoing laws, they could exercise their enforcement powers in ways that would have a material adverse effect on our business, financial condition, results of operations and cash flows.
Unlike banks and similar financial institutions with which we compete in our Home Lending segment, we are subject to state licensing and operational requirements that result in substantial compliance costs.
Because we are not a depository institution, we do not benefit from exemptions to state mortgage banking, loan servicing or debt collection licensing and some regulatory requirements that are generally given to depository institutions under state law. Home Lending must comply with state licensing requirements and varying compliance requirements in each jurisdiction in which it actively does business, which consists of 45 states and the District of Columbia as of December 31, 2017. Future regulatory changes may increase our costs through stricter licensing or disclosure laws or increased fees, or may impose conditions to licensing that we are unable to meet. In addition, we are subject to periodic examinations by state regulators, which can result in refunds to borrowers of certain fees collected by us, and we may be required to pay substantial penalties imposed by state regulators due to compliance errors. Future state legislation and changes in existing regulation may significantly increase our compliance costs or reduce the amount of ancillary fees, including late fees that we may charge to borrowers. This could make our Home Lending business cost-prohibitive in the affected state or states and could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Our Home Lending business would be adversely affected if we lose our licenses or if we are unable to obtain licenses in new markets.
Our mortgage operations are subject to licensing under various federal, state and local statutes, ordinances and regulations. In most states in which we operate, a regulatory agency regulates and enforces laws relating to mortgage loan servicing companies and mortgage loan origination companies such as us. These rules and regulations generally provide for licensing as a mortgage servicing company, mortgage origination company or third party debt default specialist, requirements as to the form and content of contracts and other documentation, licensing of our employees and employee hiring background checks, licensing of independent contractors with which we contract, restrictions on collection practices, disclosure and record-keeping requirements and enforcement of borrowers' rights. In certain states, we are subject to periodic examination by state regulatory authorities. Some states in which we operate require special licensing or provide extensive regulation of our business.
We believe that we maintain all material licenses and permits required for our current operations and are in substantial compliance with all applicable federal, state and local laws. We may not, however, be able to maintain all requisite licenses and permits in the future. In addition, the states that currently do not provide extensive regulation of our business may later choose to do so, and if such states so act, we may not be able to obtain or maintain all requisite licenses and permits. The failure to satisfy those and other regulatory requirements could result in a default under our servicing agreements and have a material and adverse effect on our business, financial condition or results of operations. Furthermore, the adoption of additional, or the revision of existing, rules and regulations. The occurrence of any of the foregoing could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Changes in existing state laws governing the transfer of structured settlement or lottery payments or in the interpretation thereof may adversely impact our Structured Settlements segment.
The structured settlement and lottery payments secondary markets are highly regulated and require court approval for each sale under applicable state transfer statutes. These transfer statutes, as well as states' uniform commercial codes, insurance laws and rules of civil procedure, help ensure the validity, enforceability and tax characteristics of the structured settlement payments and lottery receivables purchasing transactions in which we engage. States may amend their transfer statutes, uniform commercial

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codes and rules of civil procedure in a manner that inhibits our ability to conduct business, including by means of retroactive laws, which would adversely impact our business. In addition, courts may interpret transfer statutes in a manner that inhibits our ability to conduct business. Failing to comply with the terms of a transfer statute when purchasing payments could potentially result in forfeiture of both the right to receive the payments and any unrecovered portion of the purchase price we paid for the payments, which could adversely affect our business, financial condition, results of operations and cash flows.
Certain changes in current tax law could have a material adverse effect on our Structured Settlements segment, financial condition, results of operations and cash flows.
The use of structured settlements is largely the result of their favorable federal income tax treatment. Under current tax law, claimants receiving installment payments as compensation for a personal injury are exempt from all federal income taxation on such payments, provided certain conditions are met. Congress has previously considered and may revisit legislation that would reduce or eliminate the benefits derived from the tax deferred nature of structured settlements and annuity products. If the tax treatment for structured settlements was changed adversely by a statutory change or a change in interpretation, the dollar volume of structured settlements issued could be reduced significantly, which would, in turn, reduce the addressable market of our structured settlement payments purchasing business. In addition, if there were a change in the Code or a change in interpretation that would result in adverse tax consequences for the assignment or transfer of structured settlement payments, such change could also reduce the market of our structured settlements and annuity payments purchasing business. Such a reduction of that market could have a material adverse effect on our business, financial condition, results of operations and cash flows.
We could be assessed excise taxes that result from IRS audits of our compliance with Section 5891 of the Code which could have a material adverse impact on our business, financial condition and results of operations in future periods.
Section 5891 of the Code, as set forth in the Tax Relief Act, levies an excise tax upon those people or entities that acquire structured settlement payments from a seller on or after February 22, 2002, unless certain conditions are satisfied. Such tax equals 40% of the discount obtained by the purchaser of the structured settlement payments. However, no such tax is levied if the transfer of such structured settlement payments is approved in a qualified court order. A qualified court order under the Tax Relief Act means a final order, judgment or decree that finds that the transfer does not contravene any federal or state law or the order of any court or administrative authority and is in the best interest of the payee, taking into account the welfare and support of the payee's dependents. The order must be issued under the authority of an applicable state statute of the state in which the seller is domiciled, or, if there is no such statute, under the authority of an applicable state statute of the state in which the payment obligor or annuity provider has its principal place of business, and issued by a court of such state, or by the responsible administrative authority (if any) that has exclusive jurisdiction over the underlying action or proceeding. If we fail to satisfy these conditions, we could be assessed excise taxes which could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Our Structured Settlements segment could be adversely affected if the Bankruptcy Code is changed or interpreted in a manner that affects our rights to scheduled payments with respect to a payment stream we have purchased.
If a holder of a structured settlement, annuity or lottery payment stream were to become a debtor in a case under the Bankruptcy Code, a court could hold that the scheduled payments transferred by the holder under the applicable purchase agreement do not constitute property of the estate of the claimant under the Bankruptcy Code. If, however, a trustee in bankruptcy or other receiver were to assert a contrary position, such as by requiring us, or any securitization vehicle, to establish our right to those payments under federal bankruptcy law or by persuading courts to recharacterize the transaction as secured loans, such result could have a material adverse effect on our business. If the rights to receive the scheduled payments are deemed to be property of the bankruptcy estate of the claimant, the trustee may be able to avoid assignment of the receivable to us.
Furthermore, a general creditor or representative of the creditors, such as a trustee in bankruptcy, of a special purpose vehicle to which an insurance company assigns its obligations to make payments under a structured settlement, annuity or lottery payment stream could make the argument that the payments due from the annuity provider are the property of the estate of such special purpose vehicle (as the named owner thereof). To the extent that a court accepted this argument, the resulting delays or reductions in payments on our receivables could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Also, many of our financing facilities are structured using "bankruptcy remote" special purpose entities to which structured settlement, annuity and lottery payment streams are sold in connection with such financing facilities. Under current case law, courts generally uphold such structures, the separateness of such entities and the sales of such assets if certain factors are met. If, however, a bankruptcy court were to find that such factors did not exist in the financing facilities or current case law was to change, there would be a risk that defaults would occur under the financing facilities. Moreover, certain subsidiaries may be consolidated upon a bankruptcy of one of our subsidiaries or the sales may not be upheld as true sales by a reviewing court. This could have a material adverse effect on our business, financial condition, results of operations and cash flows.

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Our purchases of certain financial assets may be viewed as consumer lending, which could subject us to adverse regulatory limitations and litigation.
From time to time, we have been named as defendant in suits involving attempts to recharacterize the purchase of court-ordered or non-court-ordered structured settlement payments or other assets as loan transactions. If a transaction is characterized as a loan rather than a sale, then various consumer lending laws apply, such as usury statutes, consumer credit statutes or truth-in-lending statutes. If a court finds any of our structured settlement, annuity or lottery purchase transactions are subject to consumer lending laws, we may not have complied in all respects with the requirements of the applicable statutes with respect to those transactions. The failure to comply could result in remedies including the rescission of the agreement under which we purchased the right to the stream of periodic payments and the repayment of amounts we received under that agreement.
Our foreclosure proceedings in certain states may be delayed due to inquiries by certain state Attorneys General, court administrators and state and federal government agencies, the outcome of which could have an adverse effect on our business, financial condition and results of operations.
Allegations of irregularities in foreclosure processes, including so-called "robo-signing" by mortgage loan servicers, have gained the attention of the Department of Justice, regulatory agencies, state Attorneys General and the media, among other parties. Certain state Attorneys General, court administrators and government agencies, as well as representatives of the federal government, have issued letters of inquiry to mortgage servicers requesting written responses to questions regarding policies and procedures, especially with respect to notarization and affidavit procedures. Even though we have not received any letters of inquiry and we do not have the legacy loans that have been examined for irregularities in the foreclosure process, our operations may be affected by regulatory actions or court decisions that are taken in connection with these inquiries. In addition to these inquiries, several state Attorneys General have requested that certain mortgage servicers suspend foreclosure proceedings pending internal review to ensure compliance with applicable law.
The current legislative and regulatory climate could lead borrowers to contest foreclosures that they would not otherwise have contested, and we may incur increased litigation costs if the validity of a foreclosure action is challenged by a borrower. Delays in foreclosure proceedings could also require us to make additional servicing advances by drawing on our financing facilities, delay the recovery of advances, or result in compensatory fees being imposed against us by a GSE or the Federal Housing Finance Agency (the "FHFA") for delaying the foreclosure process, all or any of which could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Increased regulation of lead generation could adversely affect our personal loan business.
On July 4, 2017, Blue Global LLC, a lead generator for payday and other short-term small loans, installment loans, and auto loans was fined $104 million by the FTC. In addition, on September 19, 2017, the CFPB fined lead generator Zero Parallel $350,000 for steering consumers to lenders that were unlicensed or otherwise offered unlawful loans. Our practices do not resemble the practices engaged in by Blue Global or Zero Parallel. However, the activities of bad actors in the lead generation industry have spurred intensified regulatory scrutiny and may result in increased regulation. For example, if enacted, proposed California Senate Bill 297 would require lead generators to register with the state; comply with legal requirements for the privacy and security of personal information; and refrain engaging in false, misleading or deceptive business or advertising practices.
In addition, the CFPB’s Payday, Vehicle Title, and Certain High-Cost Installment Loans Payday Loan Rule, which will go into effect in August 2019, could have an indirect impact on our personal loan business. While we introduce consumer borrowers to lenders and do not engage in any lending, the new rule significantly increases the complexity and costs of making high-cost loans that have a term of less than 45 days, which could affect loan volume.
Risks Related To Our Financial Position
We have indebtedness, which may adversely affect our cash flow and ability to operate or grow our business. We may not be able to generate sufficient cash to meet all of our obligations or service all of our indebtedness and may not be able to extend or refinance our indebtedness. If we are unable to do so, we may be forced to take other actions to satisfy our obligations, which may not be successful.
As of April 2, 2018, we had $59.7 million total indebtedness (not including indebtedness related to our warehouse facilities and asset-backed securitizations, which indebtedness is recourse only to the VIE assets on our balance sheet) and there was $10.3 million in borrowing availability under the New RCF. Our indebtedness could have a number of important consequences. For example, our indebtedness could:
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make it more difficult for us to satisfy our obligations under our indebtedness or comply with the obligations of any of our debt instruments, including restrictive covenants and borrowing conditions, which could result in an event of default under one or more agreements governing our indebtedness;

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make us more vulnerable to adverse changes in the general economic, competitive and regulatory environment;
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require us to dedicate a portion or all of our cash flow from operations to payments on our indebtedness, thereby reducing the cash available for working capital, capital expenditures, acquisitions and other general corporate purposes;
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limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;
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restrict us from making strategic acquisitions or causing us to make non-strategic divestitures;
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place us at a competitive disadvantage compared to our competitors that are less highly leveraged, as they may be able to take advantage of opportunities that our leverage prevents us from exploiting; and
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limit our ability to borrow additional amounts for working capital, capital expenditures, acquisitions, debt service requirements, execution of our business strategy or other purposes.
Any of the above listed factors could materially adversely affect our business, financial condition, results of operations and cash flows.
In addition, we conduct a substantial part of our operations through our subsidiaries. Accordingly, our ability to repay our indebtedness depends on the generation of cash flow by our subsidiaries and their ability to make such cash available to us by dividend, debt repayment or otherwise. Our subsidiaries may not be able to, or may not be permitted to, make distributions to enable us to make payments in respect of our indebtedness.
Much of our debt is short-term and some of our facilities are not committed and we therefore regularly seek to extend or refinance our existing indebtedness. Our ability to extend, renew or refinance our indebtedness on favorable terms, or at all, is uncertain and may be affected by our financial performance, as well as our regulatory environment, global economic and financial conditions and other factors that are outside of our control.
If our cash flows and capital resources are insufficient to fund our debt service and other obligations or we are unable to extend or refinance our indebtedness, we may be forced to reduce or delay investments and capital expenditures, or to sell assets, seek additional capital or restructure our indebtedness. We may not be able to accomplish any such measures on commercially reasonable terms or at all and, even if successful, these measures may not allow us to meet our scheduled debt service or debt obligations. If we cannot fund our debt service and other obligations, the lenders under the New RCF can terminate their commitments to loan money, can declare all outstanding principal and interest to be due and payable and foreclose against the assets securing their borrowings and we could be forced into bankruptcy or liquidation. We were recently forced to file for bankruptcy due to concerns about our ability fund our debt service and ultimately pay or refinance our indebtedness upon its maturity.
Home Lending’s operations are dependent on access to its warehouse lines of credit, which are uncommitted.  If the lenders under these warehouse lines of credit terminate, or modify the terms of, these lines of credit, it could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Our Home Lending segment depends on short-term debt financing in the form of secured borrowings under warehouse facilities with financial institutions. These facilities are uncommitted, which means that any request we make to borrow funds under these facilities may be declined for any reason, even if at the time of the borrowing request we have then-outstanding borrowings that are less than the borrowing limits under these facilities. If we breach or trigger the representations and warranties, covenants, events of default, or other terms of our warehouse facilities, we may not be able to obtain additional financing under the warehouse facility when necessary, which could have a material adverse effect on our business, financial condition, results of operations and cash flows. Furthermore, because these warehouse facilities are uncommitted, at any given time we may not be able to obtain additional financing under the warehouse facility when necessary, exposing us to, among other things, liquidity risks which could adversely affect the profitability and operations of this segment.
We may be unable to obtain sufficient capital to meet the financing requirements of our business.
We are currently highly dependent on obtaining financing to fund our purchases of structured settlement payments and other financial assets and our mortgage loan originations. We currently depend on (i) our committed warehouse lines to finance our purchase of structured settlement, annuity, and lottery payment streams prior to their securitization or other financing, (ii) a permanent financing facility for our life contingent structured settlement payments and life contingent annuity payments purchases, (iii) repurchase facilities, participation agreements and warehouse lines of credit with major financial institutions and regional banks to finance our mortgage originations and (iv) the New RCF for general corporate and working capital purposes.
In order to access these facilities we are required to meet certain conditions to borrow. In the future we may not be able to meet these conditions, in which case we would be unable to borrow under one or all of our facilities. In addition, these warehouse

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lines and other financing facilities may not continue to be available to us in the future, either beyond their current maturity dates or, in the case of uncommitted warehouse lines, prior to their maturity dates, at reasonable terms or at all. In the future, we will likely need to borrow additional money. Our ability to renew or replace our existing facilities or warehouse lines of credit as they expire and to borrow the additional funds we will need to accomplish our business strategy is affected by a variety of factors including:
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our financial condition and performance;
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the level of liquidity in the credit markets;
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prevailing interest rates;
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the strength of the lenders that provide us financing;
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limitations on borrowings on repurchase facilities, participation agreements and warehouse lines of credit;
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limitations imposed on us under financing agreements that contain restrictive covenants and borrowing conditions that may limit our ability to raise or borrow additional funds; and
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accounting changes that may impact calculations of covenants in our financing agreements.
We cannot guarantee that we will be able to renew, replace or refinance our existing financing arrangements or enter into additional financing arrangements on terms that are commercially reasonable or at all. An event of default, a negative ratings action by a rating agency, an adverse action by a regulatory authority or a general deterioration in the economy that constricts the availability of credit may increase our cost of funds and make it difficult for us to renew existing facilities or obtain new financing facilities.
We may seek opportunities to acquire financial services businesses that could benefit from our recognized brand name and direct-to-consumer marketing experience. Our liquidity and capital resources may be diminished by any such transactions. Additionally, a significant acquisition may require us to raise additional capital to facilitate such a transaction, which may not be available on acceptable terms or at all.
Changes in federal, state and international regulation of the financial institutions that we rely on for financing could increase the cost of funding for those institutions and therefore reduce our sources of funding and increase our costs. If we are unable to obtain sufficient capital on acceptable terms for any of the foregoing reasons, this could have a material adverse effect on our business, financial condition, results of operations and cash flows.
An increase in the cost of our financing sources, especially relative to the discount rate at which we purchase assets, may reduce our profitability.
Our ability to monetize our structured settlement, annuity, and lottery payment stream purchases depends on our ability to obtain temporary and/or permanent financing at competitive rates, especially relative to our purchase discount rate. If the cost of our financing increases relative to the discount rate at which we are able to purchase assets, our profits will decline. A variety of factors can materially and adversely affect the cost of our financing, including, among others, an increase in interest rates or an increase in the credit spread on our financings relative to underlying benchmark rates. Similarly, a variety of factors can materially adversely affect our purchase discount rate including, among others, increased competition, regulatory and legislative changes, including the imposition of additional or lower rate caps to those currently in effect in certain states in which we operate, the views of courts and other regulatory bodies and the efforts of consumer advocacy groups.
Our earnings may decrease because of changes in prevailing interest rates.
Our profitability is directly affected by changes in prevailing interest rates, and volatile interest rate environments can lead to volatility in our results of operations.
In our Structured Settlements segment, we purchase structured settlement, annuity and lottery payment streams at a discount rate based on, among other factors, our estimates of the future interest rate environment. Once a critical mass of payment streams is achieved, those payment streams are then securitized or otherwise financed. The discount rate at which a securitization is sold to investors is based on the current interest rates as of the time of such securitization. Interest rates may fluctuate significantly during the period between the purchase and financing of payment streams, which can reduce the spread between the discount rate at which we purchased the payment streams and the discount rate at which we securitize or otherwise finance such payment streams, which would reduce our revenues. If we are unable to finance the payment streams we purchase at a discount rate that is sufficiently lower than the discount rate at which we make such purchases, it could have a material adverse effect on our business, financial condition, results of operations and cash flows.
In our Home Lending segment, increases in prevailing interests rates could generate an increase in delinquency, default and foreclosure rates resulting in an increase in both operating expenses and interest expense and could cause a reduction in the value of our assets. Increases in prevailing interest rates could adversely affect our loan originations volume because refinancing

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an existing loan would be less attractive for homeowners and qualifying for a loan may be more difficult for prospective borrowers. We could also be affected by decreasing interest rates. A decrease in prevailing interest rates may increase prepayment speeds causing our servicing fees to decline more rapidly than anticipated and we may record a decrease in the value of our MSRs. In addition, a decrease in prevailing interest rates may lead to higher compensating interest expense and increased amortization expense as we revise downward our estimate of total expected income as prepayment speeds increase and could reduce our earnings on custodial deposit accounts.
On December 13, 2017, the Federal Reserve increased its benchmark interest rate by 0.25% to 1.50%. Recent economic reports and forecasts from federal officials suggest it is possible that the Federal Reserve will further increase interest rates three times during 2018. On March 21, 2018, the Federal Reserve increased its benchmark interest rate by an additional 0.25% to 1.75%. In the event that interest rates continue to rise, we could be subject to the risks discussed above.
Our hedging strategies may not be successful in mitigating our risks associated with interest rates.
From time to time, we have used various derivative financial instruments to provide a level of protection against interest rate risks, but no hedging strategy can protect us completely. The derivative financial instruments that we select may not have the effect of reducing our interest rate risks. In addition, the nature and timing of hedging transactions may influence the effectiveness of these strategies. Poorly designed strategies, improperly executed and documented transactions or inaccurate assumptions could actually increase our risks and losses. In addition, hedging strategies involve transaction and other costs. Our hedging strategies and the derivatives that we use may not be able to adequately offset the risks of interest rate volatility, and our hedging transactions may result in or magnify losses. Furthermore, interest rate derivatives may not be available on favorable terms or at all, particularly during economic downturns. Any of the foregoing risks could have a material adverse effect on our business, financial condition, results of operations and cash flows.
We use financial models and estimates in determining the fair value of certain assets and liabilities. If our estimates or assumptions prove to be incorrect, we may be required to record negative fair value adjustments.
We use financial models to value certain of our assets and liabilities. These models are complex and use valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. Even if the general accuracy of our valuation models is validated, valuations are highly dependent upon the reasonableness of our assumptions and the predictability of the relationships that drive the results of the models. In determining the value for such assets and liabilities, we make certain assumptions, many of which are beyond our control, including, among others, assumptions regarding future interest rates, projected rates of delinquencies, defaults and liquidations, our costs to service loans and prepayment and repayment rates.
If these assumptions or relationships prove to be inaccurate, if market conditions change or if errors are found in our models, the value of certain of our assets may decrease. We may be required to record impairment charges, which could impact our ability to satisfy minimum net worth covenants and borrowing conditions in our debt agreements and could have a material adverse effect on our business, financial condition, results of operations and cash flows.
The remaining intangible assets that we recorded in connection with previous acquisitions may become impaired.
In connection with the accounting for the acquisition of Home Lending and other acquisitions, we recorded goodwill and other intangible assets. Under U.S. generally accepted accounting principles ("U.S. GAAP"), we must assess, at least annually and potentially more frequently, whether the value of goodwill and any other indefinite-lived intangible assets have been impaired. Finite-lived intangible assets are assessed for impairment in the event of an impairment indicator. We have previously impaired goodwill and other intangible assets associated with the 2011 acquisition of OAC and goodwill associated with the 2015 acquisition of Home Lending. Any further reduction or impairment of the value of our intangible assets will result in a charge against earnings, which could materially adversely affect our results of operations and stockholders' equity in future periods.
Increases in our tax liabilities, as a result of changes in tax or accounting policies applicable to our business or as a result of changes in the operation of our business, could have a material adverse effect on our future profitability.
Our U.S. GAAP income may be significantly higher than our taxable income due to current tax and accounting laws and policies. The tax rules applicable to our business are complex and we continue to evaluate our positions and processes. If these laws and policies were to change, or if the operation of our business were to change in a way that affects the application of these laws and policies, we could owe significantly more in income taxes than the cash generated by our operations. If we were unable for any reason to continue purchasing structured settlement annuity, lottery payment streams or other products we could generate significant tax liabilities. In addition, such changes could also have a material adverse effect on our future profitability.
Residuals from prior securitizations have historically represented a significant portion of our assets, and we may not be able to sell or refinance these residuals in the future.
After a securitization is executed, we retain a subordinated interest in the receivables, referred to as the residuals, which we include within our balance sheet within the caption VIE and other finance receivables, at fair value. If we are required to sell

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or refinance our residuals in order to generate cash for operations, we may not be able to generate proceeds that reflect the value of those residuals on our books. In addition, a sale of the residuals under those circumstances would likely generate taxable income without sufficient cash to pay those taxes. Changes in interest rates, credit spreads and the specific credit of the underlying assets may lead to unrealized losses that negatively affect our U.S. GAAP income.
Additionally, certain risk retention requirements promulgated under Dodd-Frank and similar national and international laws could limit our ability to sell or finance our residual interests in the future.
More specifically, 17 C.F.R. § 246, also known as “Regulation RR,” requires the sponsor of a securitization transaction (or the majority-owned affiliate of such sponsor) to retain an economic interest in the credit risk of the securitized assets in accordance with any one of §§ 246.4 through 246.10 thereof. Except as provided in §§ 246.5 through 246.10, § 246.4 requires that if the sponsor retains only an eligible vertical interest as part of its required risk retention, that such interest represent no less than 5% of the securitized assets. According to Regulation RR, “eligible vertical interest” means, with respect to any securitization, a single vertical security or an interest in each class of asset-backed security interests in the issuing entity that constitutes the same proportion of each such class. Additionally, § 246.4 requires that if the sponsor retains only an eligible horizontal residual interest as part of its required risk retention, that such interest represent no less than 5% of the fair asset value of all asset-backed security interests in the issuing entity issued as part of the securitization. According to Regulation RR, “eligible horizontal residual interest” means, with respect to any securitization, an asset-backed security interest in the issuing entity (1) that is an interest in a single class or multiple classes in the issuing entity, provided that each interest meets, individually or in the aggregate, all of the requirements of this definition; (2) with respect to which, on any payment date or allocation date on which the issuing entity has insufficient funds to satisfy its obligation to pay all contractual interest or principal due, any resulting shortfall will reduce amounts payable to the eligible horizontal residual interest prior to any reduction in the amounts payable to any other asset-backed security interest, whether through loss allocation, operation of the priority payments, or any other governing contractual provision (until the amount of such asset-backed security interest is reduced to zero); and (3) that, with the exception of any non-economic real estate mortgage investment conduits' residual interest, has the most subordinated claim to payments of both principal and interest by the issuing entity. Finally, if a sponsor retains both an eligible vertical interest and an eligible horizontal residual interest, the percentage of the fair asset value of the eligible horizontal residual interest and the percentage of the eligible vertical interest must equal at least 5. In any case, the percentages of any of the aforementioned interests must be determined as of the closing date of the securitization transaction.
In addition, the risk retention rules impose substantial limitations on hedging, transferring or pledging any retained residual interest from securitization transactions closed after the effectiveness of the rules. The Company and its subsidiaries have traditionally pledged their retained residual interests pursuant to special purpose, non-recourse credit facilities. However, they will be substantially limited from doing so for post-effectiveness retained residual interests unless the pledge of such interest meets the requirements of the rules, including that the related facility be full-recourse to an applicable company subsidiary. The current terms of our senior secured credit facility prevent us from entering into such recourse indebtedness, thereby reducing the cash we could possibly receive from financing these residuals, as we have done in the past.
We have certain indemnification and repurchase obligations under our various financing facilities driven by potential underwriting risk.
In the ordinary course of our financing activities, we provide customary indemnities to counterparties in certain financing and other transactions. No assurance can be given that these counterparties will not call upon us to discharge these obligations in the circumstances under which they are owed. In addition, in connection with financing transactions, in certain instances we retain customary repurchase obligations with respect to any assets sold into or financed under those transactions that fail to meet the represented objective eligibility criteria. Although we believe our origination practices are sufficient to assure material compliance with such criteria, certain instances have and may occur in which we are required to repurchase such assets. Certain of our products have a life contingent aspect, which would cause us to repurchase the obligation and incur losses.
In addition, the profitability of our purchases of structured settlement, annuity and lottery payment streams depends on our selection of high quality counterparties and confirmation that there is no senior claim on the payment stream, such as child support or bankruptcy. In the event that one or more of our counterparties is unable or unwilling to make scheduled payments on a payment stream we have purchased, this may have a material adverse effect on our earnings and financial condition.
Risks Related To Our Structured Settlements Segment
Annuity providers and other payors could change their payment practices for assignments of structured settlement, annuity and lottery payment streams, which could have a material adverse impact on our business, financial condition, results of operations and cash flows in future periods.
We currently have established relationships and experience with various insurance companies as well as state lottery commissions and other payors. Purchases of structured settlement, annuity and lottery payment streams require that the payors of such payment streams redirect payments from the initial payee and change the payee records within their operational and information

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technology systems in order to direct the purchased payment streams to us. Often, when we purchase less than all payment streams related to a receivable, the insurance company or other payor directs all of the payments streams to us, and we then take on the administrative responsibility to direct un-purchased payments to the seller or other payees. Moreover, if we complete more than one purchase transaction with a seller, the payor of the payment stream may be required to make further changes in their operational and information technology systems to cover such additional purchase and to allow us to assume additional administrative payment responsibility in order to direct multiple payment streams to different payees. Often, insurance companies or other payors are paid a fee by us in consideration for their costs and expenses in redirecting payments and updating their operational and information technology systems.
If, however, in the future, one or more of such insurance companies, lottery commissions or other payors were to no longer be willing to redirect payments to new payees, or allow us to assume administrative responsibility for directing payments, it could become more expensive or no longer possible to purchase structured settlement payments or other receivables paid by such payors, or we could incur significant legal expenses associated with compelling a payor to redirect payment to us, which could have a material adverse impact on our business, financial condition, results of operations and cash flows in future periods.
If the identities of structured settlement or annuity holders become readily available, it could have an adverse effect on our structured settlements or annuity payment purchasing business and our financial condition, results of operations and cash flows.
We expect to continue to build and enhance our databases of holders of structured settlements and annuities through a combination of commercial and digital advertising campaigns, social media activities and targeted marketing efforts. If the identities of structured settlement or annuity holders in our databases were to become readily available to our competitors or to the general public, including through the physical or cyber theft of our databases, we could face increased competition and the value of our proprietary databases would be diminished, which would have a negative effect on our structured settlements and annuity payment purchasing businesses and our financial condition, results of operations and cash flows.
We are dependent on the opinions of certain rating agencies regarding insurance companies we purchase payment streams from, as well as our securitizations, and would be negatively impacted if any of these rating agencies stop rating these insurance companies or our securitizations.
Standard & Poor's, Moody's and A.M. Best evaluate some, but not all, of the insurance companies that are the payors on the structured settlement, annuity and certain lottery payment streams that we purchase. Similarly, Standard & Poor's, Moody's, A.M. Best and DBRS, Inc. evaluate some, but not all, of our securitizations of those assets. We may be negatively impacted if any of these rating agencies stop covering these insurance companies or decide to downgrade their ratings or change their methodology for rating insurance companies or our securitizations. A downgrade in the credit rating of the major insurance companies that write structured settlements could negatively affect our ability to access the capital, securitization or other markets and we may be required to hold assets longer than initially anticipated. In addition, we may be negatively impacted if any of these rating agencies stop rating our securitizations, which would adversely affect our ability to complete our securitizations and the price that we receive for them. These events could have a material adverse effect on our business, financial condition, results of operations and cash flows.
If we are unable to complete future securitizations or other financings or sell the payment streams of the structured settlement, annuity or lottery payment streams on favorable terms, then our business will be adversely affected.
Our success depends on our ability to aggregate and securitize or otherwise finance or sell many of the financial assets that we purchase, including structured settlement, annuity and lottery payment streams, in the form of privately offered asset-backed securities, direct asset sales, other term financings or private sales. The availability of financing sources is dependent in part on factors outside of our control. For example, our results in 2008 and 2009 were impacted by the financial crisis, which resulted in a lack of purchasers of our asset-backed securitizations and a resultant lack of capital availability from our warehouse facilities. We were forced to limit transaction volume without access to the securitization market and with limited warehouse capacity. We significantly scaled back new transactions, resulting in insufficient cash flow relative to our leverage. In 2009, J.G. Wentworth, LLC and certain of its affiliates completed reorganization under Chapter 11 of the Bankruptcy Code. In the future, we may not be able to continue to securitize or otherwise sell our structured settlement payments at favorable rates or obtain financing through borrowings or other means on acceptable terms or at all, in which case we may be unable to satisfy our cash requirements. Our financings generate cash proceeds that allow us to repay amounts borrowed under our committed warehouse lines, finance the purchase of additional financial assets and pay our operating expenses. Changes in our asset-backed securities program could materially adversely affect our earnings and ability to purchase and securitize structured settlement, annuity, or lottery payment streams on a timely basis. These changes could include:
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a delay in the completion of a planned securitization or other financing;
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negative market perception of us;

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•
a change in rating agency criteria with regards our asset class;
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delays from rating agencies in providing ratings on our securitizations; and
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failure of the financial assets we intend to securitize to conform to rating agency requirements.
We plan to continue to access the securitization and other financing markets frequently. If our senior management does not accurately gauge the appropriate asset mix or timing for a securitization, other financing or asset sale, this may have a material adverse effect on our business, financial condition, results of operations and cash flows. If for any reason we were not able to complete a securitization or other financing, it could negatively impact our cash flow during that period. If we are unable to consummate securitizations or other financing or sale transactions in the future or if there is an adverse change in the market for structured settlement, annuity, or lottery payment streams generally, we may have to curtail our activities, which would have a material adverse effect on our business, financial condition, results of operations and cash flows.
Insolvency of payors of the structured settlement, annuity and lottery payments we purchase and other similar events could have a material adverse effect on our business, financial condition, results of operations and cash flows.
In instances where insurance companies or other payors of the structured settlement, annuity and lottery payment assets we purchase go bankrupt, become insolvent, or are otherwise unable to pay the purchased payment streams on time, we may not be able to collect all or any of the scheduled payments we have purchased. For example, on September 1, 2011, in the Matter of the Rehabilitation of Executive Life Company of New York ("ELNY"), in the Supreme Court of the State of New York, County of Nassau, the Superintendent of Insurance of the State of New York filed an Agreement of Restructuring in connection with the liquidation of ELNY under Article 75 of the New York Insurance Laws. This restructuring plan was subsequently approved by the court. Under this plan, payment streams to be paid on certain receivables purchased by us were reduced. In the future, bankruptcies, additional insolvencies and other events may occur which limit the ability of these payors to pay on time and in full, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.
We may be unable to maintain our relationships with the vendors involved with our prepaid cards.
We currently serve as program manager for our prepaid cards. We have chosen to partner with third-party service providers to serve as the card-issuer, the card-processor and as our network partner. If any of these vendors were to suspend, limit or cease operations or if our relationship with such service providers were to otherwise terminate, we would need to implement a substantially similar arrangement with another vendor, obtain additional state licenses, or curtail our prepaid operations, as applicable. If we need to enter into alternative arrangements with a different service provider to replace our existing arrangements, we may not be able to negotiate a comparable alternative arrangement in a timely fashion, on commercially reasonable terms, or at all. Transitioning to a new issuer, processor or network partner may result in delays in the issuance of prepaid cards, which could cause irreparable harm to our brand and reputation.
Fraudulent and other illegal activity involving our prepaid cards could lead to reputational damage to us and reduce the use and acceptance of our cards and reload network.
Criminals are using increasingly sophisticated methods to engage in illegal activities involving prepaid cards, reload products or customer information. Illegal activities involving prepaid cards often include malicious social engineering schemes, where people are asked to provide a prepaid card or reload product in order to obtain a loan or purchase goods or services. Illegal activities may also include fraudulent payment or refund schemes and identity theft. We rely upon third parties for some transaction processing services, which subjects us and our customers to risks related to the vulnerabilities of those third parties. A single significant incident of fraud, or increases in the overall level of fraud, involving our cards and other products and services could result in reputational damage to us, which could reduce the use and acceptance of our cards and other products and services, cause network acceptance members to cease doing business with us or lead to greater regulation that would increase our compliance costs. Fraudulent activity could also result in the imposition of regulatory sanctions, including significant monetary fines.
Our payment solutions business could suffer if there is a decline in the use of prepaid cards as a payment mechanism or there are adverse developments with respect to the prepaid financial services industry in general.
As the prepaid financial services industry evolves, consumers may find prepaid financial services to be less attractive than traditional or other financial services. Consumers might not use prepaid financial services for any number of reasons, including the general perception of our industry or advances in mobile or other payment technologies. Further, negative publicity surrounding other prepaid financial service providers could impact our business and prospects for growth to the extent it adversely impacts the perception of prepaid financial services among consumers. If consumers do not continue or increase their usage of prepaid cards, our payment solutions business may not grow as anticipated.

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Risks Related To Our Home Lending Segment
Adverse changes in the residential mortgage lending and real estate markets would adversely affect our business, financial condition, results of operations and cash flows.
Our Home Lending results of operations are materially affected by conditions in the residential mortgage lending and real estate markets, the financial markets and the economy generally. In recent years, concerns about the mortgage market, significant declines in home prices, increases in home foreclosures, high unemployment, the availability and cost of credit and rising government debt levels, as well as inflation, energy costs, U.S. budget debates and European sovereign debt issues, have contributed to increased volatility and uncertainty for the economy and financial markets. The mortgage market continues to be adversely affected by tightened lending standards and decreased availability of credit since the 2008 financial crisis. This has an impact on new demand for homes, which may compress the home ownership rates and weigh heavily on future home price performance. There is a strong correlation between increases (or decreases) in home prices and mortgage loan default rates. Increases in the number of mortgage defaults negatively impact our servicing business because they increase the costs to service the underlying loans and may ultimately reduce the number of mortgage loans we service.
Adverse economic conditions also adversely impact our mortgage loan originations business. On December 13, 2017, the Federal Reserve increased its benchmark interest rate by 0.25% to 1.50%. Recent economic reports and forecasts from federal officials suggest it is possible that the Federal Reserve will further increase interest rates three times during 2018. On March 21, 2018, the Federal Reserve increased its benchmark interest rate by an additional 0.25% to 1.75%. Rising interest rates would slow home purchase demand and may preclude many potential borrowers from refinancing their existing loans, which would decrease our originations.
Adverse changes in the residential mortgage market may reduce the number of mortgages we service, reduce the profitability of mortgage loans we currently service, reduce the number of new mortgage loans we originate, adversely affect our ability to sell mortgage loans we originate or increase delinquency rates. Any of the foregoing adverse developments could have a material adverse effect on our business, financial condition, results of operations and cash flows.
We may not be able to continue to grow our loan origination volume.
Our loan origination operations primarily consist of distributed retail and affiliate relationship operations. In our affiliate relationship operations, we generate program leads from our lead-generation partners and originate mortgage loans directly with borrowers through six telephone call centers or the Internet. In our distributed retail operations, we generate leads and originate loans from business and personal referrals as well as from previous customers via our 24 branch locations that are located in 15 states. One of our affinity relationships accounts for a significant portion of our leads for mortgage originations. The volume of loans funded within our loan origination business is subject to multiple factors, including the success of our customer direct originations, our ability to maintain our affinity and lead-generation relationships, changes in interest rates, availability of government programs and consumer credit. Any of these factors could lead to our inability to maintain or grow our loan originations volume, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.
As of December 31, 2017, Home Lending is actively licensed as a mortgage originator in 45 states and the District of Columbia. We plan to become licensed in additional states, which we expect will have a positive impact on our origination growth. However, there are no assurances that we will obtain these additional licenses. If we are unable to obtain additional licenses, we will not be able to grow our business in accordance with our current plans, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Increases in delinquencies and defaults could have a material adverse effect on our business, financial condition, results of operations and cash flows.
As a result of conditions in the residential mortgage lending and real estate markets in recent years, borrowers may not have sufficient equity in their homes to permit them to refinance their existing loans, which may reduce the volume or growth of our loan production business. This may also provide borrowers with an incentive to default on their mortgage loans even if they have the ability to make principal and interest payments. Further, interest rates have remained at historic lows for an extended period of time, but now appear to be increasing. Borrowers with adjustable rate mortgage loans must make larger monthly payments when the interest rates on those mortgage loans adjust upward from their initial fixed rates or low introductory rates, as applicable, to the rates computed in accordance with the applicable index and margin. Increases in monthly payments may increase the delinquencies, defaults and foreclosures on a significant number of the loans that we service.
Increased mortgage delinquencies, defaults and foreclosures may result in lower servicing revenue for loans that we service for the GSEs, including Fannie Mae or Freddie Mac, because we only collect servicing fees at the time they are due from GSEs for performing loans. Additionally, while increased delinquencies generate higher ancillary fees, including late fees, these fees are not likely to be recoverable in the event that the related loan is liquidated. In addition, an increase in delinquencies lowers

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the interest income that we receive on cash held in collection and other accounts because there is less cash in those accounts. Also, increased mortgage defaults may ultimately reduce the number of mortgages that we service.
Increased mortgage delinquencies, defaults and foreclosures will also result in a higher cost to service those loans due to the increased time and effort required to collect payments from delinquent borrowers and to liquidate properties or otherwise resolve loan defaults if payment collection is unsuccessful, and only a portion of these increased costs are recoverable under our servicing agreements. Increased mortgage delinquencies, defaults, short sales and foreclosures may also result in an increase in our interest expense and affect our liquidity as a result of borrowing under our credit facilities to fund an increase in our advancing obligations.
In addition, we are subject to risks of borrower defaults and bankruptcies in cases where we might be required to repurchase loans sold with recourse or under representations and warranties. A borrower filing for bankruptcy during foreclosure would have the effect of staying the foreclosure and thereby delaying the foreclosure process, which may potentially result in a reduction or discharge of a borrower's mortgage debt. Even if we are successful in foreclosing on a loan, the liquidation proceeds upon sale of the underlying real estate may not be sufficient to recover our cost basis in the loan, resulting in a loss to us. For example, foreclosure may create a negative public perception of the related mortgaged property, resulting in a diminution of its value. Furthermore, any costs or delays involved in the foreclosure of the property securing the mortgage loan or a liquidation of the underlying property will further reduce the net proceeds and, thus, increase the loss. If these risks materialize, they could have a material adverse effect on our business, financial condition, results of operations and cash flows.
The geographic concentration of our servicing portfolio may result in a higher rate of delinquencies and/or defaults.
We have higher concentrations of loans in our servicing portfolio in Virginia and California. As of December 31, 2017, approximately 17.8% and 22.8% of the loans we serviced as measured by unpaid principal balances were concentrated in Virginia and California, respectively.
To the extent the states where we have a higher concentration of loans experience weaker economic conditions, greater rates of decline in single-family residential real estate values or reduced demand within the residential mortgage sector relative to the United States generally, the concentration of loans we service in those regions may increase the effect of these risks. Additionally, if states in which we have greater concentrations of mortgage loans were to change their licensing or other regulatory requirements to significantly increase our business costs, we may be required to stop doing business in those states or may be subject to higher costs of doing business in those states, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.
As our origination volume increases in the states where we have only recently become licensed and in the additional states where we plan to become licensed, we expect our geographic concentration to change and our origination and servicing of loans could be impacted by geographic concentrations in different states. To the extent those states experience weaker economic conditions or greater rates of decline in single-family residential real estate values, the concentration of loans we originate and service in those regions may increase the effect of the risks to our business.
We are highly dependent upon GSEs, such as Fannie Mae and Freddie Mac, to generate revenues through mortgage loan sales.
There are various government proposals which deal with GSE reform, including winding down the GSEs and reducing or eliminating over time the role of the GSEs in guaranteeing mortgages and providing funding for mortgage loans, as well as proposals to implement reforms relating to borrowers, lenders and investors in the mortgage market, including reducing the maximum size of loans that the GSEs can guarantee, phasing in a minimum down payment requirement for borrowers, improving underwriting standards and increasing accountability and transparency in the securitization process. Thus, the long-term future of the GSEs is in doubt.
Our ability to generate revenues through mortgage loan sales depends to a significant degree on GSEs. We sell mortgage loans to GSEs and also rely on programs administered by the GSEs, Ginnie Mae, and others that facilitate the issuance of MBSs in the secondary market. These entities play a critical role in the residential mortgage industry, and we have significant business relationships with many of them. Almost all of the conforming loans we originate qualify under existing standards for inclusion in guaranteed mortgage securities backed by one of these entities. We also derive other material financial benefits from these relationships, including the assumption of credit risk on loans included in such mortgage securities in exchange for our payment of guarantee fees and the ability to avoid certain loan inventory finance costs through streamlined loan funding and sale procedures. If we are unable to complete the sale or securitization of certain of our mortgage loans due to changes in GSE programs or if we are unable to sell mortgage loans to GSEs, we may lack liquidity under our mortgage financing facilities to continue to fund mortgage loans and our revenues and margins on new loan originations would be materially and negatively impacted.

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Any discontinuation of, or significant reduction in, the operation of the GSEs or any significant adverse change in the level of activity in the secondary mortgage market or the underwriting criteria of the GSEs could have a material adverse effect on our business, financial condition, results of operations and cash flows.
GSE actions may negatively impact our MSRs and business.
In January 2011, the FHFA instructed the GSEs to study possible alternatives to the current residential mortgage servicing and compensation system used for single-family mortgage loans. The FHFA has released progress reports on the implementation of these efforts and outlined (i) the development of a new Contractual and Disclosure Framework that will align the contracts and data disclosures that support the mortgage-backed securities and set uniform contracts and standards for MBSs that carry no or only a partial federal guarantee; (ii) the development of a common securitization platform that will perform major elements of the securitization process and eventually act as the agent of an issuer; and (iii) the initiation of a Uniform Mortgage Data Program to implement uniform data standards for single-family mortgages. There can be no certainty regarding what the GSEs may propose as alternatives to current servicing compensation practices, or when any such alternatives would become effective.
Although MSRs that have already been created may not be subject to any changes implemented by the GSEs, it is possible that, because of the significant role of GSEs in the secondary mortgage market, any changes they implement could become prevalent in the mortgage servicing industry generally. Other industry stakeholders or regulators may also implement or require changes in response to the perception that the current mortgage servicing practices and compensation do not appropriately serve broader housing policy objectives. Changes to the residential mortgage servicing and compensation system could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Our counterparties may terminate our MSRs.
The owners of the loans we service may, under certain circumstances, terminate our MSRs. Ginnie Mae may terminate our status as an issuer if we fail to comply with servicing standards or otherwise breach our agreement with Ginnie Mae, or if there is a concern of the overall economic conditions and performance of our enterprise. If this were to happen, Ginnie Mae would seize our MSRs without compensation. As is standard in the industry, under the terms of our master servicing agreements with GSEs, GSEs have the right to terminate us as servicer of the loans we service on their behalf at any time and the GSEs also have the right to cause us to sell the MSRs to a third party. In addition, failure to comply with servicing standards could result in termination of our agreements with GSEs. Some GSEs may also have the right to require us to assign the MSRs to a subsidiary and sell our equity interest in the subsidiary to a third party. If we were to have our servicing rights terminated on a material portion of our servicing portfolio, this could have a material adverse effect on our business, financial condition, results of operations and cash flows.
We may not be able to maintain or grow our business if we cannot originate and/or acquire MSRs on favorable terms.
Our servicing portfolio is subject to "run off," meaning that mortgage loans we service may be prepaid prior to maturity, refinanced by a mortgage loan not serviced by us, liquidated through foreclosure, deed-in-lieu of foreclosure or other liquidation process, or repaid through standard amortization of principal. As a result, our ability to maintain and grow the size of our servicing portfolio depends on our ability to originate additional mortgages, to recapture the servicing rights on loans that are refinanced and to acquire MSRs. We may not be able to originate a sufficient volume of mortgage loans, recapture a sufficient volume of refinanced loans or acquire MSRs on terms that are favorable to us or at all, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.
We may not be able to recapture loans from borrowers who refinance.
One of the focuses of our origination efforts is "recapture," which involves actively working with existing borrowers to refinance their mortgage loans with us instead of another originator of mortgage loans. Borrowers who refinance have no obligation to refinance their loans with us and may choose to refinance with a different originator. If borrowers refinance with different originators, this decreases the profitability of our primary servicing portfolio because the original loan will be repaid, and we will not have an opportunity to earn further servicing fees after the original loan is repaid. Moreover, recapture allows us to generate additional loan servicing rights more cost-effectively than MSRs acquired on the open market. If we are not successful in recapturing our existing loans that are refinanced, our servicing portfolio will become increasingly subject to run-off, which would increase our costs and risks and decrease the profitability of our servicing business.
We depend on the accuracy and completeness of information about borrowers, counterparties and other third parties, which could be intentionally or negligently misrepresented.
In deciding whether to extend credit or to enter into other transactions with borrowers and counterparties, we may rely on information furnished to us by or on behalf of borrowers and counterparties, including financial statements and other financial information. We also may rely on representations of borrowers and counterparties as to the accuracy and completeness of that information and, with respect to financial statements, on reports of independent auditors. We additionally rely on representations from public officials concerning the licensing and good standing of the third-party mortgage brokers through which we do business.

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If any material information is intentionally or negligently misrepresented and such misrepresentation is not detected prior to loan funding, the value of the loan may be significantly lower than expected and we may be subject to repurchase or indemnification obligations under loan sales agreements. Whether a misrepresentation is made by the loan applicant, the mortgage broker, another third party or one of our employees, we generally bear the risk of loss associated with the misrepresentation. Even though we may have rights against persons and entities who made or knew about the misrepresentation, such persons and entities are often difficult to locate and it is often difficult to collect any monetary losses that we have suffered as a result of their actions. We have controls and processes designed to help us identify misrepresented information in our loan originations operations; however, we may not have detected or may not detect all misrepresented information in our loan originations or from our mortgage business clients. Any such misrepresented information could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Insurance on real estate securing mortgage loans and real estate securities collateral may not cover all losses.
There are certain types of losses, generally of a catastrophic nature, that result from such events as earthquakes, hurricanes, floods, acts of war or terrorism and that may be uninsurable or not economically insurable. Inflation, changes in building codes and ordinances, environmental considerations and other factors also might make the insurance proceeds insufficient to repair or replace a property if it is damaged or destroyed. Under these circumstances, the insurance proceeds received might not be adequate to restore our economic position with respect to the affected real property. Any uninsured loss could result in the loss of cash flow from, and a decrease in the asset value of, the affected property, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.
We are required to indemnify purchasers of the mortgage loans we originate or of the MBSs backed by such loans or to repurchase the related loans if the loans fail to meet certain criteria or characteristics.
The indentures governing our securitized pools of mortgage loans and our contracts with purchasers of our whole loans contain provisions that require us to indemnify purchasers of the loans we originate or of the MBSs backed by such loans or to repurchase the related loans under certain circumstances. While our contracts vary, they contain provisions that require us to repurchase loans if:
•
our representations and warranties concerning loan characteristics, loan quality and loan circumstances are inaccurate;
•
we fail to secure adequate mortgage insurance within a certain period after closing;
•
a mortgage insurance provider denies coverage; or
•
we fail to comply, at the individual loan level or otherwise, with regulatory requirements in the current dynamic regulatory environment.
We believe that, as a result of the current market environment, many purchasers of residential mortgage loans are particularly aware of the conditions under which originators must indemnify them or repurchase loans they have purchased and would benefit from enforcing any indemnification and repurchase remedies they may have. Our exposure to repurchases under our representations and warranties could include the current unpaid balance of all loans we have sold. If we are required to indemnify or repurchase loans that we originate and sell or securitize that result in losses that exceed our reserve, this could adversely affect our business, financial condition and results of operations.
We are required to follow the guidelines of Ginnie Mae and the GSEs and are not able to negotiate our fees with these entities for the purchase of our loans.
In our transactions with Ginnie Mae and the GSEs, we are required to follow specific guidelines that impact the way we service and originate mortgage loans including:
•
our staffing levels and other servicing practices;
•
the servicing and ancillary fees that we may charge;
•
our modification standards and procedures; and
•
the amount of non-reimbursable advances.
In particular, the FHFA has directed GSEs to align their guidelines for servicing delinquent mortgages they own or guarantee, which can result in monetary incentives for servicers that perform well and penalties for those that do not. In addition, FHFA has directed Fannie Mae to assess compensatory fees against servicers in connection with delinquent loans, foreclosure delays, and other breaches of servicing obligations.
We cannot negotiate these terms with the GSEs, and they are subject to change at any time. A significant change in these guidelines that has the effect of decreasing our fees or requiring us to expend additional resources in providing mortgage services

35

could decrease our revenues or increase our costs, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.
We are required to make servicing advances that can be subject to delays in recovery or may not be recoverable in certain circumstances.
During any period in which a borrower is not making payments, we are required under most of our servicing agreements to advance our own funds to meet contractual principal and interest remittance requirements for investors, pay property taxes and insurance premiums, pay legal expenses and fund other protective advances. We also advance funds to maintain, repair and market real estate properties that we service that are in the foreclosure process or have been foreclosed. As home values change, we may have to reconsider certain of the assumptions underlying our decisions to make advances and, in certain situations, our contractual obligations may require us to make certain advances for which we may not be reimbursed. In addition, in the event a mortgage loan serviced by us defaults or becomes delinquent, the repayment to us of the advance may be delayed until the mortgage loan is repaid or refinanced or liquidation occurs. With respect to loans in Ginnie Mae pools, advances are not recovered until the loan becomes current or we make a claim with the FHA or other insurer, and our right to reimbursement is capped. Advances are typically recovered upon weekly or monthly reimbursement or from sale in the market. An increase in delinquency and default rates on the loans that we service will increase the need for us to make advances. In the event we receive requests for advances in excess of amounts we are able to fund, we may not be able to fund these advance requests, which could materially and adversely affect our business, financial condition, results of operations and cash flows.
Our investments in mortgage loans and MSRs may become illiquid, and we may not be able to vary our portfolio in response to changes in economic and other conditions.
Our investments in mortgage loans and MSRs may become illiquid. If that were to occur, it may be difficult or impossible to obtain or validate third party pricing on the investments we purchase. Illiquid investments also typically experience greater price volatility, as a ready market does not exist, and can be more difficult to value. We cannot predict if our mortgage loans or MSRs may become illiquid, or when such event may occur, though some factors that have contributed to periods of illiquidity for these assets generally in the past have been weak economic conditions, rates of decline in single-family residential real estate values and volatile interest rates. Any illiquidity of our investments may make it difficult for us to sell such investments if the need or desire arises. In addition, if we are required to liquidate all or a portion of our portfolio quickly, we may realize significantly less than the recorded value.
Risks Related to Emergence from Bankruptcy
We recently emerged from bankruptcy, which could adversely affect our business and relationships.
It is possible that our having filed for bankruptcy and our recent emergence from the bankruptcy could adversely affect our business and relationships with customers, vendors, employees, service providers and suppliers. Due to uncertainties, many risks exist, including the following:
•
vendors or other contract counterparties could terminate their relationship or require financial assurances or enhanced performance;
•
the ability to renew existing contracts and compete for new business may be adversely affected;
•
the ability to attract, motivate and/or retain key executives and employees may be adversely affected;
•
employees may be distracted from performance of their duties or more easily attracted to other employment opportunities; and
•
competitors may take business away from us, and our ability to attract and retain customers may be negatively impacted.
The occurrence of one or more of these events could adversely affect our business, operations, financial condition and reputation.
Our actual financial results after emergence from bankruptcy may not be comparable to our projections filed with the Bankruptcy Court in the course of our Chapter 11 Cases, and will not be comparable to our historical financial results as a result of the implementation of our Plan and the transactions contemplated thereby.
We filed with the Bankruptcy Court projected financial information to demonstrate to the Bankruptcy Court the feasibility of our Plan and our ability to continue operations following our emergence from bankruptcy. Those projections were prepared solely for the purpose of the Chapter 11 Cases and have not been, and will not be, updated on an ongoing basis and should not be relied upon by investors. At the time they were prepared, the projections reflected numerous assumptions concerning our anticipated future performance with respect to then prevailing and anticipated market and economic conditions that were and remain beyond our control and that may not materialize. Projections are inherently subject to substantial and numerous uncertainties and to a wide

36

variety of significant business, economic and competitive risks and the assumptions underlying the projections and/or valuation estimates may prove to be wrong in material respects. Actual results will likely vary significantly from those contemplated by the projections. As a result, investors should not rely on those projections.
Upon our emergence from bankruptcy, the composition of our Board of Directors changed significantly.
Pursuant to the Plan, the composition of our Board of Directors changed significantly. Following emergence, our Board of Directors now consists of five directors, none of which, except for Stewart A. Stockdale, our Chief Executive Officer, previously served on our Board of Directors. The new directors have different backgrounds, experiences and perspectives from those individuals who previously served on our Board of Directors and, thus, may have different views on the issues that will determine the future of the Company. There is no guarantee that the new Board of Directors will pursue, or will pursue in the same manner, strategic plans consistent with those pursued by the Company under the prior Board of Directors. As a result, the future strategy and plans of the Company may differ materially from those of the past.
The ability of the new directors to quickly expand their knowledge of our business plans, operations and strategies in a timely manner will be critical to their ability to make informed decisions about our strategy and operations. If our Board of Directors is not sufficiently informed to make such decisions, our ability to compete effectively and profitably could be adversely affected.
The ability to attract and retain key personnel is critical to the success of our business and may be affected by our emergence from bankruptcy.
The success of our business depends on key personnel. The ability to attract and retain these key personnel may be difficult in light of our emergence from bankruptcy, the uncertainties currently facing the business and changes we may make to the organizational structure to adjust to changing circumstances. We may need to enter into retention or other arrangements that could be costly to maintain. If executives, managers or other key personnel resign, retire or are terminated, or their service is otherwise interrupted, we may not be able to replace them in a timely manner and we could experience significant declines in productivity.
The change of ownership rules under Section 382 of the Code, as well as our emergence from bankruptcy, may limit our ability to use net operating loss carryforwards to reduce future taxable income.
We have net operating loss (“NOL”) carryforwards for federal and state income tax purposes. Generally, NOL carryforwards can be used to reduce future taxable income. Our use of our NOL carryforwards may be limited, however, under Section 382 of the Code, if we undergo a change in ownership of more than 50% of our common stock over a three-year period as measured under Section 382 of the Code. The complex change of ownership rules generally focus on ownership changes involving stockholders owning directly or indirectly 5% or more of our stock, including certain public “groups” of stockholders as set forth under Section 382 of the Code, including those arising from new stock issuances and other equity transactions. It is possible that we will experience another ownership change within the meaning of Section 382 of the Code resulting in an annual limit on the use of our NOL carryforwards. This limitation could result in a meaningful increase in our federal and state income tax liability in future years. The determination of whether an ownership change has occurred is complex. No assurance can be given that we will not undergo an ownership change that would have a significant adverse effect on the use of our NOL carryforwards. In addition, the possibility of causing an ownership change may reduce our willingness to issue new common stock to raise capital.
A special exception from the Section 382 limitation rules discussed above may apply in the case of a corporation that experiences an ownership change as the result of a bankruptcy proceeding. Under that exception, if certain claimants receive the loss corporation’s stock under the bankruptcy plan, although an ownership change may have occurred, there would be no limitation on the Company’s ability to utilize its NOLs under Section 382.  However, the application of such exception may require the company to reduce the amount of the NOL carryforward.  We have not yet determined whether or not this exception applies in the context of our emergence from bankruptcy.  If this exception does not apply, our ability to utilize our NOLs in the future may be severely limited.
Under the Plan, our pre-petition debt and certain other obligations were canceled and extinguished. Absent an exception, a debtor recognizes cancellation of debt income (“CODI”) upon discharge of its outstanding indebtedness for an amount of consideration that is less than its adjusted issue price. In accordance with Section 108, we will exclude the amount of discharged indebtedness from taxable income since the Code provides that a debtor in a bankruptcy case may exclude CODI from income but must reduce certain tax attributes by the amount of CODI realized as a result of the consummation of a plan of reorganization. The amount of CODI realized by a taxpayer is the adjusted issue price of any indebtedness discharged less than the sum of (i) the amount of cash paid, (ii) the issue price of any new indebtedness issued, and (iii) the fair market value of any other consideration, including equity, issued.   As a result of the CODI, we may be required to reduce the amount of the NOL carryovers.
Newly enacted laws, such as Tax Cuts and Jobs Act, or regulations and future changes in the U.S. taxation of businesses may impact our effective tax rate or may adversely affect our business, financial condition and operating results.
On December 22, 2017, the Tax Cuts and Jobs Act was signed into law. The Tax Cuts and Jobs Act significantly changed the Code, reducing in the federal statutory corporate income tax rate from 35% to 21% and adding a new limitation on the

37

deductibility of business interest expense and restrictions on the use of net operating loss carryforwards arising in taxable years beginning after December 31, 2017. The Tax Cuts and Jobs Act also authorizes the Treasury Department to issue regulations with respect to the new provisions. We are still in the process of analyzing the Tax Cuts and Jobs Act and its possible effects on the Company. We cannot predict how the changes in the Tax Cuts and Jobs Act, regulations, or other guidance issued under it or conforming or non-conforming state tax rules might affect us or our business. In addition, there can be no assurance that U.S. tax laws, including the corporate income tax rate, will not undergo significant changes in the near future.
Risks Related To Ownership Of Our Common Stock
The New Common Stock is subject to certain transfer restrictions.
After our filing Form 15 on January 5, 2018, we are no longer required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act, other than this Annual Report on Form 10-K for the year ended December 31, 2017. Our New Common Stock is not publicly traded and is subject to restrictions on transfers, among others, that any transfers must be approved by our Board of Directors or pursuant to general terms and conditions established by our Board of Directors, which may include that transfers be subject to (i) a right of first refusal subject to certain ownership thresholds, (ii) compliance with applicable securities laws generally for such transfers and (iii) such other conditions to be determined by our Board of Directors to ensure the Company will not incur obligations to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. All such transfer restrictions and the terms thereof are set forth in our governing documents.
The ability to transfer the New Common Stock may be limited by the absence of an active trading market and the New Common Stock is not registered.
Prior to our emergence from bankruptcy, our Class A common stock was traded on the over-the-counter markets. In connection with our Plan, we suspended our reporting obligations under Sections 13(a) and 15(d) of the Exchange Act and delisted the Class A common stock from the OTC. All of the Company's New Common Stock is subject to restrictions on transfer as set forth in our governing documents. We do not expect to register any of the New Common Stock under the Securities Act.
As a result of these actions, an active trading market for the New Common Stock may not be developed or maintained in the future or, even if developed, may not be liquid. The liquidity of any market for the New Common Stock will depend on various factors, including the number of holders of the New Common Stock and the interest of security dealers in making a market for the New Common Stock. If an active trading market is not developed and maintained or such trading market is not liquid, holders of New Common Stock may be unable to sell their New Common Stock at fair market value or at all. Consequently, holders of the New Common Stock may bear certain risks associated with holding securities for an indefinite period of time, including, but not limited to, the risk that the New Common Stock will lose some or all of its value. No assurance can be given that the liquidity of any trading market may develop, that the holders of the New Common Stock will be able to sell their New Common Stock or on the price at which holders would be able to sell their New Common Stock.
We have suspended ongoing reporting obligations with respect to our SEC filings.
We have filed a Form 15 to terminate our ongoing reporting obligations. We expect that we will no longer be required to file any current or periodic reports with the SEC as and when due going forward. Accordingly, subject to the provisions contained in our governance documents, holders of New Common Stock, or any potential buyers of New Common Stock from such holders, will no longer have access to ongoing and updated reports and results from the Company. Consequently, holders of the New Common Stock may bear certain risks associated with holding securities of a non-reporting company, including increased difficulty in valuing and transferring the New Common Stock.
We are under no obligation to declare or pay any dividends or other distributions.
We are under no obligation, and do not expect, to declare or pay any dividends or other distributions on account of the New Common Stock. The terms of any such distributions are set forth in our governance documents. In addition, the New RCF Agreement significantly restricts certain of our subsidiaries' ability, and therefore our ability, to make distributions and certain other payments. Consequently, a holder’s only ability to recognize a return on the New Common Stock may be through the sale of the New Common Stock.
The New Common Stock is subject to dilution.
The New Common Stock is subject to dilution as a result of the issuance of new equity securities. In addition, our Board of Directors may agree to grant equity securities to employees, consultants and directors under certain management incentive plans that may result in additional issuances of New Common Stock or rights with respect thereto. Furthermore, we may issue equity securities in connection with future investments, acquisitions or capital raising transactions. Such grants or issuances may result in substantial dilution in ownership of the New Common Stock.

38

Certain rights under our governance documents are based on ownership percentages of the New Common Stock.
Certain rights under our governance documents are limited to holders of New Common Stock holding specified percentages of the outstanding New Common Stock. For example, only those holders above certain percentage thresholds may be provided with registration rights, including demand, shelf and piggyback rights, certain consent rights over corporate actions, preemptive rights and/or a right of first refusal on any proposed transfers of the New Common Stock. Such thresholds and the terms of such rights are set forth in our governance documents.
As a holding company, we have no operations and our only material asset is our economic interest in JGW LLC, and we are accordingly dependent upon distributions from JGW LLC to pay our expenses, including payments with respect to our indebtedness, taxes and dividends (if and when declared by our Board of Directors).
We are a holding company and have no material direct operations or assets other than our ownership of common membership interests in JGW LLC (“Common Interests”). We have no independent means of generating revenue and as a result are dependent on loans, dividends and other payments from our subsidiaries to generate the funds necessary to meet our financial obligations and to pay dividends on our common stock. We intend to cause JGW LLC to make distributions to us, as its managing member, in an amount sufficient to cover all expenses, including payments with respect to our indebtedness, applicable taxes payable and dividends, if any, declared by our Board of Directors. However, our subsidiaries are legally distinct from us and may be prohibited or restricted from paying dividends or otherwise making funds available to us under certain conditions. For example, it is likely that Ginnie Mae will place restrictions on the cash generated by Home Lending such that it can only be used for Home Lending's operations and, thus, cannot be used to assist with the repayment of indebtedness at the corporate level. Furthermore, the New RCF Agreement governing the New RCF significantly restricts the ability of our subsidiaries to pay dividends or otherwise transfer assets to us. To the extent that we need funds and JGW LLC is restricted from making such distributions under applicable law or regulation or under any present or future debt covenants or is otherwise unable to provide such funds, it could materially adversely affect our business, financial condition, results of operations and cash flows.
Holders of the New Common Stock may not be able to recover in future cases of bankruptcy, liquidation, insolvency, or reorganization.
Holders of the New Common Stock will be subordinated to all liabilities of the Company, JGW LLC and their subsidiaries, including the indebtedness under the New RCF Agreement. Therefore, the assets of the Company and JGW LLC will not be available for distribution to any holder of the New Common Stock in any bankruptcy, liquidation, insolvency or reorganization of the Company or JGW LLC unless and until all indebtedness, if any, of the Company, JGW LLC and their subsidiaries, including the Credit Agreement (to the extent any loans thereunder are outstanding) has been paid. The remaining assets of the Company, JGW LLC and each of their subsidiaries may not be sufficient to satisfy the outstanding claims of its equity holders, including the holders of the New Common Stock.
Our disclosure controls and procedures may not prevent or detect all errors or acts of fraud.
Our disclosure controls and procedures are designed to reasonably assure that information required to be disclosed by us in reports we file or submit under the Exchange Act is accumulated and communicated to management and recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. We believe that any disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.
These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by an unauthorized override of the controls. Accordingly, because of the inherent limitations in our control system, misstatements or insufficient disclosures due to error or fraud may occur and not be detected.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Our principal executive offices, which also house our Structured Settlements segment, are located at 1200 Morris Drive, Suite 300, Chesterbrook, Pennsylvania 19087-5148 and consist of approximately 41,750 square feet of leased office space.
Our Home Lending corporate office is located at 3350 Commission Court, Woodbridge, Virginia and consists of approximately 31,000 square feet of leased office space. Our Home Lending business also leases small offices throughout the United States.
We consider our facilities to be adequate for our current operations.
Item 3.  Legal Proceedings

39

Chapter 11 Cases
As described above, on December 12, 2017, the Debtors commenced the Chapter 11 Cases in the Bankruptcy Court to pursue the Plan. The Chapter 11 Cases are being administered jointly under the caption In re: Orchard Acquisition Company, LLC, et. al., Case No. 17-12914 (KG).
On January 17, 2018, the Bankruptcy Court entered the Confirmation Order. On January 25, 2018, the Effective Date of the Plan occurred and the Debtors emerged from bankruptcy. The Chapter 11 Cases remain ongoing primarily for administrative purposes, including submission and approval of final fee applications of professionals retained by the Debtor, and will be closed after all such proceedings are concluded.
See “Item 1. Business-Reorganization Plan Under Chapter 11 and Bankruptcy Proceedings.”
Petition to Enforce Civil Investigative Demand
On June 6, 2016, the CFPB filed a petition to Enforce Civil Investigative Demand against JGW LLC in the United States District Court for the Eastern District of Pennsylvania; Case No. 2:16-cv-02773-CDJ. The petition stated that the CFPB has authority to issue a Civil Investigative Demand ("CID") whenever it has reason to believe that any person may have information relevant to a violation of Federal consumer financial laws, noted the history of the interaction between the CFPB and JGW LLC, and stated that JGW LLC has refused to produce any additional materials in response to the third of three CIDs the CFPB served on JGW LLC. On June 1, 2017, after the parties had submitted their briefing on the issues raised in the petition, the CFPB withdrew the third CID, and thereafter notified the court of its withdrawal.  On June 9, 2017, the court issued an order dismissing the noted petition.  Subsequently, the CFPB issued a new CID to JGW, LLC containing substantially similar requests as the previously withdrawn CID.  After a required meeting and conference, the CFPB agreed to limit this newly issued CID to a single request for sample transaction documents.  JGW, LLC complied with the single request, while continuing to note its position on the CFPB’s lack of jurisdiction over it. 
On February 1, 2018, the CFPB issued a letter to JGW LLC noting that it had completed its review as to JGW LLC and that the Office of Enforcement was not intending to recommend that the CFPB take any enforcement action. Thus, JGW LLC considers this matter closed.
Other Legal Proceedings
In the ordinary course of our business, we are party to various legal proceedings, including but not limited to those brought by our current or former employees, customers and competitors, the outcome of which cannot be predicted with certainty.
Other than as disclosed in this Annual Report on Form 10-K below, we are not involved in any legal proceedings that are expected to have a material adverse effect on our business, financial condition, results of operations and cash flows.
Our policy is to defend vigorously all claims and actions brought against us. Although we intend to continue to defend ourselves aggressively against all claims asserted against us, current pending proceedings and any future claims are subject to the uncertainties attendant to litigation and the ultimate outcome of any such proceedings or claims cannot be predicted. Due to the nature of our business, at any time we may be a plaintiff in a proceeding pursuing judgment against parties from whom we have purchased a payment stream.
Illinois Class Action Proceedings
In February 2014, a purported class action filing was made against us and our subsidiaries in the Circuit Court, 20th Judicial Circuit, St. Clair County, Illinois. The class action complaint, as amended, alleges that we violated the Illinois Consumer Fraud and Deceptive Business Practices Act by, among other things, marketing, soliciting, and engaging in transfers of structured settlement payment rights despite knowledge of anti-assignment clauses in the underlying structured settlement agreements, and also alleges common law fraud, breach of the implied duty of good faith and fair dealing and violations of the federal Racketeer Influenced and Corrupt Organizations Act ("RICO") based on the same structured settlement purchase transactions. The plaintiffs seek to have the prior transfers declared void. The case was removed to the United States District Court for the Southern District of Illinois, transferred to the United States District Court for the Northern District of Illinois, Eastern Division; Case No.: 1:14-cv-09188, and subsequently remanded back to the Circuit Court of the 20th Judicial Circuit, St. Clair County, Illinois due to a finding that the United States District Court for the Northern District of Illinois lacked subject matter jurisdiction. Following the remand, upon our appeal, the United States Court of Appeals for the Seventh Circuit found that the United States District Court for the Northern District of Illinois had subject matter jurisdiction over the matter and remanded the case back to that court.
Based on amendments to the Illinois Structured Settlement Protection Act providing that where the terms of the structured settlement agreements prohibit sale, assignment, or encumbrance of such payment rights, a court is not precluded from hearing an application for transfer of the payment rights and ruling on the merits of such application, and a declaration that the amendment was "declarative of existing law", we believe that the original ruling in Illinois which commenced the continuing Illinois proceedings was not consistent with precedent and existing law, and we filed updates with the court accordingly. On July 27, 2016, the United

40

States District Court for the Northern District of Illinois, Eastern Division entered an order granting in part and denying in part our motion to dismiss the plaintiffs’ complaint. The court dismissed with prejudice any claims based on allegations that the transfer approval orders were void. The court held that the Illinois courts that approved the original transfers had jurisdiction to approve the transfers and/or claims based on those orders being void ab initio were dismissed, as well as claims based on allegations that the venue was improper for the approval petitions or that the disclosures were inadequate. The court held that anti-assignment provisions in the original settlement agreements can be waived, but because the plaintiffs did not plead that they waived the anti-assignment clauses, the motion to dismiss those claims were denied. The court dismissed without prejudice plaintiffs’ claims under RICO because plaintiffs failed to allege two predicate acts as to each of the defendants. The court also dismissed claims against entities that were not in existence at the time of the transfers.  The court dismissed with prejudice claims for unjust enrichment and joint enterprise. The court denied the motion to dismiss the claims based on a breach of fiduciary duty, parts of the conversion claims and the defense of statute of limitations because plaintiffs’ complaint stated a claim. The plaintiffs filed a third amended complaint on September 2, 2016, which dropped certain of the claims and now asserts claims only for breach of fiduciary duty, tortious interference with contract, civil conspiracy, and conversion. Defendants filed their motions to dismiss on December 22, 2016, plaintiffs filed responses on January 22, 2017, and Defendants filed their replies on February 13, 2017. On June 21, 2017, the court entered an order dismissing with prejudice the claims for tortious interference with contract and conversion as to all defendants except Settlement Funding, LLC (as the only party entitled to receive future periodic payments), leaving open claims for breach of fiduciary duty and civil conspiracy. Thereafter, the defendants filed an answer denying all claims.
At the same time, Settlement Funding, LLC filed a motion to compel arbitration on December 22, 2016. On January 10, 2017, plaintiffs served written discovery on Settlement Funding concerning the issue of arbitrability and on January 23, 2017 filed a motion to stay briefing on the motion to compel arbitration pending discovery. On January 26, 2017, Settlement Funding filed a motion for protective order to bar discovery and the parties appeared in court on February 7, 2017 for a status conference on that issue. The court scheduled a status hearing for March 29, 2017 to issue a ruling on the motion for protective order and to schedule the remaining briefing on the motion to compel arbitration. The court ruled that only discovery related to whether the arbitration provisions were unconscionable was allowable. The parties responded to the discovery. In February 2018, the court ruled that the plaintiffs must commence the arbitration against Settlement Funding, LLC or face dismissal of the claim. The court also established a discovery schedule within the arbitration proceeding. The plaintiffs did not file the arbitration as required by the court, and the defendants, Settlement Funding, LLC, will work to have the matter dismissed. The defendants continue to believe that some of the plaintiffs’ claims are time-barred and all claims are without merit and intend to vigorously defend these claims on a number of factual and legal grounds.
Other Litigation
On September 14, 2017, a styled “Class Action Complaint” (the “Complaint”) was filed by plaintiff Larry G. Dockery in the United States District Court for the Eastern District of Pennsylvania; Case No.: 2:17-cv-04114-MMB. The Complaint names a certain company subsidiary that purchases structured settlement payments, a competitor and an attorney, Stephen J. Heretick, as defendants and alleges that the structured settlement payment purchasing parties conspired with Stephen J. Heretick, Esq. and certain judges sitting in Portsmouth County, Virginia to violate state and federal laws with respect to certain transfers of structured settlement receivables, including claims of fraudulent concealment and conspiracy in violation of RICO. The Complaint alleges that Heretick, the judges and the other defendants, including the company subsidiary, engaged in a scheme to short cut the transfer order process under the applicable Structured Settlement Transfer Statute. The Complaint seeks, among other things, the declaration that the company affiliate hold the payments subject to the related transfer orders in a constructive trust for the benefit of the related plaintiffs. The company affiliate has retained counsel in the case and has filed a motion to dismiss the Complaint. The company affiliate defendant believes all claims set forth in the Complaint are without merit and intends to vigorously defend these claims on a number of factual and legal grounds.
Item 4. Mine Safety Disclosures
Not applicable.
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
On November 16, 2017, the OTC Markets Group notified that the Company no longer qualified to be listed on the OTCQX, as its market capitalization had been less than $5 million for more than 30 consecutive calendar days. The OTC Markets Group advised that the Company would be moved to the Pink Open Market (the “OTC Pink”) unless it regained compliance by December
15, 2017. The Company was unable to meet the relevant criteria to regain compliance and, therefore, was moved to the OTC Pink on December 12, 2017. Trading of the Company on the OTC Pink was suspended on the Effective Date.
The following table sets forth the high and low sales prices per share of our Class A common stock as reported by the New York Stock Exchange, under the symbol "JGW," through June 17, 2016, the OTCQX Market, under the symbol "JGWE,"

41

from June 20, 2016 to December 11, 2017, and the OTC Pink, under the symbol "JGWEQ," starting December 12, 2017, during each quarterly period for the years ended December 31, 2017 and 2016, respectively. Any over-the-counter quotations reflect inter-dealer prices, without retail mark-up, mark-down or commissions and may not necessarily represent actual transactions.
2017
 
Low
 
High
 
 
 
 
 
First Quarter
 
$
0.26

 
$
0.44

Second Quarter
 
$
0.18

 
$
0.41

Third Quarter
 
$
0.14

 
$
0.24

Fourth Quarter
 
$
—

 
$
0.21

2016
 
Low
 
High
 
 
 
 
 
First Quarter
 
$
0.95

 
$
1.81

Second Quarter
 
$
0.20

 
$
1.34

Third Quarter
 
$
0.25

 
$
0.46

Fourth Quarter
 
$
0.18

 
$
0.46

Holders of Records
As of February 28, 2018, there were approximately 59 holders of record of our New Class A common stock and 1 holder of record of our New Class B common stock.
Dividends
We have not declared any dividends on any class of common stock since our initial public offering ("IPO"). We currently do not intend to pay cash dividends on our New Class A common stock. The declaration and payment of dividends to holders of shares of New Class A common stock will be at the discretion of our Board of Directors and will depend on many factors, including our financial condition, earnings, legal requirements, restrictions in our debt agreements and other factors our Board of Directors deems relevant. Except in respect of any tax distributions we receive from JGW LLC, if JGW LLC makes a distribution to its members, including us, we will be required to make a corresponding distribution to each of our holders of New Class A common stock.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
There was no share repurchase activity during the fourth quarter of fiscal year 2017.

42

Item 6. Selected Financial Data.
 
As of and For the Year Ended December 31,
 
2017
 
2016
 
2015
 
2014
 
2013
 
(Dollars in thousands, except per share data)
Total assets
$
5,051,465

 
$
4,992,907

 
$
5,051,098

 
$
5,182,709

 
$
4,472,097

Total long-term debt (1)
4,648,884

 
4,559,915

 
4,615,781

 
4,726,311

 
4,086,565

Total revenues
428,712

 
324,672

 
296,367

 
494,376

 
459,563

Net (loss) income
(210,708
)
 
(98,015
)
 
(197,140
)
 
96,613

 
61,818

Net (loss) income attributable to non-controlling interests
(19,375
)
 
(51,158
)
 
(101,828
)
 
65,402

 
67,395

Net (loss) income attributable to The J.G. Wentworth Company
(191,333
)
 
(46,857
)
 
(95,312
)
 
31,211

 
(5,577
)
 
 
 
 
 
 
 
 
 
 
Net (loss) income per Class A common stock of The J.G. Wentworth Company
 

 
 

 
 

 
 

 
 

Basic (2)
$
(12.12
)
 
$
(2.99
)
 
$
(6.49
)
 
$
2.40

 
$
(0.54
)
Diluted (2)
$
(12.12
)
 
$
(2.99
)
 
$
(6.49
)
 
$
2.40

 
$
(0.54
)
(1) The Company includes VIE derivative liabilities, at fair value, VIE long-term debt, VIE long-term debt issued by securitization and permanent financing trusts, at fair value, the term loan payable and capital leases from its consolidated balance sheets as its long-term debt.
(2) For the year ended December 31, 2013, the loss per common share attributable to the Company was computed for the period November 14, 2013 through December 31, 2013.
The selected financial data set forth under "Part II, Item 7 'Management's Discussion and Analysis of Financial Condition and Results of Operations'" of this Annual Report on Form 10-K is incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion and analysis of our financial condition and results of operations together with our audited consolidated financial statements and the related notes included elsewhere in this Annual Report on Form 10-K. Some of the information in this discussion and analysis or set forth elsewhere in this Annual Report on Form 10-K, including information with respect to our plans and strategy for our business and related financing, contains forward-looking statements that involve risks and uncertainties. You should read the "Risk Factors" and the "Cautionary Statement Regarding Forward-Looking Statements" sections of this Annual Report on Form 10-K for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.
Overview
We are focused on providing direct-to-consumer access to financing solutions through a variety of avenues, including: mortgage lending, structured settlement, annuity and lottery payment purchasing, prepaid cards, and access to providers of personal loans. Our direct-to-consumer businesses use digital channels, television, direct mail, and other channels to offer access to financing solutions. We warehouse, securitize, sell or otherwise finance the financial assets that we purchase in transactions that are structured to ultimately generate cash proceeds to us that exceed the purchase price we paid for those assets.
We currently operate our business through two business segments: (i) Structured Settlements and (ii) Home Lending. Our Structured Settlements segment provides liquidity to customers by purchasing structured settlements, annuities and lottery winnings. Structured Settlements also includes corporate activities, payment solutions, pre-settlements and providing (i) access to providers of personal lending and (ii) access to providers of funding for pre-settled legal claims. Our Home Lending segment specializes in originating, selling and servicing residential mortgage loans.
2017 Highlights
In the first half of 2017, we focused on improving the performance of our Structured Settlements business, maintaining adequate liquidity through funding source optimization and rigorous expense controls while continuing to grow our Home Lending business and enhance the value of our mortgage servicing rights.
During the second half of 2017, we completed our consensual restructuring with our lenders and significantly reduced our debt and fortified our balance sheet. Under the terms of the restructuring, we extinguished $449.5 million of our senior credit facility and obtained a new secured revolving credit facility of $70.0 million which is utilized for general corporate purposes and

43

working capital. In addition to reducing the Company's annual debt service from $32.0 million to less than $5.0 million, we reconstituted our Board of Directors to reflect the new ownership of the Company and consequently and pursuant to the Plan, all previously issued and held equity interests were canceled without recovery. The claims under the TRA, as discussed further in Note 24, were discharged and, in consideration, each TRA claimant received its pro rata share of the New Class A common stock and the New Class B common stock of the Company or cash consideration, at the sole election of each holder of a TRA claim. The restructuring was accomplished, and became effective on January 25, 2018, through a voluntary, pre-packaged, in-court process whereby the Company's operating entities, including those serving employees, customers, vendors and suppliers, were unaffected.
We also continued to access the capital markets through the execution of a securitization of our structured settlements assets to extract what we believe was the maximum profitability based on current market conditions and underlying economics. During 2017, the Company completed the pre-funding associated with the 2016-1 securitization, and three securitization transactions which generated $102.6 million in net cash proceeds. In addition, we issued $2.3 million in notes collateralized by the residual asset cash flows and reserve cash associated with the Company's previously executed securitization, which generated $2.0 million in net cash proceeds.
At our Home Lending business, we concentrated on continuing to grow our business through operational scale while focusing on capital market execution and anticipating changes in the interest rate environment. Our Home Lending business achieved loan lock volume and closed loan volume originations of $6.4 billion and $3.8 billion, respectively, as a result of our strong affinity relationships that leveraged the strength of our brand name.
Results of Operations
Comparison of Consolidated Results for the Years Ended December 31, 2017 and 2016
 
Years Ended December 31,
 
2017 vs. 2016
 
2017
 
2016
 
$ Change
 
% Change
 
(In thousands)
Total revenues
$
428,712

 
$
324,672

 
$
104,040

 
32.0
 %
Total expenses
629,775

 
438,027

 
191,748

 
43.8

Loss before income taxes
(201,063
)
 
(113,355
)
 
(87,708
)
 
(77.4
)
Provision (benefit) for income taxes
9,645

 
(15,340
)
 
24,985

 
162.9

Net loss
(210,708
)
 
(98,015
)
 
(112,693
)
 
(115.0
)
Less: net loss attributable to non-controlling interests
(19,375
)
 
(51,158
)
 
31,783

 
62.1

Net loss attributable to The J.G. Wentworth Company
$
(191,333
)
 
$
(46,857
)
 
$
(144,476
)
 
(308.3
)%
 
 
 
 
 
 
 
 
Total TRB Purchases
$
719,503

 
$
713,371

 
$
6,132

 
0.9
 %
Interest rate locks - volume
$
6,433,427

 
$
5,264,222

 
$
1,169,205

 
22.2
 %
Loans closed - volume
$
3,777,689

 
$
3,424,237

 
$
353,452

 
10.3
 %
The $87.7 million increase in our loss before income taxes was principally due to a $62.9 million increase in our pre-tax loss from our Structured Settlements segment that was the result of a $160.1 million of an expense associated with the TRA obligations in connection with its filing for Chapter 11 Cases. The TRA obligations were offset by a $95.1 million increase in realized and unrealized gains on VIE and other finance receivables, long term debt and derivatives driven by the change in the interest rates between the periods and a favorable change in the unrealized loss on our residual interest assets and related debt which were permanently refinanced in September 2016 at which time the Company elected the fair value option for the related debt. In addition, there was a decrease of $24.9 million in pre-tax income generated by our Home Lending segment primarily due to an $8.4 million goodwill impairment charge relating to the 2015 acquisition of Home Lending, and an $11.1 million increase in advertising expense coupled with a $6.5 million increase in compensation and benefits as a result of the Company's plan to grow the business through operational scale.
We recorded a consolidated income tax provision during the year ended December 31, 2017 of $9.6 million compared to an income tax benefit of $15.3 million for the year ended December 31, 2016. Our overall effective tax rate was (4.8)% for the year ended December 31, 2017 compared to an overall effective rate of 13.5% for the year ended December 31, 2016. The change in the Company's effective tax rate was primarily the result of additional operating losses incurred during the year, for which minimal benefit is derived, primarily due to legislative changes that occurred during the fourth quarter that restricted our ability to realize the benefits of certain of our deferred tax assets.

44

The net loss attributable to non-controlling interests represents the portion of loss attributable to the economic interests in JGW LLC held by the non-controlling holders of Common Interests ("Common Interestholders"). The $19.4 million net loss attributable to the non-controlling interests for the year ended December 31, 2017 represents the non-controlling interests' 45.2% weighted average economic interest in JGW LLC's net loss for the year ended December 31, 2017. The $51.2 million net loss attributable to the non-controlling interests for the year ended December 31, 2016 represents the non-controlling interests' 45.5% weighted average economic interest in JGW LLC's net income for the year ended December 31, 2016.
Comparison of Consolidated Results for the Years Ended December 31, 2016 and 2015
 
Years Ended December 31,
 
2016 vs. 2015
 
2016
 
2015
 
$ Change
 
% Change
 
(In thousands)
 
 
Total revenues
$
324,672

 
$
296,367

 
$
28,305

 
9.6
 %
Total expenses
438,027

 
511,723

 
(73,696
)
 
(14.4
)
Loss before income taxes
(113,355
)
 
(215,356
)
 
102,001

 
47.4

Benefit for income taxes
(15,340
)
 
(18,216
)
 
2,876

 
15.8

Net loss
(98,015
)
 
(197,140
)
 
99,125

 
50.3

Less: net loss attributable to non-controlling interests
(51,158
)
 
(101,828
)
 
50,670

 
49.8

Net loss attributable to The J.G. Wentworth Company
$
(46,857
)
 
$
(95,312
)
 
$
48,455

 
50.8
 %
 
 
 
 
 
 
 
 
Total TRB Purchases
$
713,371

 
$
987,618

 
$
(274,247
)
 
(27.8
)%
Interest rate locks - volume (1)
$
5,264,222

 
$
1,290,586

 
$
3,973,636

 
307.9
 %
Loans closed - volume (1)
$
3,424,237

 
$
843,208

 
$
2,581,029

 
306.1
 %
(1) Includes activity since the acquisition of Home Lending on July 31, 2015.
The $102.0 million decrease in our loss before income taxes was principally due to a $75.0 million decrease in our pre-tax loss from our Structured Settlements segment that was the result of: (i) $121.6 million in impairment charges recognized during the year ended December 31, 2015 as compared to $5.5 million in impairment charges recognized during the year ended December 31, 2016 and (ii) a $15.1 million decrease in advertising expense as part of our previously announced cost-saving initiatives, partially offset by a $62.8 million unfavorable change in realized and unrealized gains on VIE and other finance receivables, long term debt and derivatives driven by lower TRB purchases and a decrease in realized and unrealized gains on unsecuritized finance receivables. The decrease in Structured Settlements' pre-tax loss was coupled with an increase of $27.0 million in pre-tax income generated by our Home Lending segment that was driven by growth in interest rate lock volume of approximately $4.0 billion due in part to the low interest rate environment and as a result of only five months of Home Lending's results of operations being included in the Company's consolidated results for the year ended December 31, 2015.
We recorded a consolidated income tax benefit during the year ended December 31, 2016 of $15.3 million compared to a benefit of $18.2 million for the year ended December 31, 2015. Our overall effective tax rate was 13.5% for the year ended December 31, 2016 compared to an overall effective rate of 8.5% for the year ended December 31, 2015. The increase in the overall effective tax rate was due primarily to the impact of the $121.6 million impairment charge on goodwill and intangible assets recorded in 2015 and the Company recorded a valuation allowance of $11.9 million in 2016 due to the uncertainty that it will fully benefit from the losses incurred during the current and prior years. The Company is recording certain deferred tax liabilities as it is now required to file tax returns in jurisdictions where it has no offsetting loss carryforwards.
The net loss attributable to non-controlling interests represents the portion of loss attributable to the economic interests in JGW LLC held by the non-controlling Common Interestholders. The $51.2 million net loss attributable to the non-controlling interests for the year ended December 31, 2016 represents the non-controlling interests' 45.5% weighted average economic interest in JGW LLC's net loss for the year ended December 31, 2016. The $101.8 million net loss attributable to the non-controlling interests for the year ended December 31, 2015 represents the non-controlling interests' 48.3% weighted average economic interest in JGW LLC's net income for the year ended December 31, 2015.

45

Comparison of Structured Settlements Results for the Years Ended December 31, 2017 and 2016
 
 
Years Ended December 31,
 
2017 vs. 2016
 
 
2017
 
2016
 
$ Change
 
% Change
 
 
(In thousands)
REVENUES
 
 

 
 

 
 
 
 
Interest income
 
$
187,208

 
$
189,216

 
$
(2,008
)
 
(1.1
)%
Realized and unrealized gains on VIE and other finance receivables, long-term debt and derivatives
 
112,316

 
17,225

 
95,091

 
552.1

Servicing, broker, and other fees
 
6,556

 
4,875

 
1,681

 
34.5

Realized and unrealized gains on marketable securities, net
 
7,855

 
4,083

 
3,772

 
92.4

Total revenues
 
$
313,935

 
$
215,399

 
$
98,536

 
45.7
 %
 
 
 
 
 
 
 
 
 
EXPENSES
 
 

 
 

 
 
 
 
Advertising
 
$
43,804

 
$
44,858

 
$
(1,054
)
 
(2.3
)%
Interest expense (contractual interest, $231,322) (1)
 
221,413

 
218,519

 
2,894

 
1.3

Compensation and benefits
 
24,956

 
32,172

 
(7,216
)
 
(22.4
)
General and administrative
 
18,873

 
19,978

 
(1,105
)
 
(5.5
)
Professional and consulting
 
21,528

 
12,933

 
8,595

 
66.5

Debt issuance
 
5,878

 
5,117

 
761

 
14.9

Securitization debt maintenance
 
5,314

 
5,605

 
(291
)
 
(5.2
)
Provision for losses
 
2,596

 
3,431

 
(835
)
 
(24.3
)
Depreciation and amortization
 
2,566

 
3,095

 
(529
)
 
(17.1
)
Installment obligations expense, net
 
10,818

 
6,538

 
4,280

 
65.5

Impairment charges and loss on disposal of assets
 
—

 
5,483

 
(5,483
)
 
(100.0
)
Reorganization items, net (2)
 
161,370

 
—

 
161,370

 
100.0

Total expenses
 
$
519,116

 
$
357,729

 
$
161,387

 
45.1
 %
Loss before income taxes
 
(205,181
)
 
(142,330
)
 
(62,851
)
 
(44.2
)
Provision (benefit) for income taxes
 
9,645

 
(15,340
)
 
24,985

 
162.9

Net loss
 
$
(214,826
)
 
$
(126,990
)
 
$
(87,836
)
 
(69.2
)%
 
 
 
 
 
 
 
 
 
TRB PURCHASES
 
 
 
 
 
 
 
 
Guaranteed structured settlements, annuities and lotteries
 
$
614,023

 
$
604,846

 
$
9,177

 
1.5
 %
Life contingent structured settlements and annuities
 
105,480

 
108,525

 
(3,045
)
 
(2.8
)
Total TRB purchases
 
$
719,503

 
$
713,371

 
$
6,132

 
0.9
 %
(1) Contractual interest expense for the year ended December 31, 2017 is related to the term loan payable and presented in accordance with ASC 852.
(2) Reorganization items, net for the year ended December 31, 2017 are presented in accordance with ASC 852 and include (i) $160.1 million of TRA obligations and, (ii) $1.3 million of professional and consulting fees incurred in connection with the Company's bankruptcy proceedings from the Petition Date through December 31, 2017.



46

Revenues
Total revenues for the year ended December 31, 2017 were $313.9 million, an increase of $98.5 million, or 45.7%, from $215.4 million for the year ended December 31, 2016. The increase was primarily attributable to a $95.1 million favorable change in realized and unrealized gains on VIE and other finance receivables, long-term debt and derivatives.
Interest income for the years ended December 31, 2017 and 2016 was comprised of the following:
 
For the years ended December 31,
 
2017 vs. 2016
 
2017
 
2016
 
$ Change
 
% Change
 
(In thousands)
Accretion income on finance receivables
$
179,921

 
$
180,657

 
$
(736
)
 
(0.4
)%
Interest income on installment obligations
2,963

 
2,455

 
508

 
20.7

Interest income on pre-settlement funding transaction receivables
2,882

 
5,162

 
(2,280
)
 
(44.2
)
Interest income on notes receivable
886

 
816

 
70

 
8.6

Other interest income
556

 
126

 
430

 
341.3

Total interest income
$
187,208

 
$
189,216

 
$
(2,008
)
 
(1.1
)%
The $2.3 million decrease in interest income on pre-settlement funding transaction receivables was due to a reduction in the associated VIE and other finance receivables resulting from management's decision to curtail purchases of such assets in April 2015. This amount was offset by an increase of $0.4 million in other interest income primarily due to our residual refinancing transaction on September 2, 2016, whereas the net proceeds from the transaction were placed in an interest bearing cash account. Due to the timing of the transaction and the our subsequent use of the net proceeds, more interest income was earned for the year ended December 31, 2017 as compared to the prior year.
Realized and unrealized gains on VIE and other finance receivables, long-term debt, and derivatives for the years ended December 31, 2017 and 2016 was comprised of the following:
 
 
For the years ended December 31,
 
2017 vs. 2016
 
 
2017
 
2016
 
$ Change
 
% Change
 
 
(In thousands)
Day one gains
 
$
97,112

 
$
113,355

 
$
(16,243
)
 
(14.3
)%
Gains (losses) from changes in fair value subsequent to day one
 
4,163

 
(13,881
)
 
18,044

 
130.0

Total realized and unrealized gains on unsecuritized finance receivables
 
101,275

 
99,474

 
1,801

 
1.8

Realized and unrealized gain (losses) on interest rate swaps related to warehouse facilities
 
182

 
(1,544
)
 
1,726

 
111.8

Total realized and unrealized gains on unsecuritized finance receivables and derivatives
 
101,457

 
97,930

 
3,527

 
3.6

Unrealized gain (losses) on securitized finance receivables, debt and derivatives
 
10,859

 
(77,652
)
 
88,511

 
114.0

Loss on termination of interest rate swaps related to securitized debt
 
—

 
(3,053
)
 
3,053

 
100.0

Total realized and unrealized gains (losses) on securitized finance receivables, debt and derivatives
 
10,859

 
(80,705
)
 
91,564

 
113.5

Total realized and unrealized gains on finance receivables, securitized debt and derivatives
 
$
112,316

 
$
17,225

 
$
95,091

 
552.1
 %
Total realized and unrealized gains on unsecuritized finance receivables represent: (i) unrealized gains and losses on finance receivables acquired from customers prior to their securitization and (ii) realized gains and losses on finance receivables acquired from customers resulting from their inclusion in direct asset sale transactions.

47

Newly acquired finance receivable assets are accounted for at fair value until they are securitized or disposed of pursuant to a direct asset sale. Subsequent to acquisition but prior to securitization or sale, the Company generally borrows against purchased finance receivables pursuant to one of its revolving credit facilities. When the Company borrows against its finance receivables, it transfers the encumbered assets into a VIE. If the finance receivables are securitized, immediately prior to securitization, the securitized assets are adjusted to their current fair value and the resulting change in fair value is included in gains/(losses) from changes in fair value subsequent to day one. If the finance receivables are included in a direct asset sale, the previously recognized unrealized gains/(losses) are reversed and the difference between the purchase price and sales price is recorded as a realized gain and included in gains/(losses) from changes in fair value subsequent to day one. The difference between the price paid to acquire finance receivables and their fair value at the end of the month acquired is referred to as "day one gains." Changes in fair value of finance receivables acquired in subsequent periods are referred to as "gains (losses) from changes in fair value subsequent to day one."
Total realized and unrealized gains on unsecuritized finance receivables for the year ended December 31, 2017 increased $1.8 million from the year ended December 31, 2016 primarily due to an increase of $6.1 million, or 0.9%, in guaranteed and life contingent structured settlement, annuity and lottery TRB purchases to $719.5 million for the year ended December 31, 2017, as compared to $713.4 million for the year ended December 31, 2016.
The $0.2 million gain on interest rate swaps related to warehouse facilities during the year ended December 31, 2017 was the result of the termination of interest rate swaps with a notional value of $21.8 million that were executed as part of our strategy to hedge interest rate risk. The $1.5 million loss on interest rate swaps related to warehouse facilities during the year ended December 31, 2016 was the result of the termination of interest rate swaps with a notional value of $75.2 million that were executed as part of our strategy to hedge interest rate risk.
The $88.5 million increase in unrealized gains (losses) on securitized finance receivables, debt and derivatives was primarily due to a $74.5 million favorable change in the unrealized loss on our residual interest assets and related debt which were permanently refinanced in September 2016 at which time the Company elected the fair value option for the related debt. Prior to refinancing the residual interest assets, the related debt was held at cost with no associated unrealized gain or loss. In addition to the favorable change related to our residual interest assets and related debt, the change was due to (i) a net $8.7 million favorable change in unrealized gains on derivatives resulting principally from movements in the interest rates, and (ii) a $5.3 million favorable change in the unrealized loss on the securitized finance receivables, debt and derivatives associated with the Peachtree Structured Settlements LLC permanent financing facility primarily due to an early amortization event that occurred in the first quarter of 2016 which resulted in future excess cash flows being applied to the prepayment of the outstanding debt and derivatives.
There was no loss on the termination of interest rate swaps related to securitized debt during the year ended December 31, 2017. The $3.1 million loss on termination of interest rate swaps related to securitized debt during the year ended December 31, 2016 represents the loss on the termination of interest rate swaps related to the Peachtree Structured Settlements, LLC ("PSS") securitized debt that had a notional value of $13.8 million.
Realized and unrealized gains on marketable securities, net, was a $7.9 million gain for the year ended December 31, 2017, an increase of $3.8 million from the $4.1 million net gain for the year ended December 31, 2016, due to higher investment returns on marketable securities. The increase was primarily offset by a corresponding increase in installment obligations expense, net. These amounts relate to the marketable securities and installment obligations payable on our consolidated balance sheets. The marketable securities are owned by us but are held to fully offset our installment obligations liability. Therefore, increases or decreases in gains on marketable securities do not impact our net income.
Expenses 
Total expenses for the year ended December 31, 2017 were $519.1 million, an increase of $161.4 million, or 45.1%, from expenses of $357.7 million for the year ended December 31, 2016.
Advertising expense, which consists of our marketing costs including television, internet, direct mail and other related expenses, decreased to $43.8 million for the year ended December 31, 2017 from $44.9 million for the year ended December 31, 2016, primarily due to a $7.0 million decrease in our internet, direct mailing, and other advertising expenses offset by a $5.9 million increase in our television spend. We continually assess the effectiveness of our advertising initiatives and adjust the timing, investment and advertising channels on an ongoing basis.
Interest expense, which includes interest on our securitization and other VIE long-term debt, warehouse facilities and our term loan, increased by 1.3% to $221.4 million for the year ended December 31, 2017 from $218.5 million for the year ended December 31, 2016. The $2.9 million increase was primarily due to the interest expense associated with the increased debt from the permanent refinancing of the Residual Term Facility in September 2016 and the JGW-S LC II (2011-A) facility, partially offset by a $1.1 million decrease in interest expense on our term loan payable because as of the date of filing for Chapter 11 Cases, the Company ceased recording interest expense.

48

Compensation and benefits expense decreased to $25.0 million for the year ended December 31, 2017 from $32.2 million for the year ended December 31, 2016, primarily due to a $6.1 million decrease in salaries, incentives, payroll taxes and share-based compensation that resulted from a combination of lower headcount and a $1.9 million decrease in severance expense between periods as a result of the cost savings activities during the year ended December 31, 2016.
Professional and consulting costs increased to $21.5 million for the year ended December 31, 2017 from $12.9 million for the year ended December 31, 2016. The $8.6 million increase was primarily due to $12.7 million in third party fees incurred prior to the Company's voluntary filing for Chapter 11 Cases, offset by a $1.8 million decrease related to reimbursements for various settlements and $1.1 million decrease in client-related legal and other professional fees.
Reorganization items, net, of $161.4 million for the period from December 12, 2017 through December 31, 2017, primarily represent $160.1 million of an expense associated with the TRA obligations in connection with our filing for Chapter 11 Cases. In addition, the Company recorded $1.3 million of professional and consulting fee related to its restructuring.
During the second quarter of 2016, we tested for potential impairment relating to the Structured Settlements segment's indefinite-lived trade name and finite-lived customer-relationships intangible assets that were acquired in connection with the 2011 acquisition of Orchard Acquisition Company. As a result of this analysis, we determined the trade name and the customer-relationships intangible assets within the Structured Settlements reporting unit were impaired and recorded an impairment charge of $5.5 million in the condensed consolidated statements of operations for the year ended December 31, 2016. The $5.5 million impairment charge was comprised of the following: (i) a $2.8 million write-down of the trade name and (ii) a $2.7 million write-down of the customer relationships. We also determined that the remaining useful lives of our intangible assets within the Structured Settlements reporting unit were less than previously assigned and consequently revised them to their currently estimated useful lives of approximately three years. We also determined in connection with this analysis that the trade name is a finite-lived asset.
    
 

49

Comparison of Structured Settlements Results for the Years Ended December 31, 2016 and 2015
 
 
Years Ended December 31,
 
2016 vs. 2015
 
 
2016
 
2015
 
$ Change
 
% Change
 
 
(In thousands)
REVENUES
 
 

 
 

 
 
 
 
Interest income
 
$
189,216

 
$
189,394

 
$
(178
)
 
(0.1
)%
Realized and unrealized gains on VIE and other finance receivables, long-term debt and derivatives
 
17,225

 
80,023

 
(62,798
)
 
(78.5
)
Servicing, broker, and other fees
 
4,875

 
4,859

 
16

 
0.3

Realized and unrealized gains (losses) on marketable securities, net
 
4,083

 
(4,641
)
 
8,724

 
188.0

Total revenues
 
$
215,399

 
$
269,635

 
$
(54,236
)
 
(20.1
)%
 
 
 
 
 
 
 
 
 
EXPENSES
 
 

 
 

 
 
 
 
Advertising
 
$
44,858

 
$
59,961

 
$
(15,103
)
 
(25.2
)%
Interest expense
 
218,519

 
207,099

 
11,420

 
5.5

Compensation and benefits
 
32,172

 
38,997

 
(6,825
)
 
(17.5
)
General and administrative
 
19,978

 
18,679

 
1,299

 
7.0

Professional and consulting
 
12,933

 
20,801

 
(7,868
)
 
(37.8
)
Debt issuance
 
5,117

 
6,741

 
(1,624
)
 
(24.1
)
Securitization debt maintenance
 
5,605

 
5,912

 
(307
)
 
(5.2
)
Provision for losses
 
3,431

 
4,546

 
(1,115
)
 
(24.5
)
Depreciation and amortization
 
3,095

 
3,878

 
(783
)
 
(20.2
)
Installment obligations expense (income), net
 
6,538

 
(1,225
)
 
7,763

 
633.7

Impairment charges and loss on disposal of assets
 
5,483

 
121,594

 
(116,111
)
 
(95.5)
Total expenses
 
$
357,729

 
$
486,983

 
$
(129,254
)
 
(26.5
)%
Loss before income taxes
 
(142,330
)
 
(217,348
)
 
75,018

 
34.5

Benefit for income taxes
 
(15,340
)
 
(18,614
)
 
3,274

 
17.6

Net loss
 
$
(126,990
)
 
$
(198,734
)
 
$
71,744

 
36.1
 %
 
 
 
 
 
 
 
 
 
TRB PURCHASES
 
 
 
 
 
 
 
 
Guaranteed structured settlements, annuities and lotteries
 
$
604,846

 
$
879,159

 
$
(274,313
)
 
(31.2
)%
Life contingent structured settlements and annuities
 
108,525

 
97,696

 
10,829

 
11.1

Pre-settlement fundings
 
—

 
10,763

 
(10,763
)
 
(100.0
)
Total TRB purchases
 
$
713,371

 
$
987,618

 
$
(274,247
)
 
(27.8
)%
Revenues
Total revenues for the year ended December 31, 2016 were $215.4 million, a decrease of $54.2 million, or 20.1%, from $269.6 million for the year ended December 31, 2015. The decrease was primarily attributable to a $62.8 million unfavorable change in realized and unrealized gains on VIE and other finance receivables, long-term debt and derivatives, partially offset by an $8.7 million increase in realized and unrealized gains on marketable securities, net.

50

Interest income for the years ended December 31, 2016 and 2015 was comprised of the following:
 
For the years ended December 31,
 
2016 vs. 2015
 
2016
 
2015
 
$ Change
 
% Change
 
(In thousands)
Accretion income on finance receivables
$
180,657

 
$
176,048

 
$
4,609

 
2.6
 %
Interest income on installment obligations
2,455

 
3,416

 
(961
)
 
(28.1
)
Interest income on pre-settlement funding transaction receivables
5,162

 
9,117

 
(3,955
)
 
(43.4
)
Interest income on notes receivable
816

 
773

 
43

 
5.6

Other interest income
126

 
40

 
86

 
215.0

Total interest income
$
189,216

 
$
189,394

 
$
(178
)
 
(0.1
)%
The $4.6 million increase in accretion income on finance receivables was primarily due to an increase in the average fair value discount rate used to calculate interest income on the associated securitized assets, partially offset by a decrease in our average outstanding securitized finance receivables balance during the periods. The $4.0 million decrease in interest income on pre-settlement funding transaction receivables was due to a reduction in the associated VIE and other finance receivables resulting from management's decision to curtail purchases of such assets in April 2015.
Realized and unrealized gains on VIE and other finance receivables, long-term debt, and derivatives for the years ended December 31, 2016 and 2015 was comprised of the following:
 
 
For the years ended December 31,
 
2016 vs. 2015
 
 
2016
 
2015
 
$ Change
 
% Change
 
 
(In thousands)
 
 
Day one gains
 
$
113,355

 
$
171,200

 
$
(57,845
)
 
(33.8
)%
Losses from changes in fair value subsequent to day one
 
(13,881
)
 
(15,804
)
 
1,923

 
12.2

Total realized and unrealized gains on unsecuritized finance receivables
 
99,474

 
155,396

 
(55,922
)
 
(36.0
)
Realized and unrealized losses on interest rate swaps related to warehouse facilities
 
(1,544
)
 
(132
)
 
(1,412
)
 
(1,069.7
)
Total realized and unrealized gains on unsecuritized finance receivables and derivatives
 
97,930

 
155,264

 
(57,334
)
 
(36.9
)
Unrealized losses on securitized finance receivables, debt and derivatives
 
(77,652
)
 
(75,834
)
 
(1,818
)
 
(2.4
)
Gain on extinguishment of securitized debt
 
—

 
593

 
(593
)
 
(100.0
)
Loss on termination of interest rate swaps related to securitized debt
 
(3,053
)
 
—

 
(3,053
)
 
100.0

Total realized and unrealized losses on securitized finance receivables, debt and derivatives
 
(80,705
)
 
(75,241
)
 
(5,464
)
 
(7.3
)
Total realized and unrealized gains on finance receivables, securitized debt and derivatives
 
$
17,225

 
$
80,023

 
$
(62,798
)
 
(78.5
)%
Total realized and unrealized gains on unsecuritized finance receivables represent: (i) unrealized gains and losses on finance receivables acquired from customers prior to their securitization and (ii) realized gains and losses on finance receivables acquired from customers resulting from their inclusion in direct asset sale transactions.
Newly acquired finance receivable assets are accounted for at fair value until they are securitized or disposed of pursuant to a direct asset sale. Subsequent to acquisition but prior to securitization or sale, the Company generally borrows against purchased finance receivables pursuant to one of its revolving credit facilities. When the Company borrows against its finance receivables, it transfers the encumbered assets into a VIE. If the finance receivables are securitized, immediately prior to securitization, the securitized assets are adjusted to their current fair value and the resulting change in fair value is included in gains/(losses) from changes in fair value subsequent to day one. If the finance receivables are included in a direct asset sale, the previously recognized unrealized gains/(losses) are reversed and the difference between the purchase price and sales price is recorded as a realized gain and included in gains/(losses) from changes in fair value subsequent to day one.

51

Total realized and unrealized gains on unsecuritized finance receivables for the year ended December 31, 2016 decreased $55.9 million from the year ended December 31, 2015 primarily due to a decrease of $263.5 million, or 27.0%, in guaranteed and life contingent structured settlement, annuity and lottery TRB purchases, from $976.9 million for the year ended December 31, 2015 to $713.4 million for the year ended December 31, 2016.
The $1.5 million loss on interest rate swaps related to warehouse facilities during the year ended December 31, 2016 was the result of the termination of interest rate swaps with a notional value of $75.2 million that were executed as part of our strategy to hedge interest rate risk. The $0.1 million loss on interest rate swaps related to warehouse facilities during the year ended December 31, 2015 was the result of the termination of interest rate swaps with a notional value of $61.1 million that were executed as part of our strategy to hedge interest rate risk.
The $1.8 million increase in unrealized losses on securitized finance receivables, debt and derivatives was primarily the result of: (i) a $9.4 million unfavorable change in the unrealized gain (loss) on the securitized finance receivables, debt and derivatives associated with the Peachtree Structured Settlements LLC permanent financing facility primarily due to an early amortization event that occurred during the first quarter of 2016 which resulted in future excess cash flows being applied to the prepayment of the outstanding debt and derivatives and (ii) a $9.1 million unfavorable change in the unrealized gain (loss) on other securitized finance receivables (other than the associated residual interests), securitized debt and derivatives resulting principally from movements in the fair value discount rates used to value these items, partially offset by a $16.7 million favorable change in the unrealized loss on our residual interests as a result of movement in the fair value interest rate used to value our residual interest cash flows during the year ended December 31, 2016 compared to the prior year.
The $0.6 million gain on extinguishment of securitized debt during the year ended December 31, 2015 resulted from the early repayment of the 2004-A securitization debt issued by Structured Receivables Finance #1, LLC. The associated finance receivables subsequently were included in the 2015-1 securitization. There was no gain on extinguishment of securitized debt during the year ended December 31, 2016.
The $3.1 million loss on termination of interest rate swaps related to securitized debt during the year ended December 31, 2016 represents the loss on the termination of interest rate swaps related to the Peachtree Structured Settlements, LLC ("PSS") securitized debt that had a notional value of $13.8 million. There was no loss on the termination of interest rate swaps related to securitized debt during the year ended December 31, 2015.
Realized and unrealized gains on marketable securities, net, was a $4.1 million gain for the year ended December 31, 2016, a favorable change from the $4.6 million loss for the year ended December 31, 2015, due to higher investment returns on marketable securities. The increase was primarily offset by a corresponding increase in installment obligations expense (income), net. These amounts relate to the marketable securities and installment obligations payable on our consolidated balance sheets. The marketable securities are owned by us but are held to fully offset our installment obligations liability. Therefore, increases or decreases in gains on marketable securities do not impact our net income.
Expenses
Total expenses for the year ended December 31, 2016 were $357.7 million, a decrease of $129.3 million, or 26.5%, from expenses of $487.0 million for the year ended December 31, 2015.
Advertising expense, which consists of our marketing costs including television, internet, direct mail and other related expenses, decreased to $44.9 million for the year ended December 31, 2016 from $60.0 million for the year ended December 31, 2015, primarily due to a $10.0 million decrease in our television spend and a $5.1 million decrease in our internet, direct mailing, and other advertising expenses. These actions were part of our previously announced plan to turn around the Structured Settlements segment in part by overhauling our media spend. We continually assess the effectiveness of our advertising initiatives and adjust the timing, investment and advertising channels on an ongoing basis.
Interest expense, which includes interest on our securitization and other VIE long-term debt, warehouse facilities and our term loan, increased by 5.5% to $218.5 million for the year ended December 31, 2016 from $207.1 million for the year ended December 31, 2015. The $11.4 million increase was primarily attributable to a $11.3 million increase in interest expense associated with our VIE securitized debt that resulted from an increase in the average outstanding balance between periods, coupled with an increase in the interest rate used to calculate interest expense.
Compensation and benefits expense decreased to $32.2 million for the year ended December 31, 2016 from $39.0 million for the year ended December 31, 2015, primarily due to an $8.1 million decrease in salaries, commissions and payroll taxes that resulted from a combination of lower headcount and lower commissions due to lower TRB purchase volume in the current year compared to the prior year.
Professional and consulting costs decreased to $12.9 million for the year ended December 31, 2016 from $20.8 million for the year ended December 31, 2015. The $7.9 million decrease was primarily due to third-party fees incurred in connection with the 2015 acquisition of Home Lending and an overall decrease in the use of outside consultants as part of our cost-savings initiatives.

52

Debt issuance costs decreased to $5.1 million for the year ended December 31, 2016 from $6.7 million for the year ended December 31, 2015. The $5.1 million of debt issuance costs incurred in the year ended December 31, 2016 related to: (i) $0.5 million in fees to amend certain provisions of our previously issued securitization debt, (ii) $2.6 million in fees paid in connection with the issuance of $207.5 million of notes payable that are collateralized by the residual asset cash flows and reserve cash related to 36 of our securitizations, and (iii) $2.0 million in fees paid related to the 2016-1 securitization transaction that closed in October 2016. The $6.7 million of debt issuance costs incurred in the year ended December 31, 2015 related to fees incurred in connection with three securitization transactions that closed during 2015. During the year ended December 31, 2016, we issued $117.3 million in securitized debt, a decrease of $358.6 million from the $475.9 million in securitized debt issued in 2015, due primarily to the Company electing to complete two direct asset sales in the first nine months of 2016 which do not result in the issuance of securitized debt. Underwriting fees associated with our securitizations are calculated as a percentage of the principal amount of debt issued.
During the second quarter of 2016, we re-evaluated our projections for our Structured Settlements segment based on lower than anticipated results that were included in the prior year's annual impairment test and a continued decline in the stock price of our Class A common stock. Accordingly, we determined these events constituted a triggering event requiring the Company to test the indefinite-lived trade name and finite-lived customer-relationships intangible assets acquired in connection with the 2011 acquisition of OAC for potential impairment. As a result of this analysis, we determined the trade name and the customer-relationships intangible assets within the Structured Settlements reporting unit were impaired and recorded an impairment charge of $5.5 million in our consolidated statements of operations. The $5.5 million impairment charge was comprised of the following: (i) a $2.8 million write-down of the trade name and (ii) a $2.7 million write-down of the finite-lived customer relationships. We also determined that the remaining useful lives of our intangible assets within the Structured Settlements reporting unit were less than previously assigned and consequently revised them to their currently estimated useful lives of approximately three years. We also determined in connection with this analysis that the trade name is a finite-lived asset.
During the year ended December 31, 2015, based on review of our projections for our Structures Settlements segment based on lower than anticipated results, a significant decline in the stock price of our Class A common stock, and a re-assessment of the reporting unit's brand strategy, we recorded impairment charges of $121.6 million comprised of the following: (i) an $85.0 million write-down of goodwill, (ii) a $35.5 million write-down of the indefinite-lived trade name, and (iii) a $1.1 million write-down of other intangible assets.

53

Home Lending
Comparison of Home Lending Results for the Years Ended December 31, 2017 and 2016
 
 
Years Ended December 31,
 
2017 vs. 2016
 
 
2017
 
2016
 
$ Change
 
% Change
 
 
(Dollars in thousands)
REVENUES
 
 
 
 
 
 
 
 
Interest income
 
$
5,032

 
$
3,816

 
$
1,216

 
31.9
 %
Realized and unrealized gains on sale of mortgage loans held for sale, net of direct costs
 
72,459

 
75,102

 
(2,643
)
 
(3.5
)
Changes in mortgage servicing rights, net
 
14,437

 
12,410

 
2,027

 
16.3

Servicing, broker, and other fees
 
12,070

 
8,949

 
3,121

 
34.9

Loan origination fees
 
10,779

 
8,996

 
1,783

 
19.8

Total revenues
 
$
114,777

 
$
109,273

 
$
5,504

 
5.0
 %
 
 
 
 
 
 
 
 
 
EXPENSES
 
 
 
 
 
 
 
 
Advertising
 
$
21,543

 
$
10,365

 
$
11,178

 
107.8
 %
Interest expense
 
8,084

 
5,980

 
2,104

 
35.2

Compensation and benefits
 
54,121

 
47,578

 
6,543

 
13.8

General and administrative
 
8,700

 
6,892

 
1,808

 
26.2

Professional and consulting
 
2,130

 
1,822

 
308

 
16.9

Provision for losses
 
2,264

 
2,527

 
(263
)
 
(10.4
)
Direct subservicing costs
 
3,868

 
3,415

 
453

 
13.3

Depreciation and amortization
 
1,580

 
1,719

 
(139
)
 
(8.1
)
Impairment charges and loss on disposal of assets
 
8,369

 
—

 
8,369

 
100.0

Total expenses
 
$
110,659

 
$
80,298

 
$
30,361

 
37.8
 %
Income before income taxes
 
4,118

 
28,975

 
(24,857
)
 
(85.8
)
Net income
 
$
4,118

 
$
28,975

 
$
(24,857
)
 
(85.8
)%
 
 
 
 
 
 
 
 
 
Mortgage Originations:
 
 
 
 
 
 
 
 
Interest rate locks - units
 
24,529

 
20,078

 
4,451

 
22.2
 %
Interest rate locks - volume
 
$
6,433,427

 
$
5,264,222

 
$
1,169,205

 
22.2
 %
Loans closed - units
 
14,454

 
12,886

 
1,568

 
12.2
 %
Loans closed - volume
 
$
3,777,689

 
$
3,424,237

 
$
353,452

 
10.3
 %
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2017
 
Balance at December 31, 2016
Mortgage Servicing:
 
(Dollars in thousands)
Loan count - servicing
 
21,974
 
 
16,817
 
Average loan amount
 
$
240
 
 
$
241
 
Average interest rate
 
3.61
%
 
3.57
 %
Revenues
Total revenues for the year ended December 31, 2017 were $114.8 million, an increase of $5.5 million from $109.3 million for the year ended December 31, 2016. The increase was primarily attributable to a $3.1 million increase in servicing, broker and other fees coupled with increases of $2.0 million in changes in mortgage servicing rights, net and $1.8 million in loan origination fees.    
Interest income earned during the years ended December 31, 2017 and 2016 was $5.0 million and $3.8 million, respectively. Interest income principally relates to our mortgage loans held for sale, at fair value, which is recognized in income prior to the loan being sold, and is based on the principal amount outstanding and contractual interest rates.

54

In evaluating performance, we net the gains on mortgage loans sold, unrealized gains on mortgage loans held for sale, interest rate lock commitments ("IRLCs"), and associated derivative instruments (i.e., forward sale commitments to deliver mortgage loans and forward sales of MBS) resulting from fair value mark-to-market adjustments, with direct costs such as fees paid to third parties to originate and sell the associated mortgage loans, and present it as realized and unrealized gains on sale of mortgage loans held for sale, net of direct costs, in our consolidated statements of operations. During the year ended December 31, 2017, we generated $81.6 million in gross revenue from the sale of mortgage loans and netted against it $7.8 million in direct costs, as compared to the year ended December 31, 2016, when we generated $82.2 million in gross revenue from the sale of mortgage loans and netted against it $7.1 million in direct costs.
U.S. GAAP requires that MSRs initially be recorded at fair value at the time the underlying mortgage loans are sold with servicing rights retained. MSRs are subsequently measured at fair value at each reporting period. The increase (decrease) in the fair value of our MSRs portfolio resulting from: (i) loans sold with servicing rights retained; (ii) the runoff of our MSRs portfolio including payoffs; and (iii) changes in fair valuation inputs and assumptions is included in changes in MSRs, net, in our consolidated statements of operations. During the year ended December 31, 2017, the value of our MSRs increased by $14.4 million due to the $1.2 billion net increase in the unpaid principal balance of our MSR portfolio, offset by a $0.5 million decrease in the fair value of MSRs resulting from the increase in mortgage interest rates during the year. During the year ended December 31, 2016, the fair value of our MSRs increased by $12.4 million primarily due to the $1.1 billion net increase in the unpaid principal balance of our MSR portfolio, coupled with a $2.8 million increase in the fair value of MSRs resulting from the change in mortgage interest rates during the year.
Servicing, broker and other fees represent revenue recognized for servicing mortgage loans for various investors that are based on a contractual percentage of the outstanding principal balance. Servicing, broker and other fees during the years ended December 31, 2017 and 2016 was $12.1 million and $8.9 million, respectively. The primary driver of our servicing revenue is our MSR portfolio. The outstanding unpaid principal balance of serviced mortgages was $5.3 billion as of December 31, 2017, an increase of $1.2 billion from the prior year unpaid principal balance of serviced mortgages of $4.1 billion.
Loan origination fee income earned during the years ended December 31, 2017 and 2016 was $10.8 million and $9.0 million, respectively, which represents revenue earned from originating mortgage loans and generally represents flat, per loan fee amounts.
Advertising expense, which consists of our marketing costs including television, internet, direct mail and other related expenses, increased to $21.5 million for the year ended December 31, 2017 from $10.4 million for the year ended December 31, 2016, primarily due to a $11.1 million increase in line with the direct-to-consumer growth plan and the response to the competitive environment due to shifts in consumer demand and increased costs in obtaining leads due to the increase in interest rates in the period. We continually assess the effectiveness of our advertising initiatives and adjust the timing, spend and advertising channels on an ongoing basis.
Interest expense represents interest on Home Lending's three warehouse credit facilities with various financial institutions used to originate mortgage loans held for sale that had a combined maximum borrowing capacity of $340.0 million as of December 31, 2017 and a single operating line of credit, which is collateralized by our MSRs, with a maximum borrowing capacity of $10.0 million as of December 31, 2017. Interest expense increased to $8.1 million for the year ended December 31, 2017 from $6.0 million for the year ended December 31, 2016, primarily due to: (i) an increase in borrowings in line with the direct-to-consumer growth plan and (ii) an increase in interest rates, as compared to the prior year.
Compensation and benefits includes salaries for Home Lending employees, commissions paid to loan officers, applicable taxes and the cost of providing employee benefits. During the year ended December 31, 2017, Compensation and benefits expense increased to $54.1 million from $47.6 million for the year ended December 31, 2016 primarily due to higher headcount and higher commissions resulting from a $353.5 million increase in closed loan production in the twelve months ended December 31, 2017 compared to the prior year.
Home Lending's general and administrative expense primarily represents the cost to lease and operate the segment's headquarters in Woodbridge, Virginia and the various retail and direct lending call center offices across the country. General and administrative expense increased to $8.7 million for the year ended December 31, 2017 from $6.9 million for the year ended December 31, 2016. The $1.8 million increase was primarily due to a $0.5 million increase in rent expense associated with lease termination charges and additional rent expenses incurred in connection with the Company's new leasing arrangement, and an $0.8 million increase in software and office expenses as a result of the increase in closed loan production in the twelve months ended December 31, 2017 compared to the prior year.
The provision for losses represents estimates of losses to be incurred on the repurchase or indemnification of purchasers of mortgage loans. Certain sales contract and GSE standards require us to repurchase a loan or indemnify the purchaser or insurer for losses if a borrower fails to make initial loan payments or if the accompanying mortgage loan fails to meet certain customary representations and warranties, such as the nature and extent of underwriting standards. In the event of a breach of the representations and warranties, we may be required to either repurchase the loan or indemnify the purchaser for losses it sustains on the loan. We

55

record a provision for estimated repurchases and loss indemnification on loans sold, which is charged to the provision for losses. In addition, the provision for losses also includes a reserve for potential losses related to impaired loans within our servicing portfolio, which include various factors such as historical loss experience, actual write-offs during the period, known delinquent loans and GSE guidelines. There was no significant change in the provision for losses in our servicing portfolio for the year ended December 31, 2017 as compared to the year ended December 31, 2016.
Comparison of Home Lending Results for the Years Ended December 31, 2016 and 2015
 
 
Years Ended December 31,
 
2016 vs. 2015
 
 
2016
 
2015
 
$ Change
 
% Change
 
 
(Dollars in thousands)
REVENUES
 
 
 
 
 
 
 
 
Interest income
 
$
3,816

 
$
809

 
$
3,007

 
371.7
 %
Realized and unrealized gains on sale of mortgage loans held for sale, net of direct costs
 
75,102

 
18,590

 
56,512

 
304.0

Changes in mortgage servicing rights, net
 
12,410

 
1,649

 
10,761

 
652.6

Servicing, broker, and other fees
 
8,949

 
3,141

 
5,808

 
184.9

Loan origination fees
 
8,996

 
2,543

 
6,453

 
253.8

Total revenues
 
$
109,273

 
$
26,732

 
$
82,541

 
308.8
 %
 
 
 
 
 
 
 
 
 
EXPENSES
 
 
 
 
 
 
 
 
Advertising
 
$
10,365

 
$
3,859

 
$
6,506

 
168.6
 %
Interest expense
 
5,980

 
1,446

 
4,534

 
313.6

Compensation and benefits
 
47,578

 
13,659

 
33,919

 
248.3

General and administrative
 
6,892

 
2,378

 
4,514

 
189.8

Professional and consulting
 
1,822

 
685

 
1,137

 
166.0

Provision for losses
 
2,527

 
1,030

 
1,497

 
145.3

Direct subservicing costs
 
3,415

 
948

 
2,467

 
260.2

Depreciation and amortization
 
1,719

 
735

 
984

 
133.9

Total expenses
 
$
80,298

 
$
24,740

 
$
55,558

 
224.6
 %
Income before income taxes
 
28,975

 
1,992

 
26,983

 
1,354.6

Provision for income taxes
 
—

 
398

 
(398
)
 
(100.0
)
Net income
 
$
28,975

 
$
1,594

 
$
27,381

 
1,717.8
 %
 
 
 
 
 
 
 
 
 
Mortgage Originations:
 
 
 
 
 
 
 
 
Interest rate locks - units
 
20,078

 
5,085

 
14,993

 
294.8
 %
Interest rate locks - volume
 
$
5,264,222

 
$
1,290,586

 
$
3,973,636

 
307.9
 %
Loans closed - units
 
12,886

 
3,291

 
9,595

 
291.6
 %
Loans closed - volume
 
$
3,424,237

 
$
843,208

 
$
2,581,029

 
306.1
 %
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2016
 
Balance at December 31, 2015
Mortgage Servicing:
 
(Dollars in thousands)
Loan count - servicing
 
16,817
 
 
12,504
 
Average loan amount
 
$
241
 
 
$
238
 
Average interest rate
 
3.57
%
 
3.72
 %
Our Home Lending segment's results for the year ended December 31, 2016 are not directly comparable to the same period in the prior year since we acquired Home Lending on July 31, 2015. As a result, only five months of Home Lending's results of operations were included in the prior year's reporting period.

56

Interest income principally relates to our mortgage loans held for sale, at fair value, which is recognized in income prior to the loan being sold, and is based on the principal amount outstanding and contractual interest rates.
In evaluating performance, we net the gains on mortgage loans sold, unrealized gains on mortgage loans held for sale, interest rate lock commitments ("IRLCs"), and associated derivative instruments (i.e., forward sale commitments to deliver mortgage loans and forward sales of MBS) resulting from fair value mark-to-market adjustments, with direct costs such as fees paid to third parties to originate and sell the associated mortgage loans, and present it as realized and unrealized gains on sale of mortgage loans held for sale, net of direct costs, in our consolidated statements of operations. During the year ended December 31, 2016, we generated $82.2 million in gross revenue from the sale of mortgage loans and netted against it $7.1 million in direct costs, as compared to the year ended December 31, 2015, when we generated $20.5 million in gross revenue from the sale of mortgage loans and netted against it $1.9 million in direct costs.
U.S. GAAP requires that MSRs initially be recorded at fair value at the time the underlying mortgage loans are sold with servicing rights retained. MSRs are subsequently measured at fair value at each reporting period. The increase (decrease) in the fair value of our MSRs portfolio resulting from: (i) loans sold with servicing rights retained; (ii) the runoff of our MSRs portfolio including payoffs; and (iii) changes in fair valuation inputs and assumptions is included in changes in MSRs, net, in our consolidated statements of operations. During the year ended December 31, 2016, the value of our MSRs increased by $12.4 million due to the $1.1 billion net increase in the unpaid principal balance of our MSRs portfolio, coupled with a $2.8 million increase in the fair value of MSRs resulting from the increase in mortgage interest rates during the year. From the date of acquisition through December 31, 2015, the fair value of our MSRs increased by $1.6 million primarily due to the $212.4 million net increase in the unpaid principal balance of our MSRs portfolio.
Servicing, broker and other fees represent revenue recognized for servicing mortgage loans for various investors that are based on a contractual percentage of the outstanding principal balance. The primary driver of our servicing revenue is our MSRs portfolio. The outstanding unpaid principal balance of serviced mortgages was $4.1 billion as of December 31, 2016, an increase of $1.1 billion from the prior year unpaid principal balance of serviced mortgages of $3.0 billion.
Loan origination fee income earned during the years ended December 31, 2016 and 2015 was $9.0 million and $2.5 million, respectively, which represents revenue earned from originating mortgage loans and generally represents flat, per loan fee amounts.
Advertising expense consists of our marketing costs including television, internet, direct mail and other related expenses. Advertising expense for the five months ended December 31, 2015 included $0.7 million in costs associated with the re-branding of WestStar Mortgage Inc. as J.G. Wentworth Home Lending, Inc. (and ultimately J. G. Wentworth Home Lending, LLC) and the production costs for new television commercials that began to air in the third quarter of 2015.
Interest expense represents interest on Home Lending's: (i) five warehouse credit facilities with various financial institutions used to originate mortgage loans held for sale that had a combined maximum borrowing capacity of $365.0 million as of December 31, 2016; and (ii) a single operating line of credit, which is collateralized by our MSRs, with a maximum borrowing capacity of $10.0 million as of December 31, 2016.
Compensation and benefits includes salaries for Home Lending employees, commissions paid to loan officers, applicable taxes and the cost of providing employee benefits. During the year ended December 31, 2016, Home Lending recorded severance charges of $0.5 million related primarily to the departure of two former owners of the acquired entity.
Home Lending's general and administrative expense primarily represents the cost to lease and operate the segment's headquarters in Woodbridge, Virginia and the various retail and direct lending call center offices across the country.
The provision for losses represents estimates of losses to be incurred on the repurchase or indemnification of purchasers of mortgage loans. Certain sales contract and GSE standards require us to repurchase a loan or indemnify the purchaser or insurer for losses if a borrower fails to make initial loan payments or if the accompanying mortgage loan fails to meet certain customary representations and warranties, such as the nature and extent of underwriting standards. In the event of a breach of the representations and warranties, we may be required to either repurchase the loan or indemnify the purchaser for losses it sustains on the loan. We record a provision for estimated repurchases and loss indemnification on loans sold, which is charged to the provision for losses. In addition, the provision for losses also includes a reserve for potential losses related to impaired loans within our servicing portfolio, which include various factors such as historical loss experience, actual write-offs during the period, known delinquent loans and GSE guidelines.

57

Reconciliation of our Segments' Net Loss (Income) to Net (Loss) Income Attributable to The J.G. Wentworth Company
The table below presents a reconciliation of the two reportable Segments' Net Loss to Net Loss Attributable to The J.G. Wentworth Company for the years ended December 31, 2017, 2016 and 2015.
 
 
Years Ended December 31,
 
2017 vs. 2016
 
Years Ended December 31,
 
2016 vs. 2015
 
 
2017
 
2016
 
$ Change
 
% Change
 
2016
 
2015
 
$ Change
 
% Change
 
 
(Dollars in thousands)
Structured Settlements Segment
 
$
(214,826
)
 
$
(126,990
)
 
$
(87,836
)
 
(69.2
)%
 
$
(126,990
)
 
$
(198,734
)
 
$
71,744

 
36.1
%
Home Lending Segment (1)
 
4,118

 
28,975

 
(24,857
)
 
(85.8
)
 
28,975

 
1,594

 
27,381

 
1,717.8

Net Loss
 
$
(210,708
)
 
$
(98,015
)
 
$
(112,693
)
 
(115.0
)%
 
$
(98,015
)
 
$
(197,140
)
 
$
99,125

 
50.3
%
Less net (loss) income attributable to non-controlling interests
 
(19,375
)
 
(51,158
)
 
31,783

 
62.1

 
(51,158
)
 
(101,828
)
 
50,670

 
49.8

Net (loss) income attributable to The J.G. Wentworth Company
 
$
(191,333
)
 
$
(46,857
)
 
$
(144,476
)
 
(308.3
)%
 
$
(46,857
)
 
$
(95,312
)
 
$
48,455

 
50.8
%
(1) Home Lending was acquired on July 31, 2015, and, therefore, the results for the year ended December 31, 2015 include only five months of Home Lending’s operations.

58

Quarterly Financial Data
 
Year Ended December 31, 2017
 
Fourth Quarter
 
Third Quarter
 
Second Quarter
 
First Quarter
 
(Dollars in thousands, except per share data)
Total revenues
$
103,903

 
$
118,700

 
$
101,409

 
$
104,700

Loss before income taxes
(174,930
)
 
(9,219
)
 
(11,202
)
 
(5,712
)
Net loss
(182,427
)
 
(6,514
)
 
(12,094
)
 
(9,673
)
Net loss attributable to non-controlling interests
(7,618
)
 
(4,200
)
 
(5,083
)
 
(2,474
)
Net loss attributable to The J.G. Wentworth Company
(174,809
)
 
(2,314
)
 
(7,011
)
 
(7,199
)
 
 
 
 
 
 
 
 
Net loss per Class A common stock of The J.G. Wentworth Company
 
 
 
 
 
 
 
Basic*
$
(11.06
)
 
$
(0.15
)
 
$
(0.44
)
 
$
(0.46
)
Diluted*
$
(11.06
)
 
$
(0.15
)
 
$
(0.44
)
 
$
(0.46
)
 
 
 
 
 
 
 
 
 
Year Ended December 31, 2016
 
Fourth Quarter
 
Third Quarter
 
Second Quarter
 
First Quarter
 
(Dollars in thousands, except per share data)
Total revenues
$
106,574

 
$
68,787

 
$
82,724

 
$
66,577

Income (loss) before income taxes
800

 
(42,690
)
 
(29,776
)
 
(41,689
)
Net loss
(648
)
 
(38,807
)
 
(23,510
)
 
(35,050
)
Net income (loss) attributable to non-controlling interests
615

 
(20,094
)
 
(12,716
)
 
(18,963
)
Net loss attributable to The J.G. Wentworth Company
(1,263
)
 
(18,713
)
 
(10,794
)
 
(16,087
)
 
 
 
 
 
 
 
 
Net loss per Class A common stock of The J.G. Wentworth Company
 

 
 
 
 
 
 
Basic*
$
(0.08
)
 
$
(1.19
)
 
$
(0.69
)
 
$
(1.03
)
Diluted*
$
(0.08
)
 
$
(1.19
)
 
$
(0.69
)
 
$
(1.03
)



59

 
Year Ended December 31, 2015
 
Fourth Quarter
 
Third Quarter
 
Second Quarter
 
First Quarter
 
(Dollars in thousands, except per share data)
Total revenues
$
84,316

 
$
63,858

 
$
61,363

 
$
86,830

Loss before income taxes
(113,213
)
 
(64,879
)
 
(28,649
)
 
(8,615
)
Net loss
(107,420
)
 
(57,627
)
 
(26,633
)
 
(5,460
)
Net loss attributable to non-controlling interests
(52,446
)
 
(30,930
)
 
(14,337
)
 
(4,115
)
Net loss attributable to The J.G. Wentworth Company
(54,974
)
 
(26,697
)
 
(12,296
)
 
(1,345
)
 
 
 
 

 
 

 
 

Net loss per Class A common stock of The J.G. Wentworth Company
 

 
 
 
 
 
 
Basic*
$
(3.56
)
 
$
(1.79
)
 
$
(0.87
)
 
$
(0.09
)
Diluted*
$
(3.56
)
 
$
(1.79
)
 
$
(0.87
)
 
$
(0.09
)
 
 
 
 
 
 
 
 
* The sum of the quarterly net income per Class A common stock of The J.G. Wentworth Company on a basic and diluted basis does not equal the respective year to date amounts due to changes in The J.G. Wentworth's ownership interest in JGW LLC and in 2015, the timing of impairment charges.
Liquidity and Capital Resources
We generate cash by purchasing payment streams which we subsequently securitize, sell or otherwise finance in transactions that are structured to generate cash proceeds to us that exceed the purchase price we paid for those payment streams. For Structured Settlements these payment streams are generally structured settlements, annuities and lottery winnings. For Home Lending we purchase mortgage loans and sell these loans with servicing retained or released.
The securitization or sales of the purchased assets in Structured Settlements are normally structured with an "initial close" in which we issue the principal amount of securitized debt and receive: (i) cash in exchange for assets delivered and (ii) restricted cash in exchange for assets to be delivered 60 to 90 days in the future (referred to as the "pre-funding" date). On the pre-funding date, additional assets are delivered to the lenders in return for the lifting of restrictions on the restricted cash. As a result of structuring the securitizations in this fashion, our restricted cash balances have fluctuated significantly depending on the timing of the transactions' initial close and their associated pre-funding dates. We refer to each of these transactions as a monetization event. Historically, securitizations or direct asset sales have generally had two monetization events, but there are times when we opted not to have a pre-funding date, but instead had only a single monetization event: the initial close. In 2017, we completed six monetization events which consisted of: (i) one securitization for which the pre-funding was completed in 2017 associated with the 2016-1 securitization, (ii) two securitizations for which each had two monetization events and (iii) one securitization with an initial close. In 2016, we completed five monetization events which were comprised of: (i) two direct assets sales which each had two monetization events and (ii) one securitization for which the initial close was completed in 2016 and the pre-funding in 2017. In 2015, we completed seven monetization events which were comprised of: (i) the pre-funding from the securitization which completed the initial close in 2014, (ii) two direct assets sales which each had two monetization events in the calendar year, (iii) one direct asset sale which completed a single monetization event, and (iv) one securitization which also completed only a single monetization event.
In conjunction with the implementation of the credit risk retention rules mandated by Dodd-Frank, the total net cash proceeds received by the Company for each securitization in the Structured Settlement segment is less than would have been received absent the application of such rules.

60

Cash Flows
The following table sets forth a summary of our cash flows for the years ended December 31, 2017, 2016, and 2015.
 
For the Year Ended December 31,
 
2017
 
2016
 
2015
 
(In thousands)
Net cash (used in) provided by operating activities
$
(39,621
)
 
$
42,526

 
$
(125,696
)
Net cash used in investing activities
(1,552
)
 
(8,697
)
 
(50,500
)
Net cash (used in) provided by financing activities
(3,431
)
 
(10,985
)
 
191,870

Net (decrease) increase in cash
$
(44,604
)
 
$
22,844

 
$
15,674

Cash and cash equivalents at beginning of year
80,166

 
57,322

 
41,648

Cash and cash equivalents at end of year
$
35,562

 
$
80,166

 
$
57,322

For the Years Ended December 31, 2017 and December 31, 2016
Cash Flow from Operating Activities
Net cash (used in) provided by operating activities was $(39.6) million and $42.5 million for the years ended December 31, 2017 and 2016, respectively. The cash (used in) provided by operating activities does not reflect the financing of our purchased receivables, which is an integral part of our Structured Settlements segment and is reflected in net cash (used in) provided by financing activities. The $82.1 million increase in the net cash used in operating activities was primarily due to a $252.3 million decrease in net proceeds from the sale of finance receivables, which was the primary result of our decision to monetize our Structured Settlements segment receivables through securitization transactions during the year ended December 31, 2017, as compared to direct asset sales during the year ended December 31, 2016. The increase in cash used in operating activities in the Structured Settlements segment was partially offset by (i) a $61.7 million net increase in cash provided by operating activities resulting from the Home Lending segment's originations and purchases of mortgages held for sale (net of proceeds from the sale of, and principal payments on, mortgage loans held for sale) and (ii) a $113.5 million increase in restricted cash and investments as a result of the timing and structure of our monetization events. The other changes in net cash (used in) provided by operating activities are non-cash items, primarily consisting of the realized and unrealized gains (losses) on VIE and other finance receivables, long-term debt and derivatives, gain on sale of finance receivables, accretion of interest income, changes in our deferred income tax position and TRA obligations.
Cash Flow from Investing Activities
Net cash used in investing activities was $1.6 million and $8.7 million for the years ended December 31, 2017 and 2016, respectively. The $7.1 million decrease in cash used in investing activities was primarily due to the Company making the final $7.6 million purchase price payment to the former owners of the Home Lending business segment during the year ended December 31, 2016, offset by a $0.5 million increase in purchases of premises and equipment, net of sales proceeds.
Cash Flow from Financing Activities
Net cash used in financing activities was $3.4 million and $11.0 million for the years ended December 31, 2017 and 2016, respectively. The $7.6 million change was primarily attributable to a $132.2 million decrease in repayments of long-term debt and derivatives, offset by a $125.6 million increase in repayments (net of proceeds) of our revolving credit facilities.
For the Years Ended December 31, 2016 and December 31, 2015
Cash Flow from Operating Activities
Net cash provided by (used in) operating activities was $42.5 million and $(125.7) million for the years ended December 31, 2016 and 2015, respectively. The cash provided by (used in) operating activities does not reflect the financing of our purchased receivables, which is an integral part of our Structured Settlements segment and is reflected in net cash (used in) provided by financing activities. In 2016, based on market conditions, we completed one securitization and two direct asset sales resulting in five monetization events. The $168.2 million increase in the net cash provided by operating activities for the years ended December 31, 2016 and 2015 was primarily due to: (i) a $249.4 million increase in net proceeds from the sale of finance receivables due to management’s decision to complete more direct assets sales in 2016 as compared to 2015, (ii) a $122.7 million decrease in purchases of finance receivables reflecting lower TRB purchase volume in the year ended December 31, 2016 compared to the year ended December 31, 2015, (iii) a $125.0 million change in restricted cash and investments due to the timing and structure of monetization events in the fourth quarters of 2016, 2015 and 2014, (iv) a $58.5 million decrease in net cash provided by operating activities resulting from the Home Lending segment's originations and purchases of mortgages held for sale (net of proceeds from the sale of and principal payments on mortgage loans held for sale), and (v) a $22.7 million decrease in the collections on finance receivables.

61

Net cash provided by operations for the year ended December 31, 2016 included the impact of $58.7 million increase in restricted cash that primarily related to the net effect of the following: (i) our 2015-3 securitization being structured with only an initial close and not having a pre-funding component and (ii) our 2016-1 securitization's initial close occurring in the fourth quarter of 2016 but the associated pre-funding occurring in the first quarter of 2017. As a result of the timing and the structure of the 2015-3 and 2016-1 securitizations, restricted cash increased by $58.8 million between December 31, 2015 and December 31, 2016.
Net cash used in operations for the year ended December 31, 2015 included the impact of a $66.2 million decrease in restricted cash during the year that primarily related to the net effect of: (i) the timing of 2014-3 securitization's initial close occurring in the fourth quarter of 2014 but the associated pre-funding occurring in the first quarter of 2015 and (ii) our 2015-3 securitization being structured with only an initial close and not having an associated pre-funding. The impact of the timing and structure of the 2014-3 and 2015-3 securitizations was a $71.8 million decrease in our restricted cash balance between December 31, 2014 and December 31, 2015.
Cash Flow from Investing Activities
Net cash used in investing activities was $8.7 million and $50.5 million for the years ended December 31, 2016 and 2015, respectively. The $41.8 million decrease in cash used in investing activities was primarily due to (i) the Company making the final $7.6 million purchase price payment to the former owners of the Home Lending segment during the year ended December 31, 2016, as compared to the $47.4 million of net cash used to acquire Home Lending during the year ended December 31, 2015 and (ii) a $2.0 million decrease in purchases of premises and equipment, net of sales proceeds.
Cash Flow from Financing Activities
Net cash (used in) provided by financing activities was $(11.0) million and $191.9 million for the years ended December 31, 2016 and 2015, respectively. The $202.9 million change was primarily attributable to: (i) a $177.0 million decrease in proceeds received from the issuance of VIE long-term debt resulting from our decision to complete two direct asset sales and one securitization in the year ended December 31, 2016 as compared to three securitization transactions and one direct asset sale in the year ended December 31, 2015, and includes the impact of the issuance of $207.5 million of notes payable collateralized by the residual asset cash flows and reserve cash related to 36 of our securitizations, and (ii) a $133.5 million increase in repayments of long-term debt and derivatives primarily related to the $131.4 million repayment in September 2016 of our previous $133.0 million residual term facility ("Residual Term Facility"), partially offset by (i) a $93.6 million increase in proceeds (net of repayments) from our revolving credit facilities and (ii) a $14.5 million reduction in purchases of treasury stock.
Funding Sources
We utilize a number of different funding sources to finance our segments and their associated business activities.
Structured Settlements Segment
Structured Settlements and Annuities
We finance our guaranteed structured settlement and annuity payment stream purchases with available cash and cash equivalents and/or through two separate warehouse facilities. As of December 31, 2017, these two warehouse facilities had $225.0 million of aggregate capacity which consisted of: (i) a $150.0 million syndicated warehouse facility with a revolving period that ends in November 2018 and (ii) a $75.0 million warehouse facility with a revolving period that ends on September 24, 2019. Subsequent to the expiration or termination of their respective revolving lines of credit, our warehouse facilities have amortization periods ranging from 21 to 23 months before final maturity, allowing us time to exit or refinance the warehouse facility after the revolving period has ended. As of December 31, 2017, we had $202.2 million in total unused borrowing capacity across the two separate warehouse facilities used to finance our guaranteed structured settlement and annuity payment stream purchases.
Our warehouse facilities are structured with advance rates that range from 91.5% to 95.5% and discount rates that range from 8.3% to 9.2%. The discount rate is either fixed over the term of the facility or is based on a fixed spread over a floating swap rate, which we then fix through interest rate swaps at the time of the borrowing. The discount rate is used to discount the payment streams we have purchased, and these discounted payment streams are then multiplied by the advance rate to determine the amount of funds that are available to us under the warehouse facilities.
These warehouse facilities are used strictly to fund the guaranteed structured settlement and annuity payment stream purchases. Our ability to fund current operations depends upon our ability to secure these types of short-term financings on acceptable terms and to renew or replace the financings as they expire. While we historically have been able to regularly renew the warehouse facilities in the ordinary course of business, we cannot assure that we will be able to renew, replace or refinance our existing financing arrangements or enter into additional financing arrangements on terms that are commercially reasonable or at all. In addition, a negative ratings action by a rating agency, an adverse action by a regulatory authority or a general deterioration in the economy that constricts the availability of credit may increase our cost of funds and may impair our ability to renew existing facilities or obtain new financing facilities.

62

We have historically undertaken non-recourse term securitizations or direct asset sales once we have aggregated in our warehouse facilities a sufficient amount of structured settlement and annuity payment streams to undertake a securitization. At the close of each such transaction, the outstanding amount under each of the warehouse facilities is repaid. The amount of net proceeds we receive from securitizations or direct asset sales is typically in excess of the amount of funds required to repay the warehouse facilities, resulting in a positive cash flow at the time of securitization.
In 2017, we completed six monetization events which consisted of: (i) one securitization for which the pre-funding was completed in 2017, (ii) two securitizations for which both the initial close and pre-funding were completed and (iii) one securitization for which the initial close was completed. On January 20, 2017, we completed the pre-funding associated with the 2016-1 securitization which generated net proceeds to us of $15.9 million. On March 22, 2017, we completed the initial close associated with our 2017-1 securitization with an aggregate note issuance amount of $131.8 million and a deal discount rate of 4.35% which generated net proceeds to us of $15.1 million. On June 12, 2017, we completed the pre-funding for the 2017-1 securitization which generated net proceeds to us of $16.3 million. On August 9, 2017, we completed the initial close associated with our 2017-2 securitization with an aggregate note issuance amount of $144.2 million and a deal discount rate of 3.95% which generated net proceeds to us of $19.8 million. On September 29, 2017, we completed the pre-funding for the 2017-2 securitization which generated net proceeds to us of $28.5 million. On December 19, 2017, we completed the initial close for the 2017-3 securitization with an aggregate note issuance amount of $58.7 million and a deal discount rate of 4.27% which generated net proceeds to us of $14.3 million.
In 2016, we completed five monetization events that consisted of two direct asset sales (each consisting of an initial close and pre-funding transaction) and the initial close of a securitization. The first direct asset sale consisted of $161.3 million in discounted TRB purchases based on a deal discount rate of 5.02% and was comprised of two asset pools. The first pool, which closed on February 18, 2016, consisted of $91.3 million in discounted TRB purchases and generated net proceeds to us of $27.0 million. The second pool, which closed on April 21, 2016, consisted of $70.0 million in discounted TRB purchases and generated net proceeds to us of $21.6 million. The second direct asset sale in 2016 consisted of $110.8 million in discounted TRB purchases and was also comprised of two asset pools. The first pool, which closed on June 17, 2016, consisted of $50.8 million in discounted TRB purchases based on a deal discount rate of 4.85% and generated net proceeds to us of $18.2 million. The second pool, which closed on August 19, 2016, consisted of $59.2 million in discounted TRB purchases and generated net proceeds to us of $20.1 million. On October 26, 2016, we completed the initial close associated with our 2016-1 securitization with an aggregate note issuance amount of $117.3 million and a deal discount rate of 3.89% which generated net proceeds to us of $16.5 million.
We intend, subject to market conditions, management discretion and other relevant factors, to undertake multiple securitizations or direct asset sales in the future. Although diversifying our financing strategy allows us to realize greater cost efficiencies in our capital market transactions and provides us with increased flexibility, we still believe the asset-backed securities market has been and continues to be the Company’s principal market.
The counterparties to the structured settlement and annuity payment streams we purchase have mostly investment grade credit ratings. Approximately 74.7% of the counterparties to structured settlement payment streams that we purchased in 2017 were rated "A3" or better by Moody's. This reduced credit risk, together with the long weighted average life and low pre-payment risk, results in a desirable asset class that can be securitized and sold in the asset-backed security market or through outright-sale transactions.
Life Contingent Structured Settlements and Life Contingent Annuities
We finance our purchases of life contingent structured settlement and life contingent annuity payment streams through a committed permanent financing facility with a capacity of $100.0 million. This facility allows us to purchase life contingent structured settlement and life contingent annuity payment streams without assuming any mortality risk. This facility is structured as a permanent facility, whereby the life contingent structured settlement and life contingent annuity payment streams we purchase are financed for their entire life and remain within the facility until maturity. The payment streams purchased are funded at a fixed advance rate of 94%, while the discount rate used to value the payment streams is variable, depending on the characteristics of the payment streams. The life contingent structured settlement and life contingent annuity payment streams that we purchase are discounted at a higher rate than the discount rates applied to those payment streams under the committed permanent financing facility, with the result that the funds available to be drawn under the facility exceed the purchase price for the payment streams we purchase. This positive cash flow is used to support our business and cover a portion of our operating expenses. As of December 31, 2017, our permanent financing facility had $8.2 million of unused capacity for our life contingent annuity and structured settlement businesses.
In addition, the Company has the ability to sell up to $15.0 million of discounted TRB purchases through its Asset Sale Facility for a duration of one year, starting on June 30, 2017. As of December 31, 2017, our unused capacity for our life contingent annuity and structured settlement businesses through our Asset Sale Facility was $9.5 million.


63

Lotteries
In 2013, we began purchasing lottery payment streams and have structured one of our two remaining guaranteed structured settlement and annuity warehouse facilities to allow us to finance lottery payment streams. This allows us to aggregate a pool of such payment streams that we subsequently include with structured settlement and annuity payment streams in securitizations and direct asset sales. We intend to continue to include lottery payment streams in securitizations and direct asset sales in the future.
Pre-Settlement Funding
We previously financed our pre-settlement funding transactions through a revolving credit facility. The $35.0 million facility was structured with a revolving period that ended on December 31, 2015. The principal amount outstanding under the facility as of December 31, 2015 was converted into a "term advance" facility requiring minimum principal payments over the subsequent 24 month amortization period with interest payable monthly and calculated in the same manner as the original credit facility. In August 2016, the Company made principal payments to fully repay this term advance facility and then terminated the facility. The Company incurred less than $0.1 million in fees related to the termination.
We decided, beginning in April 2015, to curtail our purchases of pre-settlement transactions. We have, however, and will continue to broker leads for such transactions to third parties in exchange for broker or referral fees, and, in the normal course of our business, will evaluate our existing pool of pre-settlement assets for retention or sale. Ceasing purchases of pre-settlement transactions has not had a material impact on our business, financial condition, results of operation or cash flows.
Credit Facility and New Revolving Credit Facility
As of December 31, 2017, we had (i) a widely syndicated senior secured term loan with a principal balance of $449.5 million that was extinguished in January 2018 as part of the Plan, as discussed below, and (ii) a $20.0 million revolving commitment that matured on August 8, 2017 which was not renewed (collectively, the "Credit Facility").
Pursuant to the Plan, which became effective on January 25, 2018, all claims related to the Credit Facility and the related guarantees were terminated and released. In addition, the Company obtained the New RCF with an aggregate borrowing availability of $70.0 million with interest accruing at LIBOR plus a spread of 5.00% subject to a floor of 1.00% and a non-usage fee of LIBOR plus 3.00% per annum. The New RCF contains other customary terms, including (i) representations, warranties and affirmative covenants, (ii) negative covenants, including limitations on indebtedness, liens, mergers, acquisitions, asset sales, investments, distributions, prepayments of subordinated debt, and transactions with affiliates, in each case subject to baskets, thresholds and other exceptions, and a financial covenant to maintain a Total Leverage Ratio (as defined in the New RCF Agreement) of 3.50 to 1.00, and (iii) customary events of default, including changes in control. The total leverage ratio is calculated by dividing the total funded debt less unrestricted cash and cash equivalents by Consolidated EBITDA (as defined in the New RCF Agreement) for the period of the four fiscal quarters most recently ended.     
On the Effective Date, the Company drew $55.0 million from its New RCF to fund (i) the Partnership Cash Consideration of $4.8 million, (ii) a portion of the Term Lender Cash Consideration of $36.0 million, (iii) $5.6 million of closing and commitment fees and (iii) $8.6 million of professional fees and expenses. As of April 2, 2018, there was $10.3 million in borrowing availability under the New RCF.
Residual Financing
On September 2, 2016, the Company issued $207.5 million in notes collateralized by the residual asset cash flows and reserve cash associated with 36 of the Company's securitizations with outstanding principle balances. Proceeds from the issuance of the notes were used, in part, to repay the $131.4 million outstanding principal balance on the Residual Term Facility (the "Residual Term Facility"). The Company incurred $0.4 million in debt termination costs and expensed $3.3 million of unamortized debt issuance costs in connection with the termination of the Residual Term Facility, which were included in interest expense in the Company's consolidated statements of operations. Previously, the Company had a $133.0 million Residual Term Facility that was scheduled to mature on May 15, 2021 and was collateralized by the cash flows from residual interests related to 28 securitizations. Interest accrued on the notes issued under the Residual Term Facility at a rate of 7.25% per annum with interest and principal payable monthly from cash flows from the collateralized residual interests.
Securitization and Permanent Financing Debt, at Fair Value
We elected fair value treatment under Accounting Standards Codification 810, Financial Instruments ("ASC 810"), to measure the VIE long-term debt issued by securitization and permanent financing trusts and related VIE finance receivables. We have determined that measurement of the VIE long-term debt issued by securitization and permanent financing trusts at fair value better correlates with the fair value of the VIE finance receivables held by special purpose entities ("SPEs"), which are held to provide the cash flow for the note obligations. The debt issued by our VIE securitization and permanent financing trusts is recourse only to the respective entities that issued the debt and is non-recourse to the Company and its other subsidiaries. Certain of our subsidiaries continue to receive fees for servicing the securitized assets which are eliminated in consolidation. In addition, the risk to our non-SPE subsidiaries from SPE losses is limited to cash reserves, residual interest amounts and repurchases of structured

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settlement payment streams that are subsequently determined to be ineligible for inclusion in the securitization or permanent financing trusts.
On September 2, 2016, the Company issued $207.5 million in notes collateralized by the residual asset cash flows and reserve cash interests related to 36 VIE securitization entities, which generated $65.9 million in net cash proceeds. The Company incurred $2.6 million of debt issuance costs which were included in debt issuance expense in the Company's consolidated statements of operations. The Company acts as the servicer and/or the subservicer and principal and interest are paid monthly from the cash flows from these collateralized residual interests.
Other Financing
We maintain other permanent financing arrangements that have been used in the past for longer term funding purposes. Each of these arrangements has assets pledged as collateral, the cash flows from which are used to satisfy the loan obligations. These other financing arrangements are more fully described in Notes 17 and 18 in our Notes to the Consolidated Financial Statements under "Part II, Item 8 'Financial Statements and Supplementary Data'" of this Annual Report on Form 10-K.
Home Lending Segment
Mortgage Loans Held For Sale
We finance our mortgage loan origination activities primarily through three separate warehouse facilities that had an aggregate capacity of $340.0 million as of December 31, 2017. As of April 2, 2018 our current aggregate borrowing capacity was $345.0 million. We regularly assess our warehouse facilities and adjust the amount and the terms of our committed warehouse lines in light of market conditions.
These credit facilities are generally renewed annually for a period of 12 months and represent secured lending facilities with our originated mortgage loans serving as collateral. In addition, our lenders require pledge fund deposits of approximately one percent of the facility's capacity be maintained with the lender. Without these facilities we would not be able to meet our short-term liquidity requirements to operate our Home Lending segment.
Our Home Lending segment typically holds its mortgage loan inventory for 30 to 45 days with these warehouse facilities until the loans are sold to take-out investors or securitized directly with Ginnie Mae, Fannie Mae or Freddie Mac, at which time the amount outstanding with the warehouse facilities are repaid.
These warehouse facilities are used strictly to fund the origination of mortgage loans. Our ability to fund current operations depends upon our ability to secure these types of short-term financings on acceptable terms and to renew or replace the financings as they expire. These warehouse facilities are uncommitted and, at any given time, we may not be able to obtain additional financing under them when we need it, exposing us to, among other things, liquidity risks of the types described in Part I, Item 1A "Risk Factors" of this Form 10-K. While we historically have been able to regularly renew the warehouse facilities in the ordinary course of business, we cannot assure that we will be able to renew, replace or refinance our existing financing arrangements or enter into additional financing arrangements on terms that are commercially reasonable or at all. In addition, a negative ratings action by a rating agency, an adverse action by a regulatory authority or a general deterioration in the economy that constricts the availability of credit may increase our cost of funds and may impair our ability to renew existing facilities or obtain new financing facilities.
Operating Line of Credit
We maintain a $10.0 million line of credit with a financial institution that is generally renewed annually for a period of 12 months and represents a secured lending facility with our MSRs serving as collateral.
Going Concern and Consolidated Liquidity Needs
In accordance with FASB Subtopic 205-40, management must evaluate whether there are conditions or events, considered in the aggregate, that could raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the financial statements are issued. In making its evaluation, management is not able to take into consideration the potential mitigating effect of management’s plans that have not been fully implemented as of the date the financial statements are issued. However, when the relevant conditions or events, considered in the aggregate, initially indicate that substantial doubt may exist, management may consider in its evaluation whether the mitigating effect of its plans sufficiently alleviates substantial doubt about the Company’s ability to continue as a going concern. The mitigating effect of management’s plans, however, is only considered if both (1) it is probable that the plans will be effectively implemented within one year after the date that the financial statements are issued, and (2) it is probable that the plans, when implemented, will mitigate the relevant conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued.
The Company performed the required assessments in conjunction with the filing of its Form 10-Q for the three months ended September 30, 2017 and determined, at that time, that substantial doubt about its ability to continue as a going concern existed and will not be alleviated before the Company emerges from the Chapter 11 Cases. On January 17, 2018, the Bankruptcy

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Court entered an order approving and confirming the Plan (the “Confirmation Order”). On January 25, 2018 (the “Effective Date”), the Debtors satisfied the conditions to effectiveness of the Plan and the Plan became effective in accordance with its terms and the Debtors emerged from bankruptcy. Management’s current assessment was based on the relevant conditions that were known and reasonably knowable at the issuance date and included the Company’s current financial condition and liquidity sources, forecasted future cash flows, the Company’s contractual obligations and commitments and other conditions that could adversely affect the Company’s ability to meet its obligations through April 2, 2019. Management concluded that no substantial doubt exists regarding the Company’s ability to continue as a going concern one year from the date of filing the Company's Form 10-K for the year ended December 31, 2017.
Contractual Obligations and Commitments
The following table summarizes our contractual obligations and commitments (excluding interest rate swaps which are discussed in "Derivatives and Other Hedging Instruments") as of December 31, 2017, and the future periods in which such obligations are expected to be settled in cash. The table also reflects the timing of principal and interest payments on outstanding debt based on scheduled and/or expected repayment dates and the interest rates in effect as of December 31, 2017. Additional details regarding these obligations are provided in the notes to the consolidated financial statements as referenced in the table:
 
 
Total
 
2018
 
2019
 
2020
 
2021
 
2022
 
Thereafter
 
 
(In Thousands)
Operating and capital leases (a)
 
$
38,458

 
$
6,870

 
$
5,496

 
$
4,333

 
$
4,215

 
$
3,891

 
$
13,653

Related interest and fees
 
14

 
8

 
5

 
1

 
—

 
—

 
—

Revolving credit facilities & other similar borrowings (a)
 
279,140

 
254,767

 
24,373

 
—

 
—

 
—

 
—

Related interest and fees (b)
 
14,999

 
13,241

 
1,758

 
—

 
—

 
—

 
—

Long-term debt issued by securitization and permanent financing trusts (a) (b) (c)
 
3,919,378

 
323,094

 
325,067

 
309,798

 
293,981

 
280,023

 
2,387,415

Related interest and fees (b)
 
2,155,031

 
188,856

 
177,139

 
164,469

 
152,529

 
140,903

 
1,331,135

Long-term debt (a) (b) (c)
 
57,814

 
4,707

 
5,026

 
5,643

 
5,615

 
5,990

 
30,833

Related interest and fees (b)
 
20,162

 
2,889

 
2,711

 
2,496

 
2,256

 
2,003

 
7,807

Installment obligation payable (a)
 
85,544

 
13,486

 
10,826

 
8,834

 
6,612

 
6,137

 
39,649

Liabilities subject to compromise ("LSTC"):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Term Loan (a) (d)
 
449,500

 
449,500

 
—

 
—

 
—

 
—

 
—

Related interest and fees (d)
 
6,757

 
6,757

 
—

 
—

 
—

 
—

 
—

TRA obligations (a) (e)
 
160,113

 
160,113

 
—

 
—

 
—

 
—

 
—

 
 
$
7,186,910

 
$
1,424,288

 
$
552,401

 
$
495,574

 
$
465,208

 
$
438,947

 
$
3,810,492

(a)
Included in the Consolidated Financial Statements and the Notes thereof.
(b)
Certain of our contractual obligations and commitments are funded through cash flows from certain VIE finance receivables included on our consolidated balance sheets.
(c)
Long-term debt does not include $5.1 million of debt associated with our Long-Term Pre-Settlement Facility which has no stated maturity date.
(d)
As of December 31, 2017, the Term Loan and accrued expense were reclassified into LSTC in accordance with ASC 852. The Company had outstanding funded indebtedness in the aggregate principal amount of $449.5 million and $6.8 million in unpaid accrued interest which represent the total outstanding indebtedness and contractual interest expense. Pursuant to the Plan, which became effective on January 25, 2018, all claims related to the Credit Facility and the related guarantees were terminated and released. The Company drew $55.0 million from its New RCF to fund (i) the Partnership Cash Consideration of $4.8 million, (ii) a portion of the Term Lender Cash Consideration of $36.0 million, (iii) $5.6 million of New RCF closing and commitment fees paid to HPS Investment Partners, LLC, and (iii) $8.6 million of professional fees and expenses. In addition, the Term Loan holders received 24,696,626 of New Class A common stock.
(e)
The filing of the Company of Chapter 11 Cases qualified as a Material Breach under the Tax Receivable Agreement. Consequently, the claims were accelerated and the claimants were owed the present value of all future tax attributes to be distributed to such claimants, subject to certain discounting and based on assumptions regarding the remaining payments. As of December 31, 2017, the TRA obligations were estimated to be $160.1 million, which were included within LSTC on the Company's consolidated balance sheet under ASC 852. As part of the Plan, on January 25, 2018, the claims under the TRA were discharged and, in consideration, each TRA claimant received its pro rata share of the New Class A common stock and the New Class B common stock of the Company and $4.8 million of cash consideration.

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Critical Accounting Policies
In establishing accounting policies within the framework of U.S. GAAP, management must make certain assessments, estimates, and choices that will result in the application of these principals in a manner that appropriately reflects our financial condition and results of operations. Critical accounting policies are those policies that we believe present the most complex or subjective measurements and have the most potential to affect our financial position and operating results. While all decisions regarding accounting policies are important, there are certain accounting policies and estimates that we consider to be critical.
Reorganization
Effective on December 12, 2017, the Company began to apply ASC 852, which is applicable to companies under Chapter 11 bankruptcy protection. It requires the financial statements for periods subsequent to the Chapter 11 filing to distinguish transactions and events that are directly associated with the reorganization from the ongoing operations of the business and to be reported separately as reorganization items, net in the consolidated statements of operations. The consolidated balance sheet must distinguish debtor pre-petition LSTC from pre-petition liabilities that are not subject to compromise and from post-petition liabilities in the accompanying consolidated balance sheet. In addition, reorganization items, net on the Company's consolidated statement of operations represent amounts incurred after the petition date, December 12, 2017 (the "Petition Date") as a direct result of the bankruptcy.
Consolidation
The consolidated financial statements include the accounts of The J.G. Wentworth Company, its wholly-owned subsidiaries, and other entities in which we have a controlling financial interest, and those variable interest entities where our wholly-owned subsidiaries are the primary beneficiaries. All material intercompany balances and transactions are eliminated in consolidation.
In the normal course of business, we are involved with various entities that are considered to be VIEs. A VIE is an entity that has either a total investment that is insufficient to permit the entity to finance its activities without additional subordinated financial support or whose equity investors lack the characteristics of a controlling financial interest under the voting interest model of consolidation. We are required to consolidate any VIE if we are determined to be the primary beneficiary. The primary beneficiary is the entity that has the power to direct those activities of the VIE that most significantly impact the VIE's economic performance and has the obligation to absorb losses from or the right to receive benefits from the VIE that could potentially be significant to the VIE. We review all significant interests in the VIEs we are involved with including consideration of the activities of the VIEs that most significantly impact the VIEs' economic performance and whether we have control over those activities. As a result of adopting ASC 810, we determined we were the primary beneficiary of the VIEs used to securitize our finance receivables ("VIE finance receivables"). We elected the fair value option with respect to assets and liabilities in our securitization VIEs as part of their initial consolidation on January 1, 2010.
On an ongoing basis, we assess whether or not we are the primary beneficiary of a VIE or whether we have acquired or divested the power to direct the activities of the VIE through changes in governing documents or other circumstances. The reassessment also considers whether we have acquired or disposed of a financial interest that could be significant to the VIE. As a result of this assessment, the consolidation status of the legal entities with which we are involved may change.
The debt issued by our securitization VIEs is reported on our consolidated balance sheets as VIE long-term debt issued by securitization and permanent financing trusts, at fair value ("VIE securitization debt"). The VIE securitization debt is recourse solely to the VIE finance receivables held by such SPEs and is non-recourse to us and our other consolidated subsidiaries. The VIEs will continue in operation until all securitization debt is paid and all residual cash flows are collected. As a result of the long lives of many finance receivables purchased and securitized by us, most consolidated VIEs have expected lives in excess of 20 years.
We acquire receivables associated with structured settlement payments from individuals in exchange for cash, and these receivables are carried at fair value in VIE finance receivables, at fair value, and Other finance receivables, at fair value, on the Company's consolidated balance sheets. Unearned income is calculated as the amount the fair value exceeds the cost basis of the receivables. Unearned income on VIE and other finance receivables is recognized as interest income using the effective interest method over the life of the related structured settlement. Changes in fair value are recorded in realized and unrealized gains on VIE and other finance receivables, long-term debt and derivatives in our consolidated statements of operations.
We, through our subsidiaries, sell finance receivables to SPEs. An SPE issues notes secured by undivided interests in the receivables. Payments due on these notes generally correspond to receipts from the receivables in terms of the timing of payments due. We retain an interest in the SPEs and are deemed to have control over these SPEs due to our servicing or subservicing role and therefore consolidate these SPEs.

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Transfers of Financial Assets
Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when the following conditions have been satisfied: (1) the transferred assets have been isolated from the Company, beyond the reach of the Company and its creditors; (2) the transferee obtains the right to pledge or exchange the transferred assets; and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity, or the ability to unilaterally cause the holder to return specific assets or through an agreement that permits the transferee to require the transferor to repurchase the transferred financial assets that is so favorable to the transferee that it is probable that the transferee will require the transferor to repurchase them. Transfers that do not meet the criteria to be accounted for as sales are accounted for as secured borrowings.
The amendments to ASC 860, Transfers and Servicing ("ASC 860"), eliminated the concept of a qualified special purpose entity, changed the requirements for derecognizing financial assets, and required additional disclosures about transfers of financial assets, including securitization transactions and continuing involvement with transferred financial assets.
Fair Value Measurements
Under ASC 820, Fair Value Measurements and Disclosure ("ASC 820"), fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in the orderly transaction between market participants at the measurement date. Fair value measurement establishes a fair value hierarchy that prioritizes the inputs of valuation techniques used to measure fair value. These three levels of fair value hierarchy are defined as follows:
•
Level 1 - inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets that are accessible at the measurement date.
•
Level 2 - inputs to the valuation methodology include quoted prices in markets that are not active or quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
•
Level 3 - inputs to the valuation methodology are unobservable, reflecting the entity's own assumptions about assumptions market participants would use in pricing the asset or liability.
A financial instrument's categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Fair value is a market based measure considered from the perspective of a market participant who holds the assets or owes the liabilities rather than an entity specific measure. Therefore, even when market assumptions are not readily available, our own assumptions are set to reflect those that market participants would use in pricing the assets or liabilities at the measurement date. We use valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. We also evaluate various factors to determine whether certain transactions are orderly and may make adjustments to transactions or quoted prices when the volume and level of activity for an asset or liability have decreased significantly.
The above conditions could cause certain assets and liabilities to be reclassified from Level 1 to Level 2 or Level 3 or reclassified from Level 2 to Level 3. The inputs or methodology used for valuing the assets or liabilities are not necessarily an indication of the risk associated with the assets and liabilities.
Goodwill and Intangible Assets
Goodwill represents the excess of the purchase price over the fair value of the net assets acquired in the business combination, and is accounted for under ASC 350, Intangibles - Goodwill and Other ("ASC 350"). Goodwill has an indefinite useful life and is evaluated for impairment at the reporting-unit level on an annual basis during the fourth quarter or more frequently if events or changes in circumstances indicate potential impairment between annual measurement dates. We have the option of performing a qualitative assessment of impairment to determine whether any further quantitative testing for impairment is necessary. The initial qualitative approach assesses whether the existence of events or circumstances lead to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events and circumstances, we determine it is more likely than not that the fair value is less than carrying value, the two step quantitative impairment test is performed. A step 1 analysis involves calculating the fair value of the associated reporting unit and comparing it to the reporting unit's carrying value. If the fair value of the reporting unit exceeds the carrying value of the reporting unit including goodwill and the carrying value of the reporting unit is positive, goodwill is considered not to be impaired and no further analysis is required. The Company early adopted ASU 2017-04 and consequently, if the carrying amount of a reporting unit exceeds its fair value, an impairment loss shall be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit.
We have intangible assets which have indefinite and finite lives, which are accounted for under ASC 350. Indefinite-lived intangible assets are tested for impairment whenever events or changes in circumstances suggest that an asset's carrying value may not be fully recoverable, and are tested at least annually. An impairment loss, calculated as the difference between the

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estimated fair value and the carrying value of an asset, is recognized if the sum of the estimated undiscounted cash flows relating to the asset is less than the corresponding carrying value. Our indefinite-lived intangible assets consist of licenses and approvals.
Finite-lived intangible assets consist primarily of databases, customer relationships, trade names and affinity relationships. Our databases are amortized over their estimated useful lives of 10 years. Customer relationships are amortized over their useful lives of 3 years to 15 years. Amortizable trade names are amortized over their useful life of 3 years. Affinity relationships are amortized over their useful life of 10 years.
Income Taxes
JGW LLC and the majority of its subsidiaries operate in the U.S. as non-tax paying entities, and are treated as disregarded entities for U.S. federal and state income tax purposes and generally as corporate entities in non-U.S. jurisdictions. In addition, certain of JGW LLC's wholly-owned subsidiaries are operating as corporations within the U.S. and subject to U.S. federal and state tax. As non-tax paying entities, the majority of JGW LLC's net income or loss is attributable to its members and included in their tax returns. The current and deferred income tax provision (benefit) relates to both the income (loss) attributable to the Corporation from JGW LLC and to the tax-paying subsidiaries of JGW LLC.
Income taxes are accounted for using the liability method of accounting in accordance with ASC 740, Income Taxes. Under this method, deferred tax assets and liabilities are recognized for the expected future tax consequences of the differences between the carrying amounts of assets and liabilities and their respective tax basis, using currently enacted tax rates. The effect on deferred assets and liabilities of a change in tax rates is recognized in income in the period when the change is enacted. Deferred tax assets are reduced by a valuation allowance when it is more likely than not that some portion or all of the deferred tax assets will not be realized.
We analyze our tax filing positions in all of the U.S. federal, state and local tax jurisdictions where it is required to file income tax returns, as well as for all open tax years in these jurisdictions. If, based on this analysis, we determine that uncertainties in tax positions exist, a reserve will be established. We will recognize accrued interest and penalties related to uncertain tax positions in our consolidated statements of operations.
Tax laws are complex and subject to different interpretations by the taxpayer and respective taxing authorities. Significant judgment is required in determining tax expense and evaluating tax positions, including evaluating uncertainties under U.S. GAAP. Management reviews its tax positions periodically and adjusts its tax balances as new information becomes available.
Emerging Growth Company
We qualify as an "emerging growth company" as defined in the JOBS Act. As a result, we are permitted to, and do, rely on exemptions from certain financial disclosure requirements under U.S. GAAP that are not applicable to other companies that are not emerging growth companies. In particular, we can take advantage of an extended transition period for complying with new or revised accounting standards which allows us to delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We took advantage of the extended transition period as permitted under JOBS Act. As a result, our financial statements may not be comparable to companies that comply with public company effective dates. On January 5, 2018, the Company terminated the effectiveness of its registration statements and removed from registration any securities that remained unsold under Section 12 of the Exchange Act and suspended its reporting obligations under Sections 13(a) and 15(d) of the Exchange Act.
Recently Issued Accounting Pronouncements Not Yet Adopted
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update ("ASU") No. 2014-09, Revenue from Contracts with Customers, which relates to how an entity recognizes the revenue it expects to be entitled to for the transfer of promised goods and services to customers. Since May 2014, the FASB issued amendments to this standard (ASU Nos. 2016-8, 2016-10, 2016-11, 2016-12, 2016-20, 2017-13 and 2017-14), which provide further clarification regarding this standard. ASU 2014-09 will replace certain existing revenue recognition guidance when it becomes effective. The original effective date of the guidance was deferred in August 2015 by the issuance of ASU No. 2015-14 and is effective for public entities in the fiscal year beginning after December 15, 2017, including interim reporting periods within that reporting period and for all other entities in the fiscal year beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019. Early adoption is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. Management has commenced its implementation activities and determined that the following revenue streams are not impacted by or are excluded from the scope of this ASU: a) interest income, b) realized and unrealized gains on VIE and other finance receivables, long-term debt and derivatives, c) realized and unrealized gains on sale of mortgage loans held for sale, net of direct costs d) changes in mortgage servicing rights, net, e) loan servicing fees, and f) realized and unrealized gains (losses) on marketable securities, net. Management is continuing to evaluate the impact of the future adoption of this ASU on our consolidated financial statements.

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In November 2015, the FASB issued ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes, which requires an entity to classify deferred tax liabilities and assets as noncurrent in the classified statement of financial position. This ASU becomes effective for public entities for annual periods beginning after December 15, 2016 and for all other entities for annual periods beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018. Early adoption is permitted. Management does not believe this ASU will have a material impact on our consolidated financial statements upon adoption.
In January 2016, the FASB issued ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, which amends the guidance in U.S. GAAP on the classification and measurement of financial instruments. Although the ASU retains many current requirements, it significantly revises an entity's accounting related to (1) the classification and measurement of investments in equity securities and (2) the presentation of certain fair value changes for financial liabilities measured at fair value. This ASU also amends certain disclosure requirements associated with the fair value of financial instruments. The FASB issued an amendment to this standard (ASU No. 2018-03), which provides further clarification regarding this standard. This ASU becomes effective for public entities in the fiscal year beginning after December 15, 2017 and for all other entities beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. Early adoption is permitted. Management is currently evaluating the impact of the future adoption of this ASU on our consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases, which requires lessees to recognize right-of-use assets and lease liabilities, for all leases, with the exception of short-term leases, at the commencement date of each lease. Under the new guidance, lessor accounting is largely unchanged. The FASB issued an amendment to this standard (ASU No. 2018-01), which provides further clarification regarding this standard. This ASU is effective for all entities for annual periods beginning after December 15, 2018, and interim periods within those annual periods. Early adoption is permitted. The amendments of this update should be applied using a modified retrospective approach, which requires lessees and lessors to recognize and measure leases at the beginning of the earliest period presented. Management is currently evaluating the impact of the future adoption of this ASU on our consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-04, Recognition of Breakage for Certain Prepaid Stored-Value Products, which addresses the current and potential future diversity in practice related to the de-recognition of a prepaid stored-value product liability. This ASU becomes effective for public entities in the fiscal year beginning after December 15, 2017 and for non-public entities in the fiscal year beginning after December 15, 2018, and interim periods within those annual periods. Early adoption is permitted. Management is currently evaluating the impact of the future adoption of this ASU on our consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-06, Contingent Put and Call Options in Debt Instruments, which addresses diversity in practice in assessing embedded contingent call or put options in debt instruments. This ASU becomes effective for public entities in the fiscal year beginning after December 15, 2016 and for non-public entities in the fiscal year beginning after December 15, 2017, and interim periods within fiscal years beginning after December 15, 2018. Early adoption is permitted. This ASU should be applied using a modified retrospective approach to existing debt instruments as of the beginning of the fiscal year for which this ASU is effective. Management does not believe this ASU will have a material impact on our consolidated financial statements upon adoption.
In March 2016, the FASB issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting, which simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. This ASU becomes effective for public entities in the fiscal year beginning after December 15, 2016 and for non-public entities in the fiscal year beginning after December 15, 2017, and interim periods within fiscal years beginning after December 15, 2018. Early adoption is permitted. Management is currently evaluating the impact of the future adoption of this ASU on our consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326). This ASU was issued to provide more decision-useful information about the expected credit losses on financial instruments and changes the loss impairment methodology. This ASU is effective for all entities for reporting periods beginning after December 15, 2019 using a modified retrospective adoption method. A prospective transition approach is required for debt securities for which an other-than-temporary impairment had been recognized. Management is currently evaluating the impact of the future adoption of this ASU on our consolidated financial statements.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force). This ASU was issued to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. This ASU becomes effective for public entities in the fiscal year beginning after December 15, 2017 and interim periods within those fiscal years and for non-public entities in the fiscal year beginning after December 15, 2018 and interim periods within fiscal years beginning after December 15, 2019.

70

Early adoption is permitted. Management is currently evaluating the impact of the future adoption of this ASU on our consolidated financial statements.
In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740): Intra-entity transfers of Assets Other than Inventory. This ASU removes the current exception in U.S. GAAP prohibiting entities from recognizing current and deferred income tax expenses or benefits related to transfer of assets, other than inventory, within the consolidated entity. The current exception to defer the recognition of any tax impact on the transfer of inventory within the consolidated entity until it is sold to a third party remains unaffected. This ASU is effective for public entities for annual reporting periods beginning after December 15, 2017 and for all other entities for annual periods beginning after December 15, 2018 and interim reporting periods within annual periods beginning after December 15, 2019. Early adoption is permitted and should be in the first interim period if an entity issues interim financial statements. Management is currently evaluating the impact of the future adoption of this ASU on our consolidated financial statements.
In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 320): Restricted Cash. This ASU clarifies the presentation of restricted cash in the statement of cash flows as it will be included with cash and cash equivalents, which eliminates diversity in practice. This ASU becomes effective for public entities in the fiscal year beginning after December 15, 2017 and interim periods within those fiscal years and for all other entities in the fiscal year beginning after December 15, 2018 and interim periods within fiscal years beginning after December 15, 2019. Early adoption is permitted, including adoption in an interim period. Management is currently evaluating the impact of the future adoption of this ASU on our consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. This ASU clarifies the definition of a business, which consists of inputs and processes applied to those inputs that have the ability to contribute to the creation of outputs. This ASU provides a framework to evaluate when an input and a substantive process are present and narrows the definition of the term outputs to be consistent with how it is described in Topic 606, Revenue from Contracts with Customers. When substantially all of the fair value of gross assets acquired is concentrated in a single asset, the assets acquired would not represent a business. This ASU introduces an initial required screen that, if met, eliminates the need for further assessment. This ASU is effective for public entities for annual reporting periods beginning after December 15, 2017, including interim periods within those periods and for all other entities for annual periods beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019. Early adoption is permitted. Management is currently evaluating the impact of the future adoption of this ASU on our consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-03, Accounting Changes and Error Corrections (Topic 250) and Investments—Equity Method and Joint Ventures (Topic 323): Amendments to SEC Paragraphs Pursuant to Staff Announcements at the September 22, 2016 and November 17, 2016 EITF Meetings. This ASU is intended to provide clarity in relation to the disclosure of the impact that ASU Nos. 2014-09, 2016-02 and 2016-13 will have on our financial statements when adopted. The effective date for this guidance is the same as the effective dates for ASU Nos. 2014-09, 2016-02 and 2016-13. Management is currently evaluating the impact of the future adoption of this ASU on our consolidated financial statements.
In May 2017, the FASB issued ASU No. 2017-09, Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting, which provides clarity as to when an entity has changes to the term or conditions of a share-based payment award, and when an entity should apply modification accounting. This ASU becomes effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted. Management is currently evaluating the impact of the future adoption of this ASU on our consolidated financial statements.
In February 2018, the FASB issued ASU No. 2018-02, Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. This ASU addresses the impact of adjustments to deferred taxes due to the reduction of the historical income tax rate to the newly enacted corporate income tax rate as required by the Tax Cuts and Jobs Act (the “TCJA”). The amendments in this update allow reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the TCJA. The amount of the reclassification would be the difference between the historical corporate income tax rate and the newly enacted 21 percent corporate income tax rate. This ASU becomes effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2018. Early adoption is permitted. Management is currently evaluating the impact of the future adoption of this ASU on our consolidated financial statements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Market Risk
Market risk is the potential for loss or diminished financial performance arising from adverse changes in market forces, including interest rates and market prices. Market risk sensitivity is the degree to which a financial instrument, or a company that owns financial instruments, is exposed to market forces. Fluctuations in interest rates, changes in economic conditions, shifts in customer behavior and other factors can affect our financial performance. Changes in economic conditions and shifts in customer

71

behavior are difficult to predict, and our financial performance cannot be completely insulated from these forces.
Structured Settlements Segment
Interest Rate Risk
We are exposed to interest rate risk on all assets and liabilities held at fair value with all gains and losses recorded in our consolidated statements of operations. As of December 31, 2017, the sensitivities of our exposed assets and liabilities to a hypothetical change in interest rates of 100 basis points are as follows:
 
 
Balance as of December 31, 2017
 
Impact at
December 31, 2017
of a 100 basis point increase in
interest rates
 
Impact at
December 31, 2017
of a 100 basis point decrease in
interest rates
 
 
(In thousands)
Securitized receivables, at fair value
 
$
4,227,389

 
$
(264,980
)
 
$
290,711

Unsecured finance receivables, at fair value
 
51,567

 
(4,843
)
 
5,652

VIE and other finance receivables, at fair value
 
$
4,278,956

 
$
(269,823
)
 
$
296,363

VIE long-term debt issued by securitization and permanent financing trusts, at fair value
 
$
(4,104,778
)
 
$
242,101

 
$
(272,797
)
VIE derivative liabilities, at fair value
 
(38,460
)
 
14,947

 
(16,284
)
Net Impact
 
N/A

 
$
(12,775
)
 
$
7,282

These sensitivities are hypothetical and should be used with caution. The impact of rate changes on securitized receivables is largely offset by the corresponding impact on securitization debt and associated VIE derivative liabilities.
In addition to the impact to our consolidated balance sheet noted above from changes in interest rates, the level of interest rates and our resulting financing costs are a key determinant in the amount of income that we generate from our inventory of structured settlement, annuity and lottery payment streams. If interest rates change between the time that we price a transaction with a customer and when it is ultimately securitized or sold, our profitability on the transaction is impacted. For example, if the cost of our financing were to have increased by 1% for all of the payment streams we purchased during 2017, and we were unable to mitigate the impact of this increase by hedging with interest rate swaps or other means, our loss for the year ended December 31, 2017 would have been decreased by approximately $37.0 million. If instead this increase of 1% in financing costs were to have only affected our December payment stream purchases our loss for the year ended December 31, 2017 would have been decreased by approximately $3.1 million.
Home Lending Segment
Interest Rate Risk
Changes in interest rates affect our operations primarily as follows:
•
an increase in interest rates would increase our costs of servicing our outstanding debt, including our ability to finance servicing advances and loan originations;
•
a decrease (increase) in interest rates would generally increase (decrease) prepayment rates and may require us to report a decrease (increase) in the value of our MSRs;
•
a change in prevailing interest rates could impact our earnings from our custodial deposit accounts;
•
an increase in interest rates could generate an increase in delinquency, default and foreclosure rates resulting in an increase in both operating expenses and interest expense and could cause a reduction in the value of our assets; and
•
a substantial and sustained increase in prevailing interest rates could adversely affect our loan originations volume because refinancing an existing loan would be less attractive and qualifying for a loan may be more difficult.
We actively manage the risk profiles of IRLCs and mortgage loans held for sale on a daily basis and enter into forward sales of MBS in an amount equal to the portion of the IRLCs expected to close, assuming no change in mortgage interest rates. In addition, to manage the interest rate risk associated with mortgage loans held for sale, we enter into forward sales of MBS to deliver mortgage loan inventory to investors.

72

Sensitivity Analysis
We assess our market risk based on changes in interest rates utilizing a sensitivity analysis. The sensitivity analysis measures the potential impact on fair values based on hypothetical changes (increases and decreases) in interest rates.
We use a duration-based model in determining the impact of interest rate shifts on our loan portfolio, certain other interest bearing liabilities measured at fair value and interest rate derivatives portfolios. The primary assumption used in these models is that an increase or decrease in the benchmark interest rate produces a parallel shift in the yield curve across all maturities.
We utilize a discounted cash flow analysis to determine the fair value of MSRs and the impact of parallel interest rate shifts on MSRs. The primary assumptions in this model are prepayment speeds and market discount rates. However, this analysis ignores the impact of interest rate changes on certain material variables, such as the benefit or detriment on the value of future loan originations, non-parallel shifts in the spread relationships between MBS, swaps and U.S. Treasury rates and changes in primary and secondary mortgage market spreads. For mortgage loans, IRLCs and forward delivery commitments on MBS, we rely on a model in determining the impact of interest rate shifts. In addition, for IRLCs, the borrower's propensity to close their mortgage loans under the commitment is used as a primary assumption.
Our total market risk is influenced by a wide variety of factors including market volatility and the liquidity of the markets. There are certain limitations inherent in the sensitivity analysis presented, including the necessity to conduct the analysis based on a single point in time and the inability to include the complex market reactions that normally would arise from the market shifts modeled.
The following sensitivity analyses are limited in that they were performed at a particular point in time, only contemplate the movement of interest rates and do not incorporate changes to other variables, are subject to the accuracy of various models and assumptions used and do not incorporate other factors that would affect our overall financial performance in such scenarios, including operational adjustments made by management to account for changing circumstances. For these reasons, the following estimates should not be viewed as earnings forecasts.
As of December 31, 2017, the sensitivities of our exposed assets and liabilities to a hypothetical change in interest rates of 100 basis points are as follows:
 
 
Balance as of December 31, 2017
 
Impact at
December 31, 2017
of a 100 basis point increase in
interest rates
 
Impact at
December 31, 2017
of a 100 basis point decrease in
interest rates
 
 
(In thousands)
Mortgage loans held for sale, at fair value
 
$
261,194

 
$
(10,732
)
 
$
6,899

Mortgage servicing rights, at fair value
 
56,134

 
10,795

 
(12,403
)
Interest rate lock commitments, at fair value
 
16,134

 
(15,581
)
 
5,628

Forward sale commitments, at fair value
 
623

 
27,138

 
(13,392
)
Net Impact
 
N/A

 
$
11,620

 
$
(13,268
)
Consumer Credit Risk
We sell our mortgage loans on a non-recourse basis. We also provide representations and warranties to purchasers and insurers of the mortgage loans sold that typically are in place for the life of the loan. In the event of a breach of these representations and warranties, we may be required to purchase a mortgage loan or indemnify the purchaser, and any subsequent loss on the mortgage loan may be borne by us. If there is no breach of a representation and warranty provision, we have no obligation to repurchase the loan or indemnify the investor against loss. The outstanding unpaid principal balance of mortgage loans sold by us represents the maximum potential exposure related to representation and warranty provisions.
We maintain a reserve for losses on mortgage loans repurchased or indemnified as a result of breaches of representations and warranties on our sold loans. Our estimate is based on our most recent data regarding loan repurchases and indemnity payments, actual credit losses on repurchased loans and recovery history, among other factors. Our assumptions are affected by factors both internal and external in nature. Internal factors include, among other things, level of loan sales, as well as to whom the loans are sold, the expectation of credit loss on repurchases and indemnifications, our success rate at appealing repurchase demands and our ability to recover any losses from third parties. External factors that may affect our estimate include, among other things, the overall economic condition in the housing market, the economic condition of borrowers, the political environment at investor agencies and the overall U.S. and world economy. Many of the factors are beyond our control and may lead to judgments that are susceptible to change.

73

Counterparty Credit Risk
We are exposed to counterparty credit risk in the event of non-performance by counterparties to various agreements. We monitor the credit ratings of our counterparties and do not anticipate losses due to counterparty non-performance.
Derivatives and Other Hedging Instruments
Refer to Note 18, Derivative Financial Instruments, in the Notes to the Consolidated Financial Statements under "Part II, Item 8 'Financial Statements and Supplementary Data'," which is incorporated by reference herein, for a summary of the Company's derivative transactions.

74

Item 8. Financial Statements and Supplementary Data
INDEX TO FINANCIAL STATEMENTS
THE J.G. WENTWORTH COMPANY
(DEBTOR-IN-POSSESSION)


F-1

Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of The J.G. Wentworth Company
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of The J.G. Wentworth Company (the Company) as of December 31, 2017 and 2016, the related consolidated statements of operations, comprehensive loss, changes in stockholders' (deficit) equity and cash flows for each of the three years in the period ended December 31, 2017, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the consolidated financial position of the Company at December 31, 2017 and 2016, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2017, in conformity with U.S. generally accepted accounting principles.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ Ernst & Young LLP

We have served as the Company’s auditor since 2005.

Boston, Massachusetts
April 2, 2018




F-2
The J.G. Wentworth Company
(Debtor-in-Possession)
Consolidated Balance Sheets


 
December 31, 2017
 
December 31, 2016
 
(Dollars in thousands, except per share data)
ASSETS
 

 
 

Cash and cash equivalents
$
35,562

 
$
80,166

Restricted cash and investments
140,878

 
195,588

VIE finance receivables, at fair value (1)
4,269,619

 
4,143,903

Other finance receivables, at fair value
9,337

 
13,134

VIE finance receivables, net of allowances for losses of $8,246 and $9,023, respectively (1)
73,805

 
85,325

Other finance receivables, net of allowances for losses of $2,004 and $2,061, respectively
8,004

 
8,619

Other receivables, net of allowances for losses of $273 and $280, respectively
20,918

 
17,771

Mortgage loans held for sale, at fair value (2)
261,194

 
232,770

Mortgage servicing rights, at fair value (2)
56,134

 
41,697

Premises and equipment, net of accumulated depreciation of $12,931 and $10,697, respectively
3,154

 
4,005

Intangible assets, net of accumulated amortization of $24,541 and $22,778, respectively
21,125

 
22,868

Goodwill
—

 
8,369

Marketable securities, at fair value
85,544

 
76,687

Deferred tax assets, net
283

 
405

Other assets
65,908

 
61,600

Total Assets
$
5,051,465

 
$
4,992,907

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ DEFICIT
 

 
 

Accrued expenses and accounts payable
$
26,330

 
$
28,929

Accrued interest
34,339

 
28,123

Term loan payable
—

 
431,872

VIE derivative liabilities, at fair value
38,460

 
50,432

VIE borrowings under revolving credit facilities and other similar borrowings
22,834

 
56,432

Other borrowings under revolving credit facilities and other similar borrowings
253,649

 
229,588

VIE long-term debt
58,480

 
62,939

VIE long-term debt issued by securitization and permanent financing trusts, at fair value
4,104,778

 
4,014,450

Other liabilities
59,198

 
52,448

Deferred tax liabilities, net
10,837

 
1,415

Installment obligations payable
85,544

 
76,687

Total liabilities not subject to compromise
$
4,694,449

 
$
5,033,315

Liabilities subject to compromise (3)
607,109

 
—

Total Liabilities
$
5,301,558

 
$
5,033,315

 
 
 
 
Commitments and contingencies (Note 24)


 


 
 
 
 
Class A common stock, par value $0.00001 per share; 500,000,000 shares authorized, 16,352,775 and 15,810,703 issued and outstanding as of December 31, 2017, respectively, 16,272,545 and 15,730,473 issued and outstanding as of December 31, 2016, respectively
$
—

 
$
—

Class B common stock, par value $0.00001 per share; 500,000,000 shares authorized, 8,629,738 issued and outstanding as of December 31, 2017, 8,710,158 issued and outstanding as of December 31, 2016, respectively
—

 
—

Class C common stock, par value $0.00001 per share; 500,000,000 shares authorized, 0 issued and outstanding as of December 31, 2017 and December 31, 2016, respectively
—

 
—

Additional paid-in-capital
106,217

 
105,823

Accumulated deficit
(308,955
)
 
(117,622
)
 
(202,738
)
 
(11,799
)
Less: treasury stock at cost, 542,072 shares as of December 31, 2017 and December 31, 2016, respectively
(2,138
)
 
(2,138
)
Total stockholders' deficit, The J.G. Wentworth Company
(204,876
)
 
(13,937
)
Non-controlling interests
(45,217
)
 
(26,471
)
Total Stockholders' Deficit
$
(250,093
)
 
$
(40,408
)
Total Liabilities and Stockholders’ Deficit
$
5,051,465

 
$
4,992,907

(1) Refer to Note 5 "VIE and Other Finance Receivables, at Fair Value" and Note 6 "VIE and Other Finance Receivables, net of Allowance for Losses" for further details on assets pledged as collateral.
(2) Pledged as collateral to Other borrowings under revolving credit facilities and other similar borrowings. Refer to Note 8 "Mortgage Loans Held for Sale, at Fair Value" and Note 9 "Mortgage Servicing Rights, at Fair Value."

F-3
The J.G. Wentworth Company
(Debtor-in-Possession)
Consolidated Balance Sheets


(3) Liabilities subject to compromise as of December 31, 2017 are presented in accordance with ASC 852. These liabilities include the "Term Loan Claims" and the "TRA Claims" as defined in the Plan.

The accompanying notes are an integral part of these consolidated financial statements.

F-4
The J.G. Wentworth Company
(Debtor-in-Possession)
Consolidated Statements of Operations


 
Years Ended December 31,
 
2017
 
2016
 
2015
 
(Dollars in thousands, except per share data)
REVENUES
 

 
 

 
 

Interest income
$
192,240

 
$
193,032

 
$
190,203

Realized and unrealized gains on VIE and other finance receivables, long-term debt and derivatives
112,316

 
17,225

 
80,023

Realized and unrealized gains on sale of mortgage loans held for sale, net of direct costs
72,459

 
75,102

 
18,590

Changes in mortgage servicing rights, net
14,437

 
12,410

 
1,649

Servicing, broker, and other fees
18,626

 
13,824

 
8,000

Loan origination fees
10,779

 
8,996

 
2,543

Realized and unrealized gains (losses) on marketable securities, net
7,855

 
4,083

 
(4,641
)
Total revenues
$
428,712

 
$
324,672

 
$
296,367

 
 
 
 
 
 
EXPENSES
 

 
 

 
 

Advertising
$
65,347

 
$
55,223

 
$
63,820

Interest expense (contractual interest, $231,322) (1)
229,497

 
224,499

 
208,545

Compensation and benefits
79,077

 
79,750

 
52,656

General and administrative
27,573

 
26,870

 
21,057

Professional and consulting
23,658

 
14,755

 
21,486

Debt issuance
5,878

 
5,117

 
6,741

Securitization debt maintenance
5,314

 
5,605

 
5,912

Provision for losses
4,860

 
5,958

 
5,576

Direct subservicing costs
3,868

 
3,415

 
948

Depreciation and amortization
4,146

 
4,814

 
4,613

Installment obligations expense (income), net
10,818

 
6,538

 
(1,225
)
Impairment charges and loss on disposal of assets
8,369

 
5,483

 
121,594

Reorganization items, net (2)
161,370

 
—

 
—

Total expenses
$
629,775

 
$
438,027

 
$
511,723

Loss before income taxes
(201,063
)
 
(113,355
)
 
(215,356
)
Provision (benefit) for income taxes
9,645

 
(15,340
)
 
(18,216
)
Net loss
$
(210,708
)
 
$
(98,015
)
 
$
(197,140
)
Less: net loss attributable to non-controlling interests
(19,375
)
 
(51,158
)
 
(101,828
)
Net loss attributable to The J.G. Wentworth Company
$
(191,333
)
 
$
(46,857
)
 
$
(95,312
)
 
Years Ended December 31,
 
2017
 
2016
 
2015
Weighted average shares of Class A common stock outstanding:
 

 
 
 
 
Basic
15,782,303

 
15,649,474

 
14,690,746

Diluted
15,782,303

 
15,649,474

 
14,690,746

Net loss per share attributable to stockholders of Class A common stock of The J.G. Wentworth Company
 

 
 
 
 

Basic
$
(12.12
)
 
$
(2.99
)
 
(6.49
)
Diluted
$
(12.12
)
 
$
(2.99
)
 
(6.49
)
(1) Contractual interest expense for the year ended December 31, 2017 is related to the term loan payable and presented in accordance with ASC 852.
(2) Reorganization items, net for the year ended December 31, 2017 are presented in accordance with ASC 852 and include (i) $160.1 million of TRA obligations and, (ii) $1.3 million of professional and consulting fees incurred in connection with the Company's bankruptcy proceedings from the Petition Date through December 31, 2017.
The accompanying notes are an integral part of these consolidated financial statements.

F-5
The J.G. Wentworth Company
(Debtor-in-Possession)
Consolidated Statements of Comprehensive Loss


 
Years Ended December 31,
 
2017
 
2016
 
2015
 
(In thousands)
Net loss
$
(210,708
)
 
$
(98,015
)
 
$
(197,140
)
Other comprehensive loss:
 

 
 

 
 

Reclassification adjustment for gain in net income
—

 
—

 
—

Unrealized gains on notes receivable arising during the year
—

 
—

 
—

Total other comprehensive loss
—

 
—

 
—

Total comprehensive loss
(210,708
)
 
(98,015
)
 
(197,140
)
Less: comprehensive loss allocated to non-controlling interests
(19,375
)
 
(51,158
)
 
(101,828
)
Comprehensive loss attributable to The J.G. Wentworth Company
$
(191,333
)
 
$
(46,857
)
 
$
(95,312
)
 
The accompanying notes are an integral part of these consolidated financial statements.


F-6
The J.G. Wentworth Company
(Debtor-in-Possession)
Consolidated Statements of Changes in Stockholders’ (Deficit) Equity

(Dollars in thousands, except per share data)
 
 
Accumulated
Other
Comprehensive
Income
 
Non-controlling
Interest
 
(Accumulated
Deficit)
Retained Earnings
 
Additional Paid-In-
Capital
 
Treasury Stock
 
Common Stock - Class A
 
Common Stock - Class B
 
Total
Stockholders’
(Deficit) 
Equity
 
 
 
 
 
 
Shares
 
Dollars
 
Shares
 
Dollars
 
Shares
 
Dollars
 
Balance as of December 31, 2014
 
$
—

 
$
134,991

 
$
25,634

 
$
95,453

 
600,755

 
$
(2,443
)
 
14,420,392

 
$
—

 
9,963,750

 
$
—

 
$
253,635

Net income
 
—

 
(101,828
)
 
(95,312
)
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(197,140
)
Share-based compensation
 
—

 
638

 
—

 
653

 
—

 
—

 
70,348

 
—

 
(70,103
)
 
—

 
1,291

Re-issuance of treasury stock in connection with the Home Lending Acquisition
 
—

 
6,380

 
(1,087
)
 
—

 
(1,572,327
)
 
7,663

 
1,572,327

 
—

 
—

 
—

 
12,956

Exchange of JGW LLC common interests into Class A common stock
 
—

 
(8,666
)
 
—

 
8,666

 
—

 
—

 
984,949

 
—

 
(984,949
)
 
—

 
—

Equity financing costs
 
—

 
(53
)
 
—

 
(59
)
 
—

 
—

 
 
 
—

 
—

 
—

 
(112
)
Repurchases of Class A common stock
 
—

 
(7,113
)
 
—

 
—

 
1,513,644

 
(7,358
)
 
(1,513,644
)
 
—

 
—

 
—

 
(14,471
)
Balance as of December 31, 2015
 
—

 
24,349

 
(70,765
)
 
104,713

 
542,072

 
(2,138
)
 
15,534,372

 
—

 
8,908,698

 
—

 
56,159

Net loss
 
—

 
(51,158
)
 
(46,857
)
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(98,015
)
Share-based compensation
 
—

 
659

 
—

 
789

 
—

 
—

 
—

 
—

 
(2,439
)
 
—

 
1,448

Exchange of JGW LLC common interests into Class A common stock
 
—

 
(321
)
 
—

 
321

 
—

 
—

 
196,101

 
—

 
(196,101
)
 
—

 
—

Balance as of December 31, 2016
 
—

 
(26,471
)
 
(117,622
)
 
105,823

 
542,072

 
(2,138
)
 
15,730,473

 
—

 
8,710,158

 
—

 
(40,408
)
Net loss
 
—

 
(19,375
)
 
(191,333
)
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(210,708
)
Share-based compensation
 
—

 
468

 
—

 
570

 
—

 
—

 
—

 
—

 
(9,871
)
 
—

 
1,038

Capital distributions
 
—

 
(15
)
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(15
)
Issuance of Class A common stock for vested equity awards
 
—

 
—

 
—

 
—

 
—

 
—

 
9,681

 
—

 
—

 
—

 
—

Exchange of JGW LLC common interests into Class A common stock
 
—

 
176

 
—

 
(176
)
 
—

 
—

 
70,549

 
—

 
(70,549
)
 
—

 
—

Balance as of December 31, 2017
 
$
—

 
$
(45,217
)
 
$
(308,955
)
 
$
106,217

 
542,072

 
$
(2,138
)
 
15,810,703

 
$
—

 
8,629,738

 
$
—

 
$
(250,093
)
 
The accompanying notes are an integral part of these consolidated financial statements.

F-7
The J.G. Wentworth Company
(Debtor-in-Possession)
Consolidated Statements of Cash Flows


 
Years Ended December 31,
 
2017
 
2016
 
2015
 
(In thousands)
Cash flows from operating activities:
 

 
 

 
 

Net loss
$
(210,708
)
 
$
(98,015
)
 
$
(197,140
)
Adjustments to reconcile net loss to net cash used in operating activities:
 

 
 

 
 

Provision for losses
4,860

 
5,958

 
5,576

Depreciation
2,403

 
2,736

 
2,365

Impairment charges
8,369

 
5,483

 
121,594

Changes in mortgage servicing rights, net
(14,437
)
 
(12,410
)
 
(1,649
)
Amortization of finance receivables acquisition costs
15

 
53

 
622

Amortization of intangibles
1,743

 
2,078

 
2,248

Amortization of debt issuance costs
7,665

 
12,955

 
7,949

Proceeds from sale of and principal payments on mortgage loans held for sale
3,817,815

 
3,408,065

 
872,526

Originations and purchases of mortgage loans held for sale
(3,789,972
)
 
(3,441,939
)
 
(847,917
)
Change in realized and unrealized gains/losses on finance receivables
(184,368
)
 
(33,698
)
 
164,311

Change in unrealized gains/losses on long-term debt
87,404

 
97,829

 
(229,635
)
Change in unrealized gains/losses on derivatives
(12,146
)
 
(16,297
)
 
(9,346
)
Net proceeds from sale of finance receivables
18,994

 
271,331

 
21,949

Realized and unrealized gains on sale of mortgage loans held for sale, net of direct costs
(72,459
)
 
(75,102
)
 
(18,590
)
Purchases of finance receivables
(285,868
)
 
(273,298
)
 
(395,986
)
Collections on finance receivables
524,894

 
531,741

 
554,464

Gain on sale of finance receivables
(3,024
)
 
(69,598
)
 
(4,950
)
Recoveries of finance receivables
18

 
147

 
1

Accretion of interest income
(186,008
)
 
(187,498
)
 
(189,736
)
Accretion of interest expense
(6,151
)
 
(25,942
)
 
(40,074
)
Gain on extinguishment of debt
—

 
—

 
(593
)
Share-based compensation expense
1,038

 
1,448

 
1,291

Change in marketable securities
(7,855
)
 
(4,083
)
 
4,641

Installment obligations expense (income), net
10,818

 
6,538

 
(1,225
)
Deferred income taxes, net
9,544

 
(15,566
)
 
(17,911
)
(Increase) decrease in operating assets:
 

 
 

 
 

Restricted cash and investments
54,710

 
(58,808
)
 
66,182

Other assets
14,844

 
(2,947
)
 
919

Other receivables
(3,143
)
 
(1,498
)
 
1,683

(Decrease) increase in operating liabilities:
 

 
 

 
 

Accrued expenses and accounts payable
(2,599
)
 
7,838

 
(1,021
)
Accrued interest
12,973

 
5,743

 
4,658

Other liabilities
897

 
(718
)
 
(2,902
)
TRA obligations
160,113

 
—

 
—

Net cash (used in) provided by operating activities
$
(39,621
)
 
$
42,526

 
$
(125,696
)
The accompanying notes are an integral part of these consolidated financial statements.




F-8
The J.G. Wentworth Company
(Debtor-in-Possession)
Consolidated Statements of Cash Flows (continued)


 
Years Ended December 31,
 
2017
 
2016
 
2015
 
(In thousands)
Cash flows from investing activities:
 

 
 

 
 

Purchase of Home Lending, net of cash acquired
$
—

 
$
(7,630
)
 
$
(47,408
)
Purchases of premises and equipment, net of sales proceeds
(1,552
)
 
(1,067
)
 
(3,092
)
Net cash used in investing activities
$
(1,552
)
 
$
(8,697
)
 
$
(50,500
)
Cash flows from financing activities:
 

 
 

 
 

Capital distributions
$
(15
)
 
$
—

 
$
—

Payments of equity financing costs
—

 
—

 
(112
)
Purchases of treasury stock
—

 
—

 
(14,471
)
Issuance of VIE long-term debt
340,573

 
337,667

 
514,699

Payments for debt issuance costs
(3,054
)
 
(1,150
)
 
(742
)
Payments on capital lease obligations
(53
)
 
(50
)
 
(4
)
Repayments of long-term debt and derivatives
(332,121
)
 
(464,282
)
 
(330,745
)
Gross proceeds from revolving credit facilities
4,038,593

 
3,668,185

 
1,140,012

Repayments of revolving credit facilities
(4,047,354
)
 
(3,551,355
)
 
(1,116,767
)
Issuance of installment obligations payable
14,527

 
3,471

 
1,419

Purchase of marketable securities
(14,527
)
 
(3,471
)
 
(1,419
)
Repayments of installment obligations payable
(16,488
)
 
(18,316
)
 
(18,620
)
Proceeds from sale of marketable securities
16,488

 
18,316

 
18,620

Net cash (used in) provided by financing activities
$
(3,431
)
 
$
(10,985
)
 
$
191,870

Net (decrease) increase in cash
(44,604
)
 
22,844

 
15,674

Cash and cash equivalents at beginning of year
80,166

 
57,322

 
41,648

Cash and cash equivalents at end of year
$
35,562

 
$
80,166

 
$
57,322

 
 
 
 
 
 
Supplemental disclosure of cash flow information:
 

 
 

 
 

Reorganization items, net:
 
 
 
 
 
   TRA obligations
$
160,113

 
$
—

 
$
—

   Professional and consulting
$
1,257

 
$
—

 
$
—

Cash paid for interest
$
211,013

 
$
224,086

 
$
236,075

Cash paid for income taxes
$
208

 
$
96

 
$
128

Supplemental disclosure of noncash items:
 

 
 

 
 

Retained mortgage servicing rights in connection with sale of mortgage loans
$
20,812

 
$
17,294

 
$
3,752

Mortgage loans subject to repurchase rights from Ginnie Mae
$
3,019

 
$
(6,130
)
 
$
23,121

Exchange of LLC Common Interests for shares of Class A common stock
$
(176
)
 
$
321

 
$
8,666

Re-issuance of treasury stock in connection with acquisition
$
—

 
$
—

 
$
12,956

Amount due to sellers in connection with acquisition
$
—

 
$
—

 
$
8,443

Capital lease obligation assumed
$
—

 
$
—

 
$
281

The accompanying notes are an integral part of these consolidated financial statements.

F-9

The J.G. Wentworth Company
(Debtor-in-Possession)
Notes to Consolidated Financial Statements


1. Background and Basis of Presentation
Organization and Description of Business Activities
The J.G. Wentworth Company (the "Corporation") is a Delaware holding company that was incorporated on June 21, 2013. The Corporation operates through its managing membership in The J.G. Wentworth Company, LLC ("JGW LLC"), the Corporation's sole operating asset. JGW LLC is a controlled and consolidated subsidiary of the Corporation whose sole asset is its membership interest in J.G. Wentworth, LLC. The "Company" refers collectively to the Corporation and, unless otherwise stated, all of its subsidiaries. The Company, operating through its subsidiaries and affiliates, has its principal offices in Chesterbrook, Pennsylvania and Woodbridge, Virginia.
The Company is focused on providing direct-to-consumer access to financing solutions through a variety of avenues, including: mortgage lending, structured settlement, annuity and lottery payment purchasing, prepaid cards, and access to providers of personal loans. The Company's direct-to-consumer businesses use digital channels, television, direct mail, and other channels to offer access to financing solutions. The Company warehouses, securitizes, sells or otherwise finances the financial assets that it purchases in transactions that are structured to ultimately generate cash proceeds to the Company that exceed the purchase price paid for those assets.
The Company identified the following two reportable segments in accordance with Accounting Standards Codification ("ASC") 280, Segment Reporting:
(i) Structured Settlement Payments ("Structured Settlements") - Structured Settlements provides liquidity to individuals with financial assets such as structured settlements, annuities, and lottery winnings by either purchasing these financial assets for a lump-sum payment, issuing installment obligations payable over time, or serving as a broker to other purchasers of those financial assets. The Company engages in warehousing and subsequent resale or securitization of these various financial assets. Structured Settlements also includes corporate activities, payment solutions, pre-settlements and providing (i) access to providers of personal lending and (ii) access to providers of funding for pre-settled legal claims.
(ii) Home Lending ("Home Lending") - Home Lending is primarily engaged in retail mortgage lending, originating primarily Federal Housing Administration ("FHA"), U.S. Department of Veterans Affairs ("VA") and conventional mortgage loans and is approved as a Title II, non-supervised direct endorsement mortgagee with the U.S. Department of Housing and Urban Development ("HUD"). In addition, Home Lending is an approved issuer with the Government National Mortgage Association ("Ginnie Mae"), Federal Home Loan Mortgage Corporation ("Freddie Mac"), and U.S. Department of Agriculture ("USDA"), as well as an approved seller and servicer with the Federal National Mortgage Association ("Fannie Mae").
Reorganization Plan under Chapter 11 and Bankruptcy Proceedings
On November 13, 2017 and November 14, 2017, the Company filed its post-effective amendments for its registration statements to terminate the effectiveness of the registration statements and to remove from registration any shares that remain unsold at that time.
On December 12, 2017, the Corporation, together with JGW LLC, Orchard Acquisition Company, LLC, JG Wentworth LLC and JGW Holdings Inc. (the “Debtors”) filed voluntary cases (the “Chapter 11 Cases”) under Chapter 11 of title 11 of the United States Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”) to pursue the previously announced Joint Pre-Packaged Plan of Reorganization of Orchard Acquisition Company, LLC and its Debtor Affiliates, dated December 1, 2017 (as amended, the “Plan”). Only the Debtors have filed the Chapter 11 Cases. Accordingly, the direct and indirect subsidiaries of Orchard Acquisition Company, LLC, including the entities which conduct all of the Company’s consolidated operations, have not filed for bankruptcy and the business of the Company, including its day to day operations, remained uninterrupted.
On December 28, 2017, the Company filed its notice of termination of registration under Section 12(g) of the Exchange Act. On January 5, 2018, the Company filed its suspension of duty to file reports under Section 13 or Section 15(d) of the Exchange Act. As a result of these filings, we are no longer required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act, other than this Annual Report on Form 10-K for the year ended December 31, 2017.
On January 17, 2018, the Bankruptcy Court entered an order approving and confirming the Plan. On the Effective Date, January 25, 2018, the Debtors satisfied the conditions to effectiveness of the Plan and the Plan became effective in accordance with its terms and the Debtors emerged from bankruptcy.
Pursuant to the Plan, (a) all claims arising under the Debtors’ pre-petition secured term loan facility and related guarantees were terminated and released, and each holder of such claims received its pro rata share of (i) certain cash consideration (the "Term

F-10

The J.G. Wentworth Company
(Debtor-in-Possession)
Notes to Consolidated Financial Statements

Lender Cash Consideration") and (ii) the New Common Equity, subject to dilution by the Management Incentive Plan adopted on the Effective Date; (b) all pre-petition equity interests in The J.G. Wentworth Company, LLC were canceled and in exchange each holder of such equity interests received its pro rata share of (i) New Common Equity or (ii) certain cash consideration (the "Partnership Cash Consideration"), or a mix of both the Partnership Cash Consideration and New Common Equity; (c) all pre-petition claims against the Company arising under the TRA were canceled and, in consideration, each TRA claimant received its pro rata share of the New Class A common stock and the New Class B common stock of the Company or cash consideration, at the sole election of each holder of a TRA claim. Consequently, the Term Loan Holders received $36.0 million of cash consideration and 24,696,626 shares of 24,858,587 shares of New Class A common stock with an aggregated fair value of $153.1 million. In addition, the TRA claimants now hold, in the aggregate, 161,961 shares of New Class A common stock and 141,384 shares of New Class B common stock and received $4.8 million of cash consideration. The aggregate fair value of the total TRA settlement was $6.6 million.
Pursuant to the Plan all previously issued and held equity interests were canceled without recovery.
On the Effective Date, we entered into a New RCF Agreement among Orchard Acquisition Company, LLC, as Parent Borrower, J.G. Wentworth, LLC, the lending institutions from time to time party thereto, and HPS Investment Partners, LLC, a related party and a holder of more than 5% of our New Class A common stock, as administrative agent. The New RCF Agreement provides for a new four-year revolving credit facility with an aggregate borrowing availability of $70.0 million with interest accruing at LIBOR plus a spread of 5.00% subject to a floor of 1.00% and a non-usage fee of LIBOR plus 3.00% per annum. The New RCF contains other customary terms, including (i) representations, warranties and affirmative covenants, (ii) negative covenants, including limitations on indebtedness, liens, mergers, acquisitions, asset sales, investments, distributions, prepayments of subordinated debt, and transactions with affiliates, in each case subject to baskets, thresholds and other exceptions, and a financial covenant to maintain a Total Leverage Ratio (as defined in the New RCF Agreement) of 3.50 to 1.00, and (iii) customary events of default, including changes in control. The total leverage ratio is calculated by dividing the total funded debt less unrestricted cash and cash equivalents by Consolidated EBITDA (as defined in the New RCF Agreement) for the period of the four fiscal quarters most recently ended.     
The Company drew $55.0 million from its New RCF to fund (i) the Partnership Cash Consideration of $4.8 million, (ii) a portion of the Term Lender Cash Consideration of $36.0 million, (iii) $5.6 million of closing and commitment fees paid to HPS Investment Partners, LLC, and (iii) $8.6 million of professional fees and expenses, which included success fees of $3.6 million.
As a result of the foregoing, the Company’s corporate structure otherwise remained substantially the same as prior to the Chapter 11 Cases and it amended and restated its certificate of incorporation to provide for, among other things, the authorization of 225,000,000 shares of New Class A common stock and 25,000,000 shares of New Class B common stock. The Company is not authorized to issue any shares of preferred stock under its amended and restated certificate of incorporation.
A New Management Incentive Plan was adopted. Under the Plan, 8% of the New Common Equity on a fully-diluted basis was reserved for issuance by the Board that was put in place upon emergence from bankruptcy for the benefit of participants in the Management Incentive Plan. On January 25, 2018, 271,739 new restricted stock units and 815,216 new stock option shares, totaling of 1,086,955 shares or 4% of the New Common Equity, were granted in accordance with the Management Incentive Plan.
In connection with the implementation of the Plan and as a result of the change in control effectuated by the Plan, the Debtors sought and obtained certain required regulatory approvals related to Home Lending prior to the effective date of the Plan.
Pursuant to the Plan the members of the Board of Directors of the Company were replaced with new members.
Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States ("U.S. GAAP"). In the opinion of management, the consolidated financial statements reflect all adjustments which are necessary for a fair presentation of financial position, results of operations, and cash flows for the periods presented. All such adjustments are of a normal and recurring nature.
Effective on December 12, 2017, the Company began to apply ASC 852, which is applicable to companies under Chapter 11 bankruptcy protection. It requires the financial statements for periods subsequent to the Chapter 11 filing to distinguish transactions and events that are directly associated with the reorganization from the ongoing operations of the business and to be reported separately as reorganization items, net in the consolidated statements of operations. In addition, the consolidated balance sheet must distinguish debtor pre-petition liabilities subject to compromise ("LSTC") from pre-petition liabilities that are not subject to compromise and from post-petition liabilities in the accompanying consolidated balance sheet. Where there is uncertainty about whether a secured claim will be paid or impaired under the Chapter 11 proceedings, the entire amount of the claim was

F-11

The J.G. Wentworth Company
(Debtor-in-Possession)
Notes to Consolidated Financial Statements

classified as a LSTC. LSTC include the all claims and obligations arising under or relating to the Term Loan Payable (the "Term Loan Claims") and all claims and obligations arising under or relating to the tax receivable agreement (the "TRA obligations").
LSTC include unsecured or under-secured liabilities incurred prior to the Petition Date. These liabilities represent the amounts expected to be allowed on known or potential claims to be resolved through the Chapter 11 Cases and remain subject to future adjustments based on negotiated settlements with claimants, actions of the Bankruptcy Court, rejection of executory contracts, proofs of claims or other events. Additionally, LSTC also include certain items that may be assumed under a plan of reorganization, and as such, may be subsequently reclassified to LSTC. Generally, actions to enforce or otherwise effect payment of prepetition liabilities are subject to the automatic stay or an approved motion of the Bankruptcy Court.
Reorganization items, net on the Company's consolidated statement of operations represent amounts incurred after the petition date, December 12, 2017 (the "Petition Date") as a direct result of the bankruptcy. The filing by the Company of Chapter 11 Cases qualified as a Material Breach under a tax receivable agreement ("TRA"). Consequently, all obligations under the TRA were accelerated and the claimants were owed the present value of all future tax attributes, subject to certain discounting and based on assumptions regarding the remaining payments expected to be made under the TRA. The TRA obligations was estimated to be $160.1 million. In addition, reorganization items, net comprise of legal and professional fees in the amount of $1.3 million.
As of the Petition Date through December 31, 2017, the Company ceased recording interest expense on outstanding pre-petition LSTC of approximately $1.8 million.     
The preparation of the financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and the amounts of revenues and expenses during the reporting periods. The most significant balance sheet accounts that could be affected by such estimates are variable interest entity ("VIE") finance receivables, at fair value; other finance receivables, at fair value; mortgage loans held for sale, at fair value; mortgage servicing rights, at fair value; intangible assets, net of accumulated amortization; goodwill; VIE derivative liabilities, at fair value; and VIE long-term debt issued by securitization and permanent financing trusts, at fair value. Actual results could differ from those estimates and such differences could be material.
The accompanying consolidated financial statements include the accounts of the Corporation, its wholly-owned subsidiaries, other entities in which the Company has a controlling financial interest and those entities that are considered VIEs where the Company has been determined to be the primary beneficiary in accordance with ASC 810, Consolidation ("ASC 810").
JGW LLC meets the definition of a VIE under ASC 810. Further, the Corporation is the primary beneficiary of JGW LLC as a result of its control over JGW LLC. As the primary beneficiary of JGW LLC, the Corporation consolidates the financial results of JGW LLC and records a non-controlling interest for the economic interest in JGW LLC not owned by the Corporation. The Corporation's and the non-controlling interests' economic interest in JGW LLC was 54.9% and 45.1%, respectively, as of December 31, 2017. The Corporation's and the non-controlling interests' economic interest in JGW LLC was 54.6% and 45.4%, respectively, as of December 31, 2016.
Net (loss) income attributable to the non-controlling interests in the Company's consolidated statements of operations represents the portion of (loss) earnings attributable to the economic interest in JGW LLC held by entities and individuals other than the Corporation. The allocation of net (loss) income attributable to the non-controlling interests is based on the weighted average percentage of JGW LLC owned by the non-controlling interests during the reporting period. The non-controlling interests' weighted average economic interests in JGW LLC for the years ended December 31, 2017, 2016 and 2015 was 45.2%, 45.5% and 48.3%, respectively. In accordance with the Plan, on the Effective Date, the non-controlling interests in the Company were canceled.
The net loss attributable to The J.G. Wentworth Company in the consolidated statements of operations for the years ended December 31, 2017, 2016 and 2015 does not necessarily reflect the Corporation's weighted average economic interests in JGW LLC for the respective periods because the majority of the (benefit) provision for income taxes was specifically attributable to the legal entity The J.G. Wentworth Company, and thus was not allocated to the non-controlling interests. For the year ended December 31, 2017, $8.8 million total tax provision was specifically attributable to The J.G. Wentworth Company. The remaining tax provision of $0.8 million relates to the Company’s subsidiaries. For the year ended December 31, 2016, $14.5 million of the $15.3 million total tax benefit was specifically attributable to The J.G. Wentworth Company. The remaining tax benefit of $0.8 million relates to the Company’s subsidiaries. For the year ended December 31, 2015, $19.0 million of the $18.2 million total tax benefit was specifically attributable to The J.G. Wentworth Company. The remaining $0.8 million tax provision relates to the Company’s subsidiaries. Refer to Note 19 for a description of the Company's income taxes.

F-12

The J.G. Wentworth Company
(Debtor-in-Possession)
Notes to Consolidated Financial Statements

Non-controlling interests on the Company's consolidated balance sheets represent the portion of deficit attributable to the non-controlling interests of JGW LLC. The allocation of deficit to the non-controlling interests in JGW LLC is based on the percentage owned by the non-controlling interests in the entity.
All material inter-company balances and transactions are eliminated in consolidation. Refer to Note 2 for a summary of significant accounting policies. Certain prior-period amounts have been reclassified to conform to current-period presentation.  
Going Concern
In accordance with the Financial Accounting Standards Board (“FASB”) ASC 205-40, Going Concern ("ASC 205-40"), management must evaluate whether there are conditions or events, considered in the aggregate, that could raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the financial statements are issued. In making its evaluation, management is not able to take into consideration the potential mitigating effect of management’s plans that have not been fully implemented as of the date the financial statements are issued. However, when the relevant conditions or events, considered in the aggregate, initially indicate that substantial doubt may exist, management may consider in its evaluation whether the mitigating effect of its plans sufficiently alleviates substantial doubt about the Company’s ability to continue as a going concern. The mitigating effect of management’s plans, however, is only considered if both (1) it is probable that the plans will be effectively implemented within one year after the date that the financial statements are issued, and (2) it is probable that the plans, when implemented, will mitigate the relevant conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued.
The Company performed the required assessments in conjunction with the filing of its Form 10-Q for the three months ended September 30, 2017 and determined, at that time, that substantial doubt about its ability to continue as a going concern existed and will not be alleviated before the Company emerges from the Chapter 11 Cases. On January 17, 2018, the Bankruptcy Court entered an order approving and confirming the Plan (the “Confirmation Order”). On January 25, 2018 (the “Effective Date”), the Debtors satisfied the conditions to effectiveness of the Plan and the Plan became effective in accordance with its terms and the Debtors emerged from bankruptcy. Management’s current assessment was based on the relevant conditions that were known and reasonably knowable at the issuance date and included the Company’s current financial condition and liquidity sources, forecasted future cash flows, the Company’s contractual obligations and commitments and other conditions that could adversely affect the Company’s ability to meet its obligations through April 2, 2019. Management concluded that no substantial doubt exists regarding the Company’s ability to continue as a going concern one year from the date of filing of the Company's Form 10-K for the year ended December 31, 2017.
The accompanying consolidated financial statements included in this Form 10-K have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The accompanying consolidated financial statements do not include any adjustments to the amounts and classification of assets and liabilities that might be necessary should the Company be unable to continue as a going concern.
2. Summary of Significant Accounting Policies and Recently Adopted Accounting Pronouncements
Summary of Significant Accounting Policies
Consolidation
The consolidated financial statements include the accounts of The J.G. Wentworth Company, its wholly-owned subsidiaries, and other entities in which the Company has a controlling financial interest, and those variable interest entities where the Company's wholly-owned subsidiaries are the primary beneficiaries. All material intercompany balances and transactions are eliminated in consolidation.
In the normal course of business, the Company is involved with various entities that are considered to be VIEs. A VIE is an entity that has either a total investment that is insufficient to permit the entity to finance its activities without additional subordinated financial support or whose equity investors lack the characteristics of a controlling financial interest under the voting interest model of consolidation. The Company is required to consolidate any VIE for which it is determined to be the primary beneficiary. The primary beneficiary is the entity that has the power to direct those activities of the VIE that most significantly impact the VIE's economic performance and has the obligation to absorb losses from or the right to receive benefits from the VIE that could potentially be significant to the VIE. The Company reviews all significant interests in the VIEs it is involved with including consideration of the activities of the VIEs that most significantly impact the VIEs' economic performance and whether the Company has control over those activities. As a result of adopting ASC 810, the Company determined it was the primary beneficiary of the VIEs used to securitize its finance receivables ("VIE finance receivables"). The Company elected the fair value option with respect to assets and liabilities in its securitization VIEs as part of their initial consolidation on January 1, 2010.

F-13

The J.G. Wentworth Company
(Debtor-in-Possession)
Notes to Consolidated Financial Statements

On an ongoing basis, the Company assesses whether or not it is the primary beneficiary of a VIE or whether the Company has acquired or divested the power to direct the activities of the VIE through changes in governing documents or other circumstances. The reassessment also considers whether the Company has acquired or disposed of a financial interest that could be significant to the VIE. As a result of this assessment, the consolidation status of the legal entities with which the Company is involved may change. As of December 31, 2017, there was no change in the consolidation status of the legal entities with which the Company is involved.
The debt issued by the Company's securitization VIEs is reported on the Company's consolidated balance sheets as VIE long-term debt issued by securitization and permanent financing trusts, at fair value ("VIE securitization debt"). The VIE securitization debt is recourse solely to the VIE finance receivables held by such special purpose entities ("SPEs") and is non-recourse to the Company and its other consolidated subsidiaries. The VIEs will continue in operation until all securitization debt is paid and all residual cash flows are collected. As a result of the long lives of many finance receivables purchased and securitized by the Company, most consolidated VIEs have expected lives in excess of 20 years.
The Company acquires receivables associated with structured settlement payments from individuals in exchange for cash, and these receivables are carried at fair value in VIE finance receivables, at fair value, and Other finance receivables, at fair value, on the Company's consolidated balance sheets. Unearned income is calculated as the amount the fair value exceeds the cost basis of the receivables. Unearned income on VIE and other finance receivables is recognized as interest income using the effective interest method over the life of the related structured settlement. Changes in fair value are recorded in realized and unrealized gains on VIE and other finance receivables, long-term debt and derivatives in the Company's consolidated statements of operations.
The Company, through its subsidiaries, sells finance receivables to SPEs. An SPE issues notes secured by undivided interests in the receivables. Payments due on these notes generally correspond to receipts from the receivables in terms of the timing of payments due. The Company retains an interest in the SPEs and is deemed to have control over these SPEs due to the Company's servicing or subservicing role and therefore consolidates these SPEs.
Fair Value Measurements
Under ASC 820, Fair Value Measurement ("ASC 820"), fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in the orderly transaction between market participants at the measurement date. Fair value measurement establishes a fair value hierarchy that prioritizes the inputs of valuation techniques used to measure fair value. These three levels of fair value hierarchy are defined as follows:
•
Level 1 - inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets that are accessible at the measurement date.
•
Level 2 - inputs to the valuation methodology include quoted prices in markets that are not active or quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
•
Level 3 - inputs to the valuation methodology are unobservable.
A financial instrument's categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Fair value is a market based measure considered from the perspective of a market participant who holds the assets or owes the liabilities rather than an entity specific measure. Therefore, even when market assumptions are not readily available, the Company's own assumptions are set to reflect those that market participants would use in pricing the assets or liabilities at the measurement date. The Company uses valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. The Company also evaluates various factors to determine whether certain transactions are orderly and may make adjustments to transactions or quoted prices when the volume and level of activity for an asset or liability have decreased significantly.
The above conditions could cause certain assets and liabilities to be reclassified from Level 1 to Level 2 or Level 3 or reclassified from Level 2 to Level 3. The inputs or methodology used for valuing the assets or liabilities are not necessarily an indication of the risk associated with the assets and liabilities.
Transfers of Financial Assets
Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when the following conditions have been satisfied: (1) the transferred assets have been isolated from the Company, beyond the reach of the Company and its creditors; (2) the transferee obtains the right to pledge or exchange the transferred assets; and (3) the Company does not maintain effective control over the transferred assets through an

F-14

The J.G. Wentworth Company
(Debtor-in-Possession)
Notes to Consolidated Financial Statements

agreement to repurchase them before their maturity or the ability to unilaterally cause the holder to return specific assets or through an agreement that permits the transferee to require the transferor to repurchase the transferred financial assets that is so favorable to the transferee that it is probable that the transferee will require the transferor to repurchase them. Transfers that do not meet the criteria to be accounted for as sales are accounted for as secured borrowings.
The amendments to ASC 860, Transfers and Servicing ("ASC 860"), eliminated the concept of a qualified special purpose entity, changed the requirements for derecognizing financial assets, and required additional disclosures about transfers of financial assets, including securitization transactions and continuing involvement with transferred financial assets.
Cash and Cash Equivalents
The Company considers all cash accounts, which are not subject to withdrawal restrictions or penalties, and all highly liquid debt instruments purchased with an initial maturity of three months or less to be cash equivalents. Cash and cash equivalents are carried at cost plus accrued interest, which approximates fair value due to the short maturities of these investments.
Restricted Cash and Investments
Restricted cash balances represent the use of trust or escrow accounts to secure the cash assets managed by the Company, certificates of deposit supporting letters of credit and warehouse lines of credit, customer purchase holdbacks, collateral collections and split payment collections, cash held in association with securitizations pending delivery of the second pool of assets and collateral for broker dealer margin calls. The Structured Settlements segment acts as the master servicer and/or the subservicer for structured settlements and annuities, lottery winnings and pre-settlements. The Home Lending segment acts as master servicer for its mortgage loan servicing portfolio. Trust accounts are established for collections with payments being made from the restricted cash accounts to the lenders and other appropriate parties on a monthly basis in accordance with the applicable loan agreements or indentures. At certain times, the Company has cash balances in excess of FDIC insurance limits of $250,000 for interest-bearing accounts, which potentially subject the Company to market and credit risks. The Company has not experienced any losses to date as a result of these risks.
Restricted investments in the amounts of $3.9 million and $4.6 million as of December 31, 2017 and 2016, respectively, include certificates of deposit which are pledged to meet certain state requirements in order to conduct business in certain states. The certificates of deposit are carried at face value inclusive of interest, which approximates fair value as such instruments are renewed annually.
Allowance for Losses on Receivables
The Company maintains an allowance for losses on receivables which represents management's estimate for losses inherent in the portfolio. The Company determines the adequacy of its allowance based upon an evaluation of the finance receivables' collateral, the financial strength of the related insurance company that issued the structured settlement, current economic conditions, historical loss experience, known and inherent risks in the portfolios and other relevant factors. Defaulted payment balances that are deemed uncollectible are charged against the allowance for losses on receivables, and subsequent recoveries, if any, are credited to the allowance.
On an ongoing basis, the Company reviews the ability to collect all amounts owed on VIE and other finance receivables carried at amortized cost.
Mortgage Loans Held for Sale, at Fair Value
Mortgage loans held for sale are carried at fair value with changes in the fair value recognized in current period earnings and included within realized and unrealized gains on sale of mortgage loans held for sale, net of direct costs in the consolidated statements of operations. At the date of funding of the mortgage loan held for sale, the funded amount of the loan plus the related derivative asset or liability of the associated interest rate lock commitment ("IRLC") becomes the initial recorded investment in the mortgage loan held for sale. Such amount is expected to approximate the fair value of the loan.
The fair value of mortgage loans held for sale is calculated using observable market information including pricing from actual market transactions, investor commitment prices, or broker quotations.
Gains and losses from the sale of mortgages are recognized in earnings based upon the difference between the sales proceeds and carrying value of the related loans upon sale. Origination fees and costs are recognized in earnings at the time of funding. Gains and losses from the sale of mortgages and origination fees and costs are recorded in realized and unrealized gains on sale of mortgage loans held for sale, net of direct costs in the Company's consolidated statements of operations.
Mortgage Servicing Rights, at Fair Value

F-15

The J.G. Wentworth Company
(Debtor-in-Possession)
Notes to Consolidated Financial Statements

Mortgage servicing rights ("MSRs") are contractual arrangements where the rights to service existing mortgages are either retained by the original lender or sold to other parties who specialize in the various functions of servicing mortgages. MSRs are initially recorded at fair value at the time the underlying loans are sold. The Company records the changes in fair value in changes in mortgage servicing rights, net, in the Company's consolidated statements of operations. To determine the fair value of the MSRs, the Company uses a discounted cash flow approach incorporating assumptions that management believes market participants would use in estimating future net servicing income, including estimates of the contractual service fees, ancillary income and late fees, the cost of servicing, the discount rate, float earning value, inflation rate, prepayment speeds and default rates. The Company elected to subsequently measure its existing MSRs portfolio using the fair value method, in which MSRs are measured at fair value each reporting period and changes in fair value are recorded in earnings in the period in which changes in value occur. Changes in the fair value of MSRs are included in the changes in mortgage servicing rights, net, in the consolidated statements of operations.
Premises and equipment 
Premises and equipment are stated at cost, net of accumulated depreciation or amortization and are comprised primarily of computer equipment, office furniture and software licensed from third parties. Depreciation and amortization is computed using the straight-line method over the estimated useful lives of the individual assets. For assets under capital lease obligations and leasehold improvements, amortization is computed over the lesser of the estimated useful lives of the improvements or the lease term. The estimated useful lives of the assets range from 3 to 10 years.
Intangible Assets
The Company has both finite lived and indefinite lived intangible assets, which are accounted for under ASC 350, Intangibles - Goodwill and Other ("ASC 350") and ASC 360, Property, Plant and Equipment ("ASC 360"). Indefinite-lived intangible assets are tested for impairment whenever events or changes in circumstances suggest that an asset's carrying value may not be fully recoverable, and are tested at least annually. An impairment loss, if any, calculated as the difference between the estimated fair value and the carrying value of an asset, is recognized if the sum of the estimated undiscounted cash flows relating to the asset is less than the corresponding carrying value. The Company's indefinite-lived intangible assets consist of licenses and approvals.
Finite-lived intangible assets consist primarily of databases, customer relationships, trade names and affinity relationships. The Company's databases are amortized over their estimated useful lives of 10 years. Customer relationships are amortized over their estimated useful lives of 3 years to 15 years. Amortizable trade names are amortized over their useful life of 3 years. Affinity relationships are amortized over their estimated useful life of 10 years.
Business Combinations
The Company records the identifiable assets acquired, the liabilities assumed, and any non-controlling interests of companies that are acquired at their estimated fair value as of the date of acquisition, and includes the results of operations from the date of the acquisition in the consolidated statement of operations. The Company recognizes, as goodwill, the excess of the acquisition price over the estimated fair value of the net assets acquired.
Goodwill
Goodwill represents the excess of the purchase price over the fair value of the net assets acquired in a business combination, and is accounted for under ASC 350. Goodwill has an indefinite useful life and is evaluated for impairment at the reporting-unit level on an annual basis during the fourth quarter or more frequently if events or changes in circumstances indicate potential impairment between annual measurement dates. The Company has the option of performing a qualitative assessment of impairment to determine whether any further quantitative testing for impairment is necessary. Prior to the third quarter of 2017, a two-step process was used. The initial qualitative approach assesses whether the existence of events or circumstances lead to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events and circumstances, the Company determines it is more likely than not that the fair value is less than carrying value, a two-step quantitative impairment test is performed. A step 1 analysis involves calculating the fair value of the associated reporting unit and comparing it to the reporting unit's carrying value. If the fair value of the reporting unit exceeds the carrying value of the reporting unit including goodwill and the carrying value of the reporting unit is positive, goodwill is considered not to be impaired and no further analysis is required. In 2017 the Company early adopted ASU 2017-04 (as described under "Recently Adopted Accounting Pronouncements"). The adoption of ASU 2017-04 does not impact the Company’s eligibility to continue to take advantage of the extended transition periods afforded to emerging growth companies under the JOBS Act.
Marketable Securities
Assets acquired through the Company's installment sale transaction structure (the "Asset Advantage® program") are

F-16

The J.G. Wentworth Company
(Debtor-in-Possession)
Notes to Consolidated Financial Statements

invested in a diverse portfolio of marketable debt and equity securities. Marketable securities are considered trading securities and are carried at fair value in accordance with ASC 820 with realized and unrealized gains and losses included in realized and unrealized gains (losses) on marketable securities, net, in the Company's consolidated statements of operations and classified as Level 1 or Level 2 assets in the valuation hierarchy of fair value measurements. Marketable securities are held for resale in anticipation of fluctuations in market prices. Marketable securities are recorded in marketable securities, at fair value, on the Company's consolidated balance sheets.
Interest on debt securities is recognized in interest income as earned and dividend income on marketable equity securities is recognized in interest income on the ex-dividend date in the Company's consolidated statements of operations. For the years ended December 31, 2017, 2016 and 2015, the Company earned $3.0 million, $2.5 million and $3.4 million, respectively, related to interest and dividends on marketable securities.
Derivative Instruments and Hedging Activities
The Company holds derivative instruments that do not qualify for hedge accounting treatment as defined by ASC 815, Derivatives and Hedging ("ASC 815"). The objective for holding these instruments is to economically offset variability in forecasted cash flows associated with interest rate fluctuations.
Interest rate swaps are recorded at fair value in VIE derivative liabilities, at fair value, on the Company's consolidated balance sheets with changes in fair value recorded in realized and unrealized gains on VIE and other finance receivables, long-term debt and derivatives in the Company's consolidated statements of operations.
The Company also enters into commitments to originate and purchase mortgage loans at interest rates that are determined prior to the funding or purchase of the loan. IRLCs are considered freestanding derivatives and are recorded at fair value at inception. Changes in fair value subsequent to inception are based on the change in fair value of the underlying loan and changes in the probability that the loan will fund within the terms of the commitment.
The Company uses derivative financial instruments, primarily forward sales commitments, to manage exposure to interest rate risk and changes in the fair value of IRLCs and mortgage loans held for sale. The Company may also enter into commitments to sell mortgage backed securities ("MBS") as part of its overall hedging strategy. The Company has elected not to apply hedge accounting to these freestanding derivatives. The fair value of freestanding derivatives is recorded in other assets or other liabilities on the Company's consolidated balance sheets with changes in fair value included in realized and unrealized gains on sale of mortgage loans held for sale, net of direct costs, in the consolidated statements of operations.
Loans Eligible for Repurchase from Ginnie Mae
For certain loans that the Company securitized with Ginnie Mae, the Company has the unilateral right to repurchase any individual loan if that loan meets certain criteria, including being delinquent greater than 90 days or in default. As a result of this unilateral right, the Company must recognize the delinquent loans on its consolidated balance sheets and establish a corresponding liability regardless of the Company's intention to repurchase the loan. The amount of loans eligible for repurchase from Ginnie Mae and the liability for loans eligible for repurchase from Ginnie Mae are included in other assets and other liabilities, respectively, on the Company's consolidated balance sheets.
Income Taxes
Tax laws are complex and subject to different interpretations by the taxpayer and respective taxing authorities. The United States recently enacted comprehensive tax reform legislation known as the Tax Cuts and Jobs Act (the "2017 Tax Act") that, among other things, reduces the U.S. federal corporate income tax rate from 35% to 21% and we are required to re-measure our deferred tax assets and liabilities using the enacted rate at which we expect them to be recovered or settled. In response, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the 2017 Tax Act and allows the registrant to record provisional amounts during a measurement period not to extend beyond one year of the enactment date. We have analyzed the provisional impacts related to the one-time transition tax and determined there is no impact to the deferred tax balances included in our consolidated financial statements for the year ended December 31, 2017. The ultimate impact may materially differ from these provisional amounts, due to, among other things, additional analysis, changes in interpretations and assumptions we have made, additional regulatory guidance that may be issued, and actions we may take as a result of the Tax Act.

F-17

The J.G. Wentworth Company
(Debtor-in-Possession)
Notes to Consolidated Financial Statements

JGW LLC and the majority of its subsidiaries operate in the U.S. as non-tax paying entities, and are treated as disregarded entities for U.S. federal and state income tax purposes and generally as corporate entities in non-U.S. jurisdictions. In addition, certain of JGW LLC's wholly-owned subsidiaries are operating as corporations within the U.S. and subject to U.S. federal and state tax. As non-tax paying entities, the majority of JGW LLC's net income or loss is attributable to its members and included in their tax returns. The current and deferred income tax provision (benefit) relates to both the income (loss) attributable to the Corporation from JGW LLC and to the tax-paying subsidiaries of JGW LLC.
Income taxes are accounted for using the liability method of accounting in accordance with ASC 740, Income Taxes. Under this method, deferred tax assets and liabilities are recognized for the expected future tax consequences of the differences between the carrying amounts of assets and liabilities and their respective tax basis, using currently enacted tax rates. The effect on deferred assets and liabilities of a change in tax rates is recognized in income in the period when the change is enacted. Deferred tax assets are reduced by a valuation allowance when it is more likely than not that some portion or all of the deferred tax assets will not be realized.
The Company analyzes its tax filing positions in all of the U.S. federal, state and local tax jurisdictions where it is required to file income tax returns, as well as for all open tax years in these jurisdictions. If, based on this analysis, the Company determines that uncertainties in tax positions exist, a reserve will be established. The Company will recognize accrued interest and penalties related to uncertain tax positions in the Company's consolidated statements of operations.
Segment Reporting
The Company reports operating segments in accordance with ASC 280. Operating segments are components of an entity for which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and assess performance. ASC 280 requires that a public entity report a measure of segment profit or loss, certain specific revenue and expense items, segment assets, and information on the way that the Company identified its operating segments. The Company's business segments are determined based on products and services offered, as well as the nature of the related business activities, and they reflect the manner in which financial information is currently evaluated by management. The Company has identified the following two reportable segments: (i) Structured Settlements and (ii) Home Lending. The Company's Structured Settlements segment also includes corporate activities, payment solutions, pre-settlements and providing (i) access to providers of personal lending and (ii) access to providers of funding for pre-settled legal claims.
Interest Income
Interest income on mortgage loans held for sale is accrued and is based upon the principal amount outstanding and contractual interest rates. Income recognition is discontinued when loans become 90 days delinquent or when, in management's opinion, the collectability of principal and interest becomes doubtful and the mortgage loans held for sale are put on a non-accrual basis. When the loan is placed on non-accrual status, the related interest receivable is reversed against interest income of the current period. If a non-accrual loan is returned to accrual status, the accrued interest existing at the date the residential loan is placed on non-accrual status and interest during the non-accrual period are recorded as interest income as of the date the loan no longer meets the non-accrual criteria.
For finance receivables, the Company suspends recognizing interest income when it is probable that the Company will be unable to collect all payments according to the contractual terms of the underlying agreements. Management considers all information available in assessing collectability. Collectability is measured on a receivable-by-receivable basis by either the present value of estimated future cash flows discounted at the effective rate, the observable market price for the receivable or the fair value of the collateral if the receivable is collateral dependent. Large groups of smaller balance homogeneous receivables, such as pre-settlement funding transactions, are collectively assessed for collectability. A receivable is charged off when in the Company's judgment, the receivable or portion of the receivable is considered uncollectible.
Payments received on past due receivables and finance receivables the Company has suspended recognizing interest income on are applied first to principal and then to accrued interest. Interest income on past due receivables and finance receivables, if received, is recorded using the cash basis method of accounting. Additionally, the Company generally does not resume recognition of interest income once it has been suspended.

F-18

The J.G. Wentworth Company
(Debtor-in-Possession)
Notes to Consolidated Financial Statements

Loan Servicing Fees
Loan servicing fees associated with mortgage loan operations represent revenue earned for servicing loans for various investors and are included in servicing, broker, and other fees in the consolidated statements of operations. The loan servicing fees are based on a contractual percentage of the outstanding principal balance and are recognized into income when earned. Loan servicing expenses are charged to operations as incurred, and included in direct subservicing costs in the Company's consolidated statements of operations.
Other Revenue Recognition
Servicing, broker, and other fees in the Company’s consolidated statements of operations primarily include broker fees and subservicing fees earned from servicing structure settlement contracts. Broker fee income is recognized when the contract between the purchasing counterparty and the seller is closed for the sale of receivables.
Share-Based Compensation 
The Company applies ASC 718, Compensation - Stock Compensation ("ASC 718"), which requires that the compensation cost relating to share-based payment transactions, based on the fair value of the equity or liability instruments issued, be included in the Company's consolidated statements of operations. The Company has determined that these share-based payment transactions represent equity awards under ASC 718 and therefore measures the cost of employee services received in exchange for share-based compensation on the grant-date fair value of the award, and recognizes the cost over the period the employee is required to provide services for the award. For all grants or modifications of stock options, the fair value at the grant date is calculated using option pricing models based on the value of the entity's shares at the award or modification date. Compensation expense for performance-based restricted stock units is recognized ratably from the date of the grant until the date the restrictions lapse and is based on the trading price of the Class A common stock on the date of grant or modification and the probability of achievement of the specific performance-based goals.
In 2016, the Company modified the terms of stock options granted to its employees and may do so again in the future. The Company accounts for the incremental increase in the fair value over the original award on the date of the modification as an expense for vested awards and over the remaining service (vesting) period for unvested awards. The incremental compensation cost is the excess of the fair value of the modified award on the date of modification over the fair value of the original award immediately before the modification.
Share-based compensation expense is included in compensation and benefits expense in the Company's consolidated statements of operations.
Debt Issuance Costs
Debt issuance costs related to liabilities for which the Company has elected the fair value option are expensed when incurred. Debt issuance costs related to liabilities for which the Company has not elected the fair value option are capitalized and amortized over the expected term of the borrowing or debt issuance. With the adoption of Accounting Standards Update ("ASU") No. 2015-03, Simplifying the Presentation of Debt Issuance Costs ("ASU 2015-03") and ASU No. 2015-15, Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements ("ASU 2015-15"), capitalized amounts are netted against the related debt facility on the Company's consolidated balance sheets and amortization of such costs is included in interest expense in the Company's consolidated statements of operations over the life of the debt facility.
Advertising Expenses
Advertising costs are expensed as incurred. The costs are included in advertising expense in the Company's consolidated statements of operations.
Recently Adopted Accounting Pronouncements
Effective in the third quarter of fiscal 2017, the Company adopted ASU No. 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment ("ASU 2017-04).Under ASU 2017-04, Step 2 of the goodwill impairment test has been eliminated. Step 2 of the goodwill impairment test required companies to determine the implied fair value of the reporting unit’s goodwill. Under the new guidance, companies will perform their annual, or interim, goodwill impairment test by comparing the reporting unit’s carrying value, including goodwill, to the fair value. ASU 2017-04 also eliminates the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. Therefore, the same impairment assessment applies to all reporting units. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. Early adoption of ASU 2017-04 is permitted for all entities for interim or annual goodwill impairment tests

F-19

The J.G. Wentworth Company
(Debtor-in-Possession)
Notes to Consolidated Financial Statements

performed on testing dates after January 1, 2017. The Company early adopted ASU 2017-04 in 2017. For its interim goodwill impairment test performed during the three months ended September 30, 2017, the Company identified events and circumstances that indicated it was more likely than not that the fair value of the reporting unit was less than its carrying value. The adoption of ASU 2017-04 does not impact the Company’s eligibility to continue to take advantage of the extended transition periods afforded to emerging growth companies under the JOBS Act. There were no balance sheet line items as of December 31, 2016 impacted by the adoption of ASU 2017-04.
Effective in the fourth quarter of fiscal 2017, the Company adopted ASU No. 2015-12, Simplifying the Accounting for Measurement Period Adjustments ("ASU 2015-12). This ASU eliminates the requirement to retrospectively account for these adjustments to their respective provisional amount with a corresponding adjustment to goodwill. There was no significant impact on the Company's financial statements upon the adoption of ASU 2015-12.    
3. Goodwill and Intangible Assets
The goodwill of the Company consists of $0.0 million and $8.4 million related to the Home Lending segment as of December 31, 2017 and 2016. There is no goodwill related to the Structured Settlements segment as of December 31, 2017 and 2016.
Intangible assets subject to amortization include the following as of:
 
Structured Settlements
 
Home Lending
 
Cost
 
Accumulated
Amortization
 
Cost
 
Accumulated
Amortization
 
(In thousands)
December 31, 2017
 
 
 
 
 
 
 
Database
$
4,609

 
$
(4,473
)
 
$
—

 
$
—

Customer relationships
16,096

 
(15,909
)
 
—

 
—

Domain names
486

 
(473
)
 
—

 
—

Trade name (1)
613

 
(368
)
 
1,095

 
(990
)
Affinity relationships
—

 
—

 
9,547

 
(2,308
)
Intangible assets subject to amortization
$
21,804

 
$
(21,223
)
 
$
10,642

 
$
(3,298
)
 
 
 
 
 
 
 
 
December 31, 2016
 
 
 
 
 
 
 
Database
$
4,609

 
$
(4,356
)
 
$
—

 
$
—

Customer relationships
16,096

 
(15,750
)
 
—

 
—

Domain names
486

 
(461
)
 
—

 
—

Trade name (1)
613

 
(157
)
 
1,095

 
(700
)
Affinity relationships
—

 
—

 
9,547

 
(1,354
)
Intangible assets subject to amortization
$
21,804

 
$
(20,724
)
 
$
10,642

 
$
(2,054
)
(1) During the three months ended June 30, 2016, the trade name the Company acquired in connection with the Company's 2011 acquisition of Orchard Acquisition Company ("OAC") was determined to be a finite-lived asset, subject to amortization.
As of December 31, 2017 and 2016, the carrying value of Home Lending's indefinite-lived licenses and approvals intangible asset was $13.2 million.
Amortization of intangible assets is included in depreciation and amortization in the Company's consolidated statements of operations. Amortization expense for the years ended December 31, 2017, 2016 and 2015 was $1.7 million, $2.1 million, and $2.2 million, respectively. As of December 31, 2017, the weighted average remaining useful lives of the databases, customer relationships, domain names and trade names are one year and affinity relationships is eight years.

F-20

The J.G. Wentworth Company
(Debtor-in-Possession)
Notes to Consolidated Financial Statements

Estimated future amortization expense for amortizable intangible assets for each of the succeeding five calendar years and thereafter is as follows:
Year Ending December 31,
 
Estimated Future Amortization Expense
 
 
(In thousands)
2018
 
$
1,560

2019
 
1,035

2020
 
957

2021
 
954

2022
 
954

Thereafter
 
2,465

Total future amortization expense
 
$
7,925

 
The commencement of the Chapter 11 Cases constituted a triggering event requiring the Company to: (i) test the related indefinite-lived licenses and approvals intangible asset for impairment under ASC 350-30 and (ii) test the related asset groups including the finite-lived intangible assets, which include the trade name and the affinity relationships, for impairment under ASC 360-10.
The fair value of the indefinite-lived licenses and approvals intangible asset was determined by utilizing the "with and without" valuation methodology, and is considered a Level 3 (unobservable) fair value determination in the fair value hierarchy. Specifically, the "with and without" valuation methodology incorporated multi-year revenue projections, out of pocket costs and lag time to obtain licenses and approvals to originate loans. Key assumptions utilized in the fair value analysis included the following: (i) projected long-term growth rates in revenues, (ii) a discount rate, developed using a cost of equity analysis and (iii) an adjustment to reflect the tax amortization benefits under Section 197 of the Internal Revenue Code. As a result of this analysis, the fair value of the indefinite-lived licenses and approvals intangible asset exceeded their carrying value.
To test the related asset groups, which include the trade name and affinity relationships finite-lived intangible assets, the Company compared the undiscounted cash flows associated with the Home Lending reporting unit to its carrying value as permitted under ASC 360-10. Key assumptions utilized in the recoverability test included the following: (i) projected long-term growth rates in revenue and (ii) terminal year cash flows capitalized using the cost of equity analysis less terminal growth rate. The results of the recoverability test indicated the estimated undiscounted cash flows of the Home Lending reporting unit exceeded its carrying value and, therefore, an impairment of the asset groups was not recorded as of December 31, 2017.
The fair value of the Structured Settlements finite-lived trade name intangible asset was determined primarily using a discounted cash flow approach that required considerable management judgment and long-term assumptions, and is considered a Level 3 (unobservable) fair value determination in the fair value hierarchy. Specifically, the "relief from royalty" method was used, which incorporated multi-year revenue projections. Key assumptions utilized in the fair value analysis included the following: (i) projected long-term growth rates in revenues directly attributable to the trade name, (ii) a discount rate, developed using cost of equity analysis and (iii) a royalty rate based on an analysis of royalty licensing data. As a result of this analysis, the fair value of the Structured Settlements finite-lived trade name exceeded its carrying value.
During the third quarter of 2017, the Company re-evaluated its internal projections for its Home Lending reporting unit based on continued lower than anticipated profitability results, a reduction of its warehouse facilities and contemplation by the Company of entering into the Restructuring Support Agreement and the related restructuring which, at the time was expected to be effectuated through a pre-packaged Chapter 11 plan of reorganization. Accordingly, the Company determined those events constituted a triggering event requiring the Company to: (i) test the related indefinite-lived licenses and approvals intangible asset for impairment under ASC 350-30, (ii) test the related asset groups including the finite-lived intangible assets, which include the trade name and the affinity relationships, for impairment under ASC 360-10 and (iii) perform a goodwill impairment analysis. Based on the assessment performed at that time, the implied fair value of the Home Lending reporting unit was less than its carrying value and as a result, the Company recorded a goodwill impairment charge of $8.4 million in the consolidated statements of operations, representing all of the goodwill associated with the Home Lending reporting unit, for the year ended December 31, 2017.
During the year ended December 31, 2016, the Company recorded an intangible asset impairment charge of $5.5 million comprised of $2.8 million for the indefinite-lived trade name and $2.7 million for the finite-lived customer relationships. The Company also determined that its trade name asset was a finite-lived intangible asset, and, consequently, a useful life of three years

F-21

The J.G. Wentworth Company
(Debtor-in-Possession)
Notes to Consolidated Financial Statements

was assigned to the asset, which is the period the Company expects the asset to contribute directly or indirectly to future cash flows of the Company. Further, the Company determined that the remaining useful lives of its finite-lived intangible assets within the Structured Settlements reporting unit, namely databases and customer relationships, were less than previously assigned and consequently revised them to their currently estimated useful lives of approximately three years.
The Company recorded in the aggregate goodwill and intangible asset impairment charges of $121.6 million during the year ended December 31, 2015.
While management believes the assumptions used in its impairment assessment are reasonable and will continuously evaluate for future potential impairment indicators, there can be no assurance that estimates and assumptions made for purposes of impairment testing will prove to be accurate predictions of the future. Less than anticipated revenues generated by the Company's reporting units, an increase in the discount rate, and/or a decrease in the internal projected revenues used in the discounted cash flow model, among other items, could result in future impairment charges.
4. Fair Value Measurements
Under ASC 820, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The standard focuses on the exit price in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. U.S. GAAP establishes a fair value reporting hierarchy to maximize the use of observable inputs when measuring fair value and defines the three levels of inputs as noted below:
•
Level 1 — inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets that are accessible at the measurement date.
•
Level 2 — inputs to the valuation methodology include quoted prices in markets that are not active or quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
•
Level 3 — inputs to the valuation methodology are unobservable, reflecting the entity's own assumptions about assumptions market participants would use in pricing the asset or liability.
A financial instrument's categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Fair value is a market based measure considered from the perspective of a market participant who holds the asset or owes the liability rather than an entity specific measure. Therefore, even when market assumptions are not readily available, the Company's own assumptions are set to reflect those that market participants would use in pricing the assets or liabilities at the measurement date. The Company uses valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. The Company also evaluates various factors to determine whether certain transactions are orderly and may make adjustments to transactions or quoted prices when the volume and level of activity for an asset or liability have decreased significantly.
The above conditions could cause certain assets and liabilities to be reclassified from Level 1 to Level 2 or Level 3 or reclassified from Level 2 to Level 3. The inputs or methodology used for valuing the assets or liabilities are not necessarily an indication of the risk associated with the assets and liabilities.
The Company uses various valuation techniques and assumptions in estimating fair value. The assumptions used to estimate the value of the Company’s assets and liabilities have varying degrees of impact to the overall fair value. This process involves the gathering of multiple sources of information, including broker quotes, values provided by pricing services, market indices and pricing matrices. When observable market prices for the asset or liability are not available, the Company employs various modeling techniques, such as discounted cash flow analysis, to estimate the fair value of the Company’s assets and liabilities. For certain assets and liabilities, the Company developed internal models which are validated and calibrated regularly by management with assistance from third parties, as appropriate. Any models used to determine fair values, including the inputs and the assumptions therein, are reviewed as part of the Company’s model validation process. The following describes the methods used in estimating the fair values of certain financial statement items:
For assets and liabilities measured at fair value in the Company's consolidated financial statements:
Marketable securities, at fair value - The fair value of investments in marketable securities, which primarily consist of equity and fixed income securities, is based on quoted market prices.
VIE and other finance receivables, at fair value, and VIE long-term debt issued by securitization and permanent financing trusts, at fair value – The estimated fair value of VIE finance receivables, at fair value, other finance receivables, at fair value,

F-22

The J.G. Wentworth Company
(Debtor-in-Possession)
Notes to Consolidated Financial Statements

and VIE long-term debt issued by securitization and permanent financing trusts, at fair value, is determined based on a discounted cash flow model using expected future collections and payments discounted at a calculated rate as described below.
For guaranteed structured settlements and annuities, the Company allocates the projected cash flows based on the waterfall of the securitization and permanent financing trusts (collectivity the "Trusts"). The waterfall includes fees to operate the Trusts (servicing fees, administrative fees, etc.), note holder principal and note holder interest. Many of the Trusts have various tranches of debt that have varying subordinations in the waterfall calculation. Refer to Note 17 for additional information. The remaining cash flows, net of those obligations, are considered a residual interest which is projected to be paid to the retained interest holder.
The projected finance receivable cash flows used to pay the obligations of the Trusts are discounted using a calculated rate derived from the fair value interest rates of the debt in the Trusts. The fair value interest rate of the debt is derived using a swap curve and applying a calculated spread that is based on either: (i) market indices that are highly correlated with the spreads from the Company's previous securitizations and asset sales or (ii) the Company's most recent securitization or asset sale if it occurs within close proximity to the reporting date. The calculated spread is adjusted for the specific attributes of the debt in the Trusts, such as years to maturity and credit grade. The debt's fair value interest rates are applied to the projected future cash payments paid on the principal and interest to derive the debt's fair value. The debt's fair value interest rates are blended using the debt's principal balance to obtain a weighted average fair value interest rate which is used to determine the value of the finance receivables' asset cash flows. In addition, the Company considers transformation costs and profit margin associated with its securitizations to derive the fair value of its finance receivables' asset cash flows. The finance receivables' residual cash flows remaining after the projected obligations of the Trusts are satisfied are discounted using a separate calculated rate (9.14% and 9.75% at December 31, 2017 and December 31, 2016, respectively, with a weighted average life of 20 years as of both dates) that is derived from the fair value interest rates of the related debt.
Based on the Company's historical performance, the residual cash flows are adjusted for a loss assumption of 0.25% over the life of the finance receivables in its fair value calculation. Finance receivable cash flows, including the residual asset cash flows, are included in VIE and other finance receivables, at fair value, on the Company's consolidated balance sheets. In connection with the refinancing of the Company's residual term facility (the "Residual Term Facility"), which was completed in September 2016, the Company issued $207.5 million in notes collateralized by the residual asset cash flows and elected the fair value option, as permitted by ASC 825, Financial Instruments ("ASC 825"). The fair value interest rate of the debt is derived using the swap curve and applying a calculated spread based on market indices that are highly correlated with the spread from the related debt issued. Refer to Notes 16 and 17 for additional information. The associated debt's projected future cash payments for principal and interest are included in VIE long-term debt issued by securitization and permanent financing trusts, at fair value.
For finance receivables not yet securitized, the Company uses the calculated spreads based on market indices, while also considering transformation costs and profit margin to determine the fair value yield adjusting for expected losses and applying the residual yield for the cash flows the Company projects would make up the retained interest in a securitization. There are no material differences in valuation techniques, assumptions and inputs used to develop the Company’s fair value measurements for finance receivables not securitized and those that are securitized.
For Life Contingent Structured Settlements ("LCSS") receivables, the Company uses the calculated spreads based on the principal market for the assets, reflecting the assumptions the Company believes market participants would use in pricing the asset, which is also used to determine the fair value of the debt cash flows. 
 Mortgage loans held for sale, at fair value - The fair value of mortgage loans held for sale is calculated using observable market information including pricing from actual market transactions, investor commitment prices, or broker quotations.
Mortgage servicing rights, at fair value - The Company uses a discounted cash flow approach to estimate the fair value of MSRs incorporating assumptions management believes market participants would use in determining fair value. The assumptions used in the estimation of the fair value of MSRs include contractual service fees, ancillary income and late fees, the cost of servicing, the discount rate, the float rate, the inflation rate, prepayment speeds and default rates.
Interest rate lock commitments, at fair value - The Company estimates the fair value of interest rate lock commitments ("IRLCs") based on the value of the underlying mortgage loan, quoted MBS prices and estimates of the fair value of the MSRs and the probability, commonly referred to as the "pull-through" rates, that the mortgage loan will close within the terms of the IRLCs. These "pull-through" rates are based on the Company's historical data and reflect the Company's best estimate of the likelihood that a commitment will ultimately result in a closed loan.
VIE derivative liabilities, at fair value – The fair value of interest rate swaps is based on pricing models which consider current interest rates and the amount and timing of cash flows.

F-23

The J.G. Wentworth Company
(Debtor-in-Possession)
Notes to Consolidated Financial Statements

Forward sale commitments, at fair value – The fair value of forward sale commitments is based on pricing models which consider current interest rates and the amount and timing of cash flows.
Assets and liabilities for which fair value is only disclosed in the notes to the Company's consolidated financial statements:
VIE and other finance receivables, net of allowances for losses – The fair value of structured settlement, annuity, and lottery receivables is estimated based on the present value of future expected cash flows using discount rates commensurate with the risks involved. The fair value of pre-settlement funding transactions and attorney cost financing is based on expected losses and historical loss experience associated with the respective receivables using management's best estimate of key assumptions regarding credit losses.
Other receivables, net of allowances for losses – The estimated fair value of advances receivable and certain other receivables, which are generally recovered in less than three months, is equal to the carrying amount. The carrying value of other receivables which have expected recoverability of greater than three months, which consist primarily of a note receivable, are estimated based on the present value of future expected cash flows using management's best estimate of certain key assumptions, including discount rates commensurate with the risks involved.
Term loan payable (LSTC) – As of December 31, 2017, the fair value of the term loan payable was estimated based on the total enterprise value of the Company after reorganization, as determined in the Plan, as a percentage of the new common equity to be issued under the Plan ("New Common Equity") issued and allocated to all holders of the term loan payable. Previously, the estimated fair value of the term loan payable was based on market price quotations obtained from third parties.
VIE borrowings under revolving credit facilities and other similar borrowings – The estimated fair value of borrowings under revolving credit facilities and other similar borrowings is based on the borrowing rates for debt with similar terms and remaining maturities.
Other borrowings under revolving credit facilities and other similar borrowings – The estimated fair value of borrowings under revolving credit facilities and similar borrowings is based on the borrowing rates for debt with similar terms and remaining maturities.
VIE long-term debt – The estimated fair value of VIE long-term debt is based on borrowing rates available to the Company based on recently executed transactions with similar underlying collateral characteristics, reflecting the specific terms and conditions of the debt.
Installment obligations payable – Installment obligations payable is reported at contract value determined based on changes in the measuring indices selected by the obligees under the terms of the obligations over the length of the obligations. The fair value of installment obligations payable is estimated to be equal to the carrying value.
TRA obligations – The estimated fair value of TRA obligations was determined in accordance with the Plan. Under the Plan, each TRA claimant received its pro rata share of the New Class A common stock and the New Class B common stock of the Company or cash consideration, at the sole election of each holder of a TRA claim. Consequently, as of January 25, 2018, the TRA claimants now hold, in the aggregate, 161,961 shares of New Class A common stock and 141,384 shares of New Class B common stock and received $4.8 million of cash consideration, resulting in an aggregate fair value of $6.6 million.


F-24

The J.G. Wentworth Company
(Debtor-in-Possession)
Notes to Consolidated Financial Statements

The following table sets forth the Company's assets and liabilities that are carried at fair value on the Company's consolidated balance sheets as of:
 
Quoted Prices in Active
Markets for Identical Assets
Level 1
 
Significant Other
Observable Inputs
Level 2
 
Significant
Unobservable Inputs
Level 3
 
Total at
Fair Value
 
(In thousands)
December 31, 2017
 

 
 

 
 

 
 

Assets
 

 
 

 
 

 
 

Marketable securities, at fair value
$
83,251

 
$
2,293

 
$
—

 
$
85,544

VIE and other finance receivables, at fair value
—

 
—

 
4,278,956

 
4,278,956

Mortgage loans held for sale, at fair value
—

 
261,194

 
—

 
261,194

Mortgage servicing rights, at fair value
—

 
—

 
56,134

 
56,134

Interest rate lock commitments, at fair value (1)
—

 
—

 
16,134

 
16,134

Total Assets
$
83,251

 
$
263,487

 
$
4,351,224

 
$
4,697,962

 
 
 
 
 
 
 
 
Liabilities
 

 
 

 
 

 
 

VIE derivative liabilities, at fair value
$
—

 
$
38,460

 
$
—

 
$
38,460

VIE long-term debt issued by securitization and permanent financing trusts, at fair value
—

 
—

 
4,104,778

 
4,104,778

Forward sale commitments, at fair value (2)
—

 
623

 
—

 
623

Total Liabilities
$
—

 
$
39,083

 
$
4,104,778

 
$
4,143,861

(1) Included in other assets on the Company's consolidated balance sheets.
(2) Included in other liabilities on the Company's consolidated balance sheets.


 
Quoted Prices in Active
Markets for Identical Assets
Level 1
 
Significant Other
Observable Inputs
Level 2
 
Significant
Unobservable Inputs
Level 3
 
Total at
Fair Value
 
(In thousands)
December 31, 2016
 

 
 

 
 

 
 

Assets
 

 
 

 
 

 
 

Marketable securities, at fair value
$
74,421

 
$
2,266

 
$
—

 
$
76,687

VIE and other finance receivables, at fair value
—

 
—

 
4,157,037

 
4,157,037

Mortgage loans held for sale, at fair value
—

 
232,770

 
—

 
232,770

Mortgage servicing rights, at fair value
—

 
—

 
41,697

 
41,697

Interest rate lock commitments, at fair value (1)
—

 
—

 
6,072

 
6,072

Forward sale commitments, at fair value (1)
—

 
659

 
—

 
659

Total Assets
$
74,421

 
$
235,695

 
$
4,204,806

 
$
4,514,922

 
 
 
 
 
 
 
 
Liabilities
 

 
 

 
 

 
 

VIE derivative liabilities, at fair value
$
—

 
$
50,432

 
$
—

 
$
50,432

VIE long-term debt issued by securitization and permanent financing trusts, at fair value
—

 
—

 
4,014,450

 
4,014,450

Total Liabilities
$
—

 
$
50,432

 
$
4,014,450

 
$
4,064,882

(1) Included in other assets on the Company's consolidated balance sheets.

F-25

The J.G. Wentworth Company
(Debtor-in-Possession)
Notes to Consolidated Financial Statements

The following table sets forth the Company's quantitative information about its Level 3 fair value measurements as of:
 
 
Fair Value
 
Valuation Technique
 
Significant Unobservable Input
 
Range
(Weighted Average)
 
 
(In thousands)
 
 
 
 
 
 
December 31, 2017
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
VIE and other finance receivables, at fair value
 
$
4,278,956

 
Discounted cash flow
 
Discount rate
 
3.37% - 10.19% (4.17%)
Mortgage servicing rights, at fair value
 
56,134

 
Discounted cash flow
 
Discount rate
 
9.50% - 12.50% (9.95%)
Prepayment speed
4.45% - 14.16% (8.87%)
Cost of servicing
$65 - $90 ($71)
Interest rate lock commitments, at fair value
 
16,134

 
Internal model
 
Pull-through rate
 
0.00% - 100.00% (79.32%)
Total Assets
 
$
4,351,224

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 

 
 
 
 
 
 
VIE long-term debt issued by securitization and permanent financing trusts, at fair value
 
4,104,778

 
Discounted cash flow
 
Discount rate
 
2.21% - 10.19% (4.10%)
Total Liabilities
 
$
4,104,778

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2016
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
VIE and other finance receivables, at fair value
 
$
4,157,037

 
Discounted cash flow
 
Discount rate
 
3.16% - 12.77% (4.32%)
Mortgage servicing rights, at fair value
 
41,697

 
Discounted cash flow
 
Discount rate
 
9.50% - 14.06% (10.11%)
Prepayment speed
6.04% - 21.82% (7.96%)
Cost of servicing
$65 - $90 ($73)
Interest rate lock commitments, at fair value
 
6,072

 
Internal model
 
Pull-through rate
 
37.25% - 97.00% (79.53%)
Total Assets
 
$
4,204,806

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 

 
 
 
 
 
 
VIE long-term debt issued by securitization and permanent financing trusts, at fair value
 
4,014,450

 
Discounted cash flow
 
Discount rate
 
1.47% - 11.91% (4.25%)
Total Liabilities
 
$
4,014,450

 
 
 
 
 
 
A significant unobservable input used in the fair value measurement of most of the Company's assets and liabilities measured at fair value using unobservable inputs (Level 3) is the discount rate. Significant decreases (increases) in the discount rate used to estimate fair value in isolation would result in a significantly higher (lower) fair value measurement of the corresponding asset or liability. Additional significant unobservable inputs used in the fair value measurement of mortgage servicing rights, at fair value, are prepayment speed, cost of servicing and pull-through rate. Significant decreases (increases) in the prepayment speed

F-26

The J.G. Wentworth Company
(Debtor-in-Possession)
Notes to Consolidated Financial Statements

used to estimate the fair value of MSRs in isolation would result in a significantly higher (lower) fair value measurement. Significant decreases (increases) in the cost of servicing used to estimate the fair value of MSRs in isolation would result in a significantly higher (lower) fair value measurement. Significant increases (decreases) in the pull-through rate used to estimate the fair value of IRLCs in isolation would result in a significantly higher (lower) fair value measurement.
The changes in assets measured at fair value using significant unobservable inputs (Level 3) during the years ended December 31, 2017 and 2016 were as follows:
 
 
VIE and other
finance receivables,
at fair value
 
Mortgage servicing rights, at fair value
 
Interest rate lock commitments, at fair value
 
Total
 
 
(In thousands)
Balance as of December 31, 2016
 
$
4,157,037

 
$
41,697

 
$
6,072

 
$
4,204,806

Total included in earnings (losses):
 
 

 
 
 
0

 
 

Unrealized gains
 
184,368

 
14,437

 
16,134

 
214,939

Realized gain on sale of finance receivable
 
3,024

 
—

 
—

 
3,024

Included in other comprehensive gain
 
—

 
—

 
—

 
—

Purchases of finance receivables
 
285,868

 
—

 
—

 
285,868

Interest accreted
 
173,652

 
—

 
—

 
173,652

Payments received
 
(505,999
)
 
—

 
—

 
(505,999
)
Sale of finance receivables
 
(18,994
)
 
—

 
—

 
(18,994
)
Transfers to other balance sheet line items
 
—

 
—

 
(6,072
)
 
(6,072
)
Transfers in (out) of Level 3
 
—

 
—

 
—

 
—

Balance as of December 31, 2017
 
$
4,278,956

 
$
56,134

 
$
16,134

 
$
4,351,224

The amount of net gains for the period included in revenues attributable to the change in unrealized gains or losses relating to assets still held as of:
 
 
 
 
 
 
 
 
December 31, 2017
 
$
184,368

 
$
14,437

 
$
16,134

 
$
214,939

 
 
 
 
 
 
 
 
 
Balance as of December 31, 2015
 
$
4,386,147

 
$
29,287

 
$
4,934

 
$
4,420,368

Total included in earnings (losses):
 
 

 
 
 
 
 
 

Unrealized gains
 
33,241

 
12,410

 
6,072

 
51,723

Realized gain on sale of finance receivable
 
69,598

 
—

 
—

 
69,598

Included in other comprehensive gain
 
—

 
—

 
—

 
—

Purchases of finance receivables
 
273,298

 
—

 
—

 
273,298

Interest accreted
 
173,194

 
—

 
—

 
173,194

Payments received
 
(507,110
)
 
—

 
—

 
(507,110
)
Sale of finance receivables
 
(271,331
)
 
—

 
—

 
(271,331
)
Transfers to other balance sheet line items
 
—

 
—

 
(4,934
)
 
(4,934
)
Transfers in (out) of Level 3
 
—

 
—

 
—

 
—

Balance as of December 31, 2016
 
$
4,157,037

 
$
41,697

 
$
6,072

 
$
4,204,806

The amount of net gains for the period included in revenues attributable to the change in unrealized gains or losses relating to assets still held as of:
 
 

 
 
 
 
 
 

December 31, 2016
 
$
33,241

 
$
12,410

 
$
6,072

 
$
51,723


F-27

The J.G. Wentworth Company
(Debtor-in-Possession)
Notes to Consolidated Financial Statements

The changes in liabilities measured at fair value using significant unobservable inputs (Level 3) during the years ended December 31, 2017 and 2016 were as follows:
 
VIE long-term debt issued
by securitizations and
permanent financing
trusts, at fair value
 
(In thousands)
Balance as of December 31, 2016
$
4,014,450

Total included in (earnings) losses:
 

Unrealized losses
87,404

Issuances
340,573

Interest accreted
(10,296
)
Repayments
(327,353
)
Transfers in (out) of Level 3
—

Balance as of December 31, 2017
$
4,104,778

The amount of net losses for the period included in revenues attributable to the change in unrealized gains or losses relating to long-term debt still held as of:
 
December 31, 2017
$
87,404

 
 
Balance as of December 31, 2015
$
3,928,818

Total included in (earnings) losses:
 

Unrealized losses
97,829

Issuances
337,667

Interest accreted
(30,234
)
Repayments
(319,630
)
Transfers in (out) of Level 3
—

Balance as of December 31, 2016
$
4,014,450

The amount of net losses for the period included in revenues attributable to the change in unrealized gains or losses relating to long-term debt still held as of:
 

December 31, 2016
$
97,829














F-28

The J.G. Wentworth Company
(Debtor-in-Possession)
Notes to Consolidated Financial Statements

Realized and unrealized gains and losses included in revenues in the accompanying consolidated statements of operations for the years ended December 31, 2017, 2016, and 2015 are reported in the following asset line items:
 
VIE and other finance receivables and long-term debt, at fair value
 
Mortgage servicing rights, at fair value
 
Interest rate lock commitments, at fair value
 
(In thousands)
Net gains included in revenues for the year ended December 31, 2017
$
99,988

 
$
14,437

 
$
16,134

Unrealized gains for the year ended December 31, 2017 relating to assets and long term debt still held as of December 31, 2017
$
96,964

 
$
14,437

 
$
16,134

Net gains included in revenues for the year ended December 31, 2016
$
5,010

 
$
12,410

 
$
6,072

Unrealized (losses) gains for the year ended December 31, 2016 relating to assets and long term debt still held as of December 31, 2016
$
(64,588
)
 
$
12,410

 
$
6,072

Net gains included in revenues for the year ended December 31, 2015
$
70,930

 
$
1,649

 
$
4,934

Unrealized gains for the year ended December 31, 2015 relating to assets and long term debt still held as of December 31, 2015
$
65,324

 
$
1,649

 
$
4,934


F-29

The J.G. Wentworth Company
(Debtor-in-Possession)
Notes to Consolidated Financial Statements

The Company discloses fair value information about financial instruments, whether or not recorded at fair value on the Company's consolidated balance sheets, for which it is practicable to estimate that value. As such, the estimated fair values of the Company's financial instruments were as follows:
 
December 31, 2017
 
December 31, 2016
 
(In thousands)
 
Estimated
Fair
Value
 
Carrying
Amount
 
Estimated
Fair
Value
 
Carrying
Amount
Financial assets:
 

 
 

 
 

 
 

VIE and other finance receivables, at fair value
$
4,278,956

 
$
4,278,956

 
$
4,157,037

 
$
4,157,037

VIE and other finance receivables, net of allowance for losses (1)
80,504

 
81,809

 
88,300

 
93,944

Other receivables, net of allowance for losses (1)
20,918

 
20,918

 
17,771

 
17,771

Mortgage loans held for sale, at fair value
261,194

 
261,194

 
232,770

 
232,770

Mortgage servicing rights, at fair value
56,134

 
56,134

 
41,697

 
41,697

Marketable securities, at fair value
85,544

 
85,544

 
76,687

 
76,687

Interest rate lock commitments, at fair value (2)
16,134

 
16,134

 
6,072

 
6,072

Forward sale commitments, at fair value (2)
—

 
—

 
659

 
659

Financial liabilities:
 

 
 

 
 

 
 

Term loan payable (1)(4)
—

 
—

 
242,730

 
431,872

VIE derivative liabilities, at fair value
38,460

 
38,460

 
50,432

 
50,432

VIE borrowings under revolving credit facilities and other similar borrowings (1)
25,369

 
22,834

 
58,798

 
56,432

Other borrowings under revolving credit facilities and other similar borrowings (1)
252,267

 
253,649

 
229,221

 
229,588

VIE long-term debt (1)
55,792

 
58,480

 
57,268

 
62,939

VIE long-term debt issued by securitization and permanent financing trusts, at fair value
4,104,778

 
4,104,778

 
4,014,450

 
4,014,450

Forward sale commitments, at fair value (3)
623

 
623

 
—

 
—

Installment obligations payable (1)
85,544

 
85,544

 
76,687

 
76,687

Liabilities subject to compromise:
 
 
 
 
 
 
 
         Term loan payable (1)(4)
153,119

 
446,996

 
—

 
—

         TRA obligations (1)(5)
6,646

 
160,113

 
—

 
—

(1)These represent financial instruments not recorded on the consolidated balance sheets at fair value. Such financial instruments would be classified as Level 3 within the fair value hierarchy.
(2) Included in other assets on the Company's consolidated balance sheets.
(3) Included in other liabilities on the Company's consolidated balance sheets.
(4) As of December 31, 2017, the fair value of the term loan payable was estimated based on the total enterprise value of the Company after reorganization, as determined in the Plan, as a percentage of the New Common Equity issued and allocated to all holders of the term loan payable.
(5) At the time of the filing by the Company of Chapter 11 Cases, it was estimated that all claims against the Company held by the TRA's claimants were in the aggregate amount of $160.1 million. Pursuant to the Plan, on January 25, 2018, the TRA claimants received, in the aggregate, 161,961 shares of New Class A common stock, 141,384 shares of New Class B common stock and $4.8 million of cash consideration, resulting in an aggregate fair value of $6.6 million.
5. VIE and Other Finance Receivables, at Fair Value
The Company has elected to fair value newly originated guaranteed structured settlements in accordance with ASC 825. The Company also elected to fair value newly originated lottery winnings effective January 1, 2013. VIE and other finance receivables for which the fair value option was elected consist of the following:
 
 
December 31, 2017
 
December 31, 2016
 
 
(In thousands)
Maturity value
 
$
6,715,441

 
$
6,584,344

Unearned income
 
(2,436,485
)
 
(2,427,307
)
Net carrying amount
 
$
4,278,956

 
$
4,157,037


F-30

The J.G. Wentworth Company
(Debtor-in-Possession)
Notes to Consolidated Financial Statements

Encumbrances on VIE and other finance receivables, at fair value, were as follows:
Encumbrance
 
December 31, 2017
 
December 31, 2016
 
 
(In thousands)
VIE long-term debt issued by securitization and permanent financing trusts (2)
 
$
4,227,389

 
$
4,060,069

$100.0 million credit facility (JGW-S III) (1)
 
—

 
27,966

$150.0 million credit facility (JGW V) (1)
 
9,287

 
55,868

$75.0 million credit facility (JGW VIII) (1)
 
32,943

 
—

Encumbered VIE finance receivables
 
4,269,619

 
4,143,903

Unencumbered
 
9,337

 
13,134

Total VIE and other finance receivables, at fair value
 
$
4,278,956

 
$
4,157,037

(1) Refer to Note 14.
(2) Refer to Note 17.
As of December 31, 2017, the residual cash flows from the Company's finance receivables, at fair value, were pledged as collateral for two of the Company's permanent financing VIEs. As of December 31, 2016, the residual cash flows from the Company's finance receivables, at fair value, were pledged as collateral for one of the Company's permanent financing VIEs. Refer to Note 17 for additional information. As of December 31, 2017 and 2016, the unsecuritized finance receivables, at fair value, were $51.6 million and $97.0 million, respectively, and were included within other finance receivables, at fair value on the Company’s consolidated balance sheets.
As of December 31, 2017, the expected cash flows of VIE and other finance receivables, at fair value, based on maturity value for the next five years and thereafter were as follows:
Year ended December 31,
 
Expected cash flows
 
 
(In thousands)
2018
 
$
496,138

2019
 
490,082

2020
 
458,467

2021
 
436,427

2022
 
409,900

Thereafter
 
4,424,427

Total
 
$
6,715,441

 
In March 2017, the Company entered into an Asset Sale Facility agreement (the "Asset Sale Facility") to sell up to $50.0 million of discounted total receivable balances ("TRB") purchases, which can be increased to $75.0 million by mutual agreement of the parties, and has a duration of one year, which the Company elected not to renew in March 2018. During the year ended December 31, 2017, the Company sold $19.8 million of TRB purchases pursuant to the Asset Sale Facility, which was accounted for as a direct asset sale, for $11.9 million, and the Company recognized a $1.0 million gain. The gain was included in realized and unrealized gains on VIE and other finance receivables, long-term debt and derivatives in the Company's consolidated statements of operations. No servicing asset or liability was recognized in connection with the Company's direct asset sale.
On June 30, 2017, the Company executed a second Asset Sale Facility agreement (the "Second Asset Sale Facility") to sell up to $5.0 million of discounted TRB purchases, which can be increased to $25.0 million by mutual agreement of the parties, and has a duration of one year. On September 28, 2017, the Company increased the capacity of its Second Asset Sale Facility to $15.0 million of discounted TRB purchases. During the year ended December 31, 2017, the Company sold $32.1 million of TRB purchases pursuant to the Second Asset Sale Facility, which was accounted for as a direct asset sale, for $5.5 million, and the Company recognized a $1.9 million gain. The gain was included in realized and unrealized gains on VIE and other finance receivables, long-term debt and derivatives in the Company's consolidated statements of operations. No servicing asset or liability was recognized in connection with the Company's direct asset sale
In February 2016, the Company completed a sale of the first pool of assets associated with its 2016-1 direct asset sale in which $151.5 million of TRB purchases were sold for $91.3 million and the Company recognized a $21.7 million gain. In April 2016, the Company completed a sale of the second pool of assets associated with its 2016-1 direct asset sale in which $115.8

F-31

The J.G. Wentworth Company
(Debtor-in-Possession)
Notes to Consolidated Financial Statements

million of TRB purchases were sold for $70.0 million, and the Company realized an $18.6 million gain. In June 2016, the Company completed a sale of the first pool of assets associated with its 2016-2 direct asset sale in which $81.3 million of TRB purchases were sold for $50.8 million. In conjunction with this transaction, the Company realized a $13.9 million gain. In August 2016, the Company completed a sale of the second pool of assets associated with its 2016-2 direct asset sale in which $93.6 million of TRB purchases were sold for $59.2 million, and the Company realized a $15.4 million gain. The aforementioned gains were included in realized and unrealized gains on VIE and other finance receivables, long-term debt and derivatives in the Company's consolidated statements of operations. No servicing asset or liability was recognized in connection with the Company's direct asset sales.
In December 2015, the Company completed a direct asset sale in which $47.2 million of TRB was sold for $20.8 million. The Company recognized a $5.0 million gain, which is included in realized and unrealized gains on VIE and other finance receivables, long-term debt and derivatives in the Company's consolidated statements of operations.
The Company is engaged to service certain finance receivables it sold to third parties. Servicing fee revenue related to those receivables is included in servicing, broker, and other fees in the Company's consolidated statements of operations, and was as follows:
 
 
Years Ended December 31,
 
 
2017
 
2016
 
2015
 
 
(In thousands)
Servicing fee income
 
$
989

 
$
929

 
$
811

6. VIE and Other Finance Receivables, net of Allowance for Losses
The Company did not elect the fair value option for VIE and other finance receivables, net of allowance for losses, which consist of the following:
 
 
December 31, 2017
 
December 31, 2016
 
 
(In thousands)
Structured settlements and annuities
 
$
64,437

 
$
67,872

Less: unearned income
 
(38,764
)
 
(42,030
)
 
 
25,673

 
25,842

Lottery winnings
 
55,641

 
63,957

Less: unearned income
 
(13,777
)
 
(16,799
)
 
 
41,864

 
47,158

Pre-settlement funding transactions
 
24,425

 
31,853

Less: unearned income
 
(261
)
 
(441
)
 
 
24,164

 
31,412

Attorney cost financing
 
358

 
616

Less: unearned income
 
—

 
—

 
 
358

 
616

VIE and other finance receivables
 
92,059

 
105,028

Less: allowance for losses
 
(10,250
)
 
(11,084
)
VIE and other finance receivables, net of allowances
 
$
81,809

 
$
93,944


F-32

The J.G. Wentworth Company
(Debtor-in-Possession)
Notes to Consolidated Financial Statements

Encumbrances on VIE and other finance receivables, net of allowance for losses, were as follows:
Encumbrance
 
December 31, 2017
 
December 31, 2016
 
 
(In thousands)
VIE long-term debt (1)
 
$
63,031

 
$
69,354

VIE and encumbered securitized debt
 
63,031

 
69,354

VIE unencumbered assets
 
10,774

 
15,971

Non-VIE unencumbered assets
 
8,004

 
8,619

Unencumbered
 
18,778

 
24,590

Total VIE and other finance receivables, net of allowances
 
$
81,809

 
$
93,944

(1) Refer to Note 16.
As of December 31, 2017, the expected cash flows of structured settlements, annuities and lottery winnings based on maturity value for the next five years and thereafter are as follows:
Year Ended December 31,
 
Expected cash flows
 
 
(In thousands)
2018
 
$
13,232

2019
 
10,085

2020
 
10,267

2021
 
10,530

2022
 
10,349

Thereafter
 
65,615

Total
 
$
120,078

 
Excluded from the above table are pre-settlement funding transactions and attorney cost financing receivable balances of $24.8 million as of December 31, 2017, which do not have specified maturity dates.

F-33

The J.G. Wentworth Company
(Debtor-in-Possession)
Notes to Consolidated Financial Statements

Activity in the allowance for losses for VIE and other finance receivables is as follows:
 
Structured
settlements and
annuities
 
Lottery winnings
 
Pre-settlement
funding
transactions
 
Attorney cost
financing
 
Total
 
(In thousands)
For the year ended December 31, 2017
 
Allowance for losses:
 

 
 

 
 

 
 

 
 

Balance as of December 31, 2016
$
93

 
$
—

 
$
10,707

 
$
284

 
$
11,084

Credit (provision) for loss
6

 
(7
)
 
2,601

 
—

 
2,600

Charge-offs
(27
)
 
—

 
(3,431
)
 
—

 
(3,458
)
Recoveries
17

 
7

 
—

 
—

 
24

Balance as of December 31, 2017
$
89

 
$
—

 
$
9,877

 
$
284

 
$
10,250

 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
89

 
$
—

 
$
2,321

 
$
284

 
$
2,694

Collectively evaluated for impairment
—

 
—

 
7,556

 
—

 
7,556

Balance as of December 31, 2017
$
89

 
$
—

 
$
9,877

 
$
284

 
$
10,250

 
 
 
 
 
 
 
 
 
 
VIE and other finance receivables, net:
 

 
 

 
 

 
 

 
 

Individually evaluated for impairment
$
25,584

 
$
41,864

 
$
109

 
$
74

 
$
67,631

Collectively evaluated for impairment
—

 
—

 
14,178

 
—

 
14,178

Balance as of December 31, 2017
$
25,584

 
$
41,864

 
$
14,287

 
$
74

 
$
81,809

 
 
 
 
 
 
 
 
 
 
For the year ended December 31, 2016
 

 
 

 
 

 
 

 
 

Allowance for losses:
 

 
 

 
 

 
 

 
 

Balance as of December 31, 2015
$
69

 
$
—

 
$
10,013

 
$
284

 
$
10,366

Provision for loss
(91
)
 
7

 
3,515

 
—

 
3,431

Charge-offs
(32
)
 
(7
)
 
(2,821
)
 
—

 
(2,860
)
Recoveries
147

 
—

 
—

 
—

 
147

Balance as of December 31, 2016
$
93

 
$
—

 
$
10,707

 
$
284

 
$
11,084

 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
93

 
$
—

 
$
2,091

 
$
284

 
$
2,468

Collectively evaluated for impairment
—

 
—

 
8,616

 
—

 
8,616

Balance as of December 31, 2016
$
93

 
$
—

 
$
10,707

 
$
284

 
$
11,084

 
 
 
 
 
 
 
 
 
 
VIE and other finance receivables, net:
 

 
 

 
 

 
 

 
 

Individually evaluated for impairment
$
25,749

 
$
47,158

 
$
85

 
$
332

 
$
73,324

Collectively evaluated for impairment
—

 
—

 
20,620

 
—

 
20,620

Balance as of December 31, 2016
$
25,749

 
$
47,158

 
$
20,705

 
$
332

 
$
93,944

 
Management makes estimates in determining the allowance for losses on finance receivables. Consideration is given to a variety of factors in establishing these estimates, including current economic conditions and delinquency rates. Because the allowance for losses is dependent on general and other economic conditions beyond the Company's control, it is possible that the estimate for the allowance for losses could differ materially from the currently reported amount in the near term.
The Company suspends recognizing interest income on a receivable when it is probable that the Company will be unable to collect all payments according to the contractual terms of the underlying agreement. Management considers all information available in assessing collectability. Collectability is measured on a receivable-by-receivable basis by either the present value of

F-34

The J.G. Wentworth Company
(Debtor-in-Possession)
Notes to Consolidated Financial Statements

estimated future cash flows discounted at the effective rate, the observable market price for the receivable or the fair value of the collateral if the receivable is collateral dependent. Large groups of smaller balance homogeneous receivables, such as pre-settlement funding transactions, are collectively assessed for collectability.
Payments received on past due receivables and finance receivables on which the Company has suspended recognizing revenue are applied first to principal and then to interest income. Additionally, the Company generally does not resume recognition of interest income once it has been suspended. As of December 31, 2017 and 2016, the Company had discontinued recognition of income on pre-settlement funding transactions in the amount of $11.3 million and $14.7 million, respectively, and attorney cost financing receivables in the amount of $0.4 million and $0.4 million, respectively.
Pre-settlement funding transactions and attorney cost financing are usually outstanding for a period of time exceeding one year. The Company assesses the status of the individual pre-settlement funding transactions to determine whether there are any case specific concerns that need to be addressed and included in the allowance for losses on finance receivables. The Company also analyzes pre-settlement funding transactions on a portfolio basis based on the age of the advances as the ability to collect is correlated to the duration of time the advances are outstanding. The Company decided, beginning in April 2015, to curtail its purchases of pre-settlement transactions and did not purchase any pre-settlement transactions in 2016 or 2017.
The following table presents gross finance receivables related to pre-settlement funding transactions based on their year of origination as of: 
Year of Origination
 
December 31, 2017
 
December 31, 2016
 
 
(In thousands)
2009
 
$
416

 
$
690

2010
 
1,609

 
1,848

2011
 
2,816

 
3,891

2012
 
2,769

 
4,279

2013
 
2,619

 
5,390

2014
 
12,037

 
13,085

2015
 
2,159

 
2,670

Total
 
$
24,425

 
$
31,853

  
Based on historical portfolio experience, the Company reserved for pre-settlement funding transactions and attorney cost financing in the amounts of $9.9 million and $0.3 million, respectively, as of December 31, 2017, and in the amounts of $10.7 million and $0.3 million, respectively, as of December 31, 2016.

F-35

The J.G. Wentworth Company
(Debtor-in-Possession)
Notes to Consolidated Financial Statements

The following table presents portfolio delinquency status excluding pre-settlement funding transactions and attorney cost financing as of:
 
30-59
Days
Past Due
 
60-89
Days
Past Due
 
Greater
than
90 Days
 
Total
Past Due
 
Current
 
VIE and Other
Finance
Receivables, net
 
VIE and Other
Finance
Receivables, net
> 90 days
accruing
 
(In thousands)
December 31, 2017
 
Structured settlements and annuities
$
10

 
$
7

 
$
146

 
$
163

 
$
25,421

 
$
25,584

 
$
—

Lottery winnings
—

 
119

 
59

 
178

 
41,686

 
41,864

 
—

Total
$
10

 
$
126

 
$
205

 
$
341

 
$
67,107

 
$
67,448

 
$
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2016
 

 
 

 
 

 
 

 
 

 
 

 
 

Structured settlements and annuities
$
11

 
$
5

 
$
88

 
$
104

 
$
25,645

 
$
25,749

 
$
—

Lottery winnings
—

 
4

 
205

 
209

 
46,949

 
47,158

 
—

Total
$
11

 
$
9

 
$
293

 
$
313

 
$
72,594

 
$
72,907

 
$
—

Pre-settlement funding transactions and attorney cost financing do not have set due dates as payment is dependent on the underlying case settling.
7. Other Receivables, Net of Allowances for Losses
Other receivables include the following as of:
 
December 31, 2017
 
December 31, 2016
 
(In thousands)
Advances receivable
$
1,922

 
$
1,800

Notes receivable
10,513

 
9,627

Tax withholding receivables on lottery winnings
246

 
246

Broker fee receivable
414

 
984

Other
8,096

 
5,394

Other receivables, gross
21,191

 
18,051

Less: allowance for losses
(273
)
 
(280
)
Other receivables, net of allowances for losses
$
20,918

 
$
17,771

The Company's lottery and structured settlements businesses in some cases will advance a portion of the purchase price to a customer prior to the closing of the transaction, which are included in advances receivable above.
Notes receivable represents receivables from a third party for the sale of LCSS assets.
Tax withholding receivables on lottery winnings represents the portion of lottery collections withheld for state and federal agencies. The Company obtains the withholding refund once appropriate tax filings are completed for the respective jurisdictions.
Broker fee receivable represents receivables from third parties for disbursements made in connection with brokered TRB.

F-36

The J.G. Wentworth Company
(Debtor-in-Possession)
Notes to Consolidated Financial Statements

Activity in the allowance for doubtful accounts for other receivables for the following years ended was as follows:
 
December 31, 2017
 
December 31, 2016
 
(In thousands)
Beginning balance
$
280

 
$
273

Provision for losses
(4
)
 
12

Recoveries
—

 
(5
)
Charge-offs
(3
)
 
—

Ending balance
$
273

 
$
280

8. Mortgage Loans Held for Sale, at Fair Value
Mortgage loans held for sale, at fair value, were as follows:
 
 
December 31, 2017
 
December 31, 2016
 
 
(In thousands)
Unpaid principal balance of mortgage loans held for sale
 
$
253,427

 
$
230,261

Fair value adjustment
 
7,767

 
2,509

Mortgage loans held for sale, at fair value
 
$
261,194

 
$
232,770

A reconciliation of the changes in mortgage loans held for sale, at fair value, is presented in the following table:
 
 
Years Ended December 31,
 
 
2017
 
2016
 
 
(In thousands)
Balance at beginning of period
 
$
232,770

 
$
124,508

Originations and purchases of mortgage loans held for sale, net of fees
 
3,789,972

 
3,441,939

Proceeds from sale of and principal payments on mortgage loans held for sale
 
(3,817,815
)
 
(3,408,065
)
Net change in fair value of mortgage loans held for sale
 
56,267

 
74,388

Balance at end of period
 
$
261,194

 
$
232,770

As the named servicer, the Company has the option to purchase any individual loan in a Ginnie Mae securitization pool if that loan meets certain criteria, including being delinquent greater than 90 days. In accordance with ASC 860, Transfers and Servicing, the Company recorded an asset and a corresponding liability, included within other assets and other liabilities on the Company's consolidated balance sheets, equal to the principal amount of the loans of $42.7 million and $39.7 million as of December 31, 2017 and 2016, respectively.
For the year ended December 31, 2017, and 2016, the Company repurchased $11.9 million and $17.7 million, respectively, of mortgage loans from Ginnie Mae securitization pools with the intent to re-pool them into new Ginnie Mae securitizations or otherwise to sell to third-party investors.
The Company did not have any mortgage loans held for sale on non-accrual status or any mortgage loans held for sale greater than 90 days past due as of December 31, 2017 or 2016.
Loan Servicing and Repurchase Reserve
Mortgage loans sold to investors by the Company which met investor and agency underwriting guidelines at the time of sale may be subject to repurchase in the event of specific default by the borrower, subsequent discovery that underwriting standards were not met or breach of representations and warranties made by the Company. In the event of a breach of the Company's representations and warranties, the Company may be required to either repurchase the mortgage loans with identified defects or indemnify the investors. The Company has established a reserve for potential losses related to these representations and warranties. The Company has also established a reserve for potential losses related to impaired loans within its servicing portfolio. In assessing

F-37

The J.G. Wentworth Company
(Debtor-in-Possession)
Notes to Consolidated Financial Statements

the adequacy of the reserve, the Company evaluates various factors, including actual write-offs during the period, historical loss experience, known delinquent loans and GSE guidelines. Actual losses incurred are reflected as write-offs against the reserve liability. The loan servicing and repurchase reserve is included within other liabilities on the Company's consolidated balance sheets. The associated expense is included in the provision for losses in the Company's consolidated statements of operations.
The activity in the loan servicing and repurchase reserve was as follows:
 
 
Years Ended December 31,
 
 
2017
 
2016
 
 
(In thousands)
Balance at beginning of period
 
$
3,010

 
$
2,575

Provision for loan servicing and repurchases
 
2,264

 
2,527

Write-offs, net
 
(2,057
)
 
(2,092
)
Balance at end of period
 
$
3,217

 
$
3,010

Due to the uncertainty in the various estimates with the loan servicing and repurchase reserve, there may be a range of losses in excess of the recorded loan servicing and repurchase reserve that is reasonably possible. The estimate of the range of possible loss does not represent a probable loss, and is based on current available information, significant judgment, and several assumptions that are subject to change.
9. Mortgage Servicing Rights, at Fair Value
The activity of MSRs was as follows:
 
 
Years Ended December 31,
 
 
2017
 
2016
 
 
(In thousands)
Balance at beginning of year
 
$
41,697

 
$
29,287

Additions due to loans sold, servicing retained
 
20,812

 
17,294

Reductions due to loan payoffs and foreclosures
 
(8,201
)
 
(7,178
)
Fair value adjustment
 
1,826

 
2,294

Mortgage servicing rights, at fair value
 
$
56,134

 
$
41,697

The unpaid principal balance of mortgage loans serviced was $5.3 billion and $4.1 billion as of December 31, 2017 and 2016, respectively.
The key assumptions used in determining the fair value of the Company's MSRs were as follows:
 
 
December 31, 2017
 
December 31, 2016
 
 
Range (Weighted Average)
Discount rate
 
9.50% - 12.50% (9.95%)
 
9.50% - 14.06% (10.11%)
Prepayment speed
 
4.45% - 14.16% (8.87%)
 
6.04% - 21.82% (7.96%)
Cost of servicing
 
$65 - $90 ($71)
 
$65 - $90 ($73)

F-38

The J.G. Wentworth Company
(Debtor-in-Possession)
Notes to Consolidated Financial Statements

The hypothetical effect of an adverse change in these key assumptions that would result in a decrease in fair values is as follows:
 
 
December 31, 2017
 
December 31, 2016
 
 
(In thousands)
Discount rate:
 
 
 
 
Effect on value - 100 basis points adverse change
 
$
(2,170
)
 
$
(1,612
)
Effect on value - 200 basis points adverse change
 
$
(4,184
)
 
$
(3,109
)
Prepayment speed:
 
 
 
 
Effect on value - 5% adverse change
 
$
(990
)
 
$
(686
)
Effect on value - 10% adverse change
 
$
(1,945
)
 
$
(1,370
)
Cost of servicing:
 
 
 
 
Effect on value - 5% adverse change
 
$
(410
)
 
$
(327
)
Effect on value - 10% adverse change
 
$
(820
)
 
$
(653
)
These sensitivities are hypothetical and should be used with caution. As the table demonstrates, the Company's methodology for estimating the fair value of MSRs is highly sensitive to changes in assumptions. For example, actual prepayment experience may differ and any difference may have a material effect on the fair value of MSRs. Changes in fair value resulting from changes in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, in the table, the effect of a variation in a particular assumption on the fair value of the MSRs is calculated without changing any other assumption; however, changes in one factor may be associated with changes in another (for example, decreases in market interest rates may indicate higher prepayments; however, this may be partially offset by lower prepayment due to other factors such as a borrower's diminished opportunity to refinance), which may magnify or counteract the sensitivities. Thus, any measurement of the fair value of MSRs is limited by the conditions existing and assumptions made as of a particular point in time. Those assumptions may not be appropriate if they are applied to a different point in time.
10. Premises and Equipment
Premises and equipment includes the following as of:
 
December 31, 2017
 
December 31, 2016
 
(In thousands)
Computer software and equipment
$
8,469

 
$
7,612

Furniture, fixtures and equipment
6,292

 
5,975

Leasehold improvements
1,324

 
1,115

Total fixed assets at cost
16,085

 
14,702

Less: accumulated depreciation
(12,931
)
 
(10,697
)
Premises and equipment, net of accumulated depreciation
$
3,154

 
$
4,005

Depreciation of premises and equipment is included in depreciation and amortization in the Company's consolidated statements of operations. Depreciation expense for the years ended December 31, 2017, 2016 and 2015, which includes amortization of assets recorded under capital leases, was $2.4 million, $2.7 million and $2.4 million, respectively.
During the fourth quarter of 2017, the company retired certain leasehold improvements associated with the former office of the Structured Settlements segment and principal executive offices. The total cost of the assets, which were purchased between December 1, 2010 and October 6, 2015, was $0.3 million, and these assets had accumulated depreciation of $0.2 million at the time of retirement.

F-39

11. Debt Issuance Costs
Debt issuance costs are capitalized and included as a reduction to the related debt liability (i.e. term loan payable, VIE borrowings under revolving credit facilities and other similar borrowings and VIE long-term debt) on the Company's consolidated balance sheets.
Debt issuance costs consist of the following as of:
 
December 31, 2017
 
December 31, 2016
 
(In thousands)
Debt issuance costs
$
40,355

 
$
44,717

Less: accumulated amortization
(31,498
)
 
(31,250
)
Unamortized debt issuance costs
$
8,857

 
$
13,467

 
Amortization expense for the years ended December 31, 2017, 2016 and 2015 was $7.7 million, $13.3 million and $7.7 million, respectively, and is included in interest expense in the Company's consolidated statements of operations. Subsequent to the bankruptcy proceedings, and in accordance with ASC 835-30, Imputation of Interest, the Company continued to amortize debt issuance costs associated with the Company's term loan payable.
Debt issuance costs related to VIE long-term debt issued by securitization and permanent financing trusts, at fair value, are expensed as incurred and included in debt issuance expense in the Company's consolidated statements of operations, and were as follows for the years ended December 31:
 
2017
 
2016
 
2015
 
(In thousands)
Debt issuance costs related to securitizations
$
5,878

 
$
5,117

 
$
6,741

  
12. Operating and Capital Leases
The Company has commitments under operating leases, principally for office space, with various expiration dates through 2028. As of December 31, 2017, the following summarizes future minimum lease payments due under non-cancelable operating leases (excluding both contingent rentals and any expected rental income under non-cancelable subleases) for the next five years and thereafter are as follows:
Year Ended December 31,
 
Operating Leases
 
 
(In thousands)
2018
 
$
6,805

2019
 
5,431

2020
 
4,274

2021
 
4,215

2022
 
3,891

Thereafter
 
13,653

Total
 
$
38,269

 
Lease expense for office and equipment is included in general and administrative expense in the Company's consolidated statements of operations and was as follows for the years ended December 31:
 
2017
 
2016
 
2015
 
(In thousands)
Lease expense
$
5,322

 
$
4,119

 
$
2,387


F-40

The J.G. Wentworth Company
(Debtor-in-Possession)
Notes to Consolidated Financial Statements

As of December 31, 2017, the following summarizes future minimum lease payments due under capital leases for the next five years and thereafter are as follows:
Year Ended December 31,
 
Capital Leases
 
 
(In thousands)
2018
 
$
65

2019
 
65

2020
 
59

2021
 
—

2022
 
—

Thereafter
 
—

Total
 
$
189

13. Term Loan Payable
The Company has a senior secured credit facility (the "Credit Facility") that consists of a term loan (the "Term Loan") with an outstanding principal balance of $449.5 million as of December 31, 2017 and 2016. As of December 31, 2017, the term loan payable is included within liabilities subject to compromise on the Company's consolidated balance sheet. There are no principal payments due on the Term Loan until its maturity in February 2019. The Credit Facility's revolving commitment of $20.0 million matured in August 2017, with an outstanding principal balance of $0.0 million, and was not renewed. Certain of the Company's subsidiaries are guarantors of the Credit Facility and substantially all of the non-securitized and non-collateralized assets of the Company are pledged as security for the repayment of borrowings outstanding under the Credit Facility.
At each interest reset date, the Company has the option to elect that the Term Loan be either a Eurodollar loan or a Base Rate loan. If a Eurodollar loan, interest on the Term Loan accrues at either LIBOR or 1.00% (whichever is greater) plus a spread of 6.00%. If a Base Rate loan, interest accrues at Prime or 2.00% (whichever is greater) plus a spread of 5.00%. As of December 31, 2017 and 2016, the interest rate on the Term Loan was 7.31% and 7.00%, respectively, as it was a Eurodollar loan on those dates. The revolving commitment had the same interest rate terms as the Term Loan. In addition, the revolving commitment was subject to an unused fee of 0.5% per annum and provided for the issuance of letters of credit equal to $10.0 million, subject to customary terms and fees.
The Credit Facility required the Company, to the extent that as of the last day of any fiscal quarter there were outstanding balances on the revolving commitment that exceeded specific thresholds (generally 15% of the $20.0 million borrowing capacity, or $3.0 million), to comply with a maximum total leverage ratio. The total leverage ratio was calculated by dividing total funded debt (as defined in the Credit Facility) less unrestricted cash and cash equivalents by the Consolidated Adjusted Earnings Before Interest Expense, Income Taxes, Depreciation and Amortization (as defined in the Credit Facility) for the period of the four fiscal quarters most recently ended. As of December 31, 2017, the maximum total leverage ratio is no longer applicable because the revolving commitment under the Credit Facility matured in August 2017 and was not renewed. The maximum required total leverage ratio was 4.75 to 1.00 as of December 31, 2016. As of December 31, 2016, there were no outstanding borrowings under the revolving commitment, and, as a result, the maximum total leverage ratio requirement pertaining to the $20.0 million revolving commitment was not applicable. Had the leverage ratio requirement been applicable as of December 31, 2016, the Company would not have satisfied the maximum total leverage ratio requirement and would have been required to repay the outstanding borrowings on the revolver in excess of the specified threshold. The Credit Facility also limits the Company and certain of its subsidiaries from engaging in certain activities, including incurring additional indebtedness and liens, making investments, transacting with affiliates, disposing of assets, and various other activities.
In addition, the Credit Facility limits, with certain exceptions, certain of the Company's subsidiaries from paying cash dividends and making loans to the Company, the calculation of which is performed annually as of the end of each fiscal year. As a result of the filing of the Chapter 11 Cases on the Petition Date, the Company was in default under the terms of the Credit Facility and consequently, as of December 31, 2017, the annual excess cash calculation was not applicable. As of December 31, 2016, $0.3 million of the Company's $40.4 million in stockholders' deficit as of December 31, 2016 was free of limitations on the payment of dividends.
Interest expense relating to the Term Loan for the years ended December 31, 2017, 2016 and 2015 was $39.5 million, $40.6 million and $40.4 million, respectively.

F-41

The J.G. Wentworth Company
(Debtor-in-Possession)
Notes to Consolidated Financial Statements

As of December 31, 2017, the Term Loan and accrued expense were reclassified from term loan payable and accrued interest to LSTC in accordance with ASC 852. Contractual interest expense represents amounts due under the contractual terms of outstanding pre-petition debt classified as LSTC in the amount of $6.8 million. As of the Petition Date through December 31, 2017, the Company ceased recording interest expense on outstanding pre-petition LSTC of approximately $1.8 million. On January 25, 2018, the Company's Term Loan was extinguished and replaced with a $70.0 million New RCF Agreement as further discussed in Note 1.
14. VIE Borrowings Under Revolving Credit Facilities and Other Similar Borrowings
VIE borrowings under revolving credit facilities and other similar borrowings on the Company's consolidated balance sheets consist of the following as of:
 
Entity
 
December 31, 2017
 
December 31, 2016
 
 
 
(In thousands)
$100.0 million variable funding note facility with interest payable monthly (6.50% as of December 31, 2016), collateralized by JGW-S III, LLC's ("JGW-S III") structured settlements receivables. JGW-S III was charged monthly an unused fee of 0.75% per annum for the undrawn balance of its line of credit. This facility was terminated on September 25, 2017.
JGW-S III
 
$
—

 
$
18,912

$150.0 million multi-tranche and lender credit facility with interest payable monthly as follows: Tranche A rate is 3.55% plus either the LIBOR or the Commercial Paper rate depending on the lender (5.07% at December 31, 2017 and 3.92% and 4.43% at December 31, 2016); Tranche B rate is 6.05% plus LIBOR (7.57% at December 31, 2017 and 6.42% at December 31, 2016). The commitment period ends on November 30, 2018 and is collateralized by JGW V, LLC's ("JGW V") structured settlements, annuity and lottery receivables. JGW V is charged monthly an unused fee of 0.625% per annum for the undrawn balance of its line of credit.
JGW V
 
2,654

 
37,520

$75.0 million variable funding note facility with interest payable monthly (7.00% as of December 31, 2017). The commitment period ends on September 24, 2019 and is collateralized by JGW VIII, LLC's ("JGW VIII") structured settlements and annuity receivables. JGW VIII is charged monthly an unused fee of 1.00% per annum for the undrawn balance of its line of credit.
JGW VIII
 
20,180

 
—

Total VIE borrowings under revolving credit facilities and other similar borrowings
 
 
$
22,834

 
$
56,432

In January 2016, the Company terminated a $50.0 million credit facility which had no outstanding balance as of December 31, 2015. The facility had an original maturity date of October 2, 2016 and was collateralized by JGW IV, LLC's structured settlement and annuity receivables. Interest was payable monthly at the rate of LIBOR plus an applicable margin and there was an unused fee of 0.50% per annum for the undrawn balance of this line of credit. No fees were paid to terminate this facility. The Company expensed $0.5 million of unamortized debt issuance costs in connection with the termination of this credit facility, which was included in interest expense in the Company's consolidated statements of operations.
In April 2016, the Company modified the terms of the credit facility collateralized by JGW VII, LLC to decrease the availability from $300.0 million to $100.0 million. In May 2016, the Company terminated the $100.0 million facility. The facility had an original maturity date of November 15, 2016 and was collateralized by JGW VII, LLC's structured settlement, annuity and lottery receivables. The Company expensed $1.1 million of unamortized debt issuance costs in connection with the termination of this credit facility, which was included in interest expense in the Company's consolidated statements of operations.
In May 2016, the Company modified the terms of its $300.0 million multi-tranche and lender credit facility collateralized by JGW V, extending the commitment termination date from July 24, 2016 to July 24, 2017 and changing the facility termination date to November 13, 2017. As part of the modification, the base interest rate on each tranche was increased by 0.30%. The Company incurred $1.5 million in debt issuance costs in connection with the modification which will be amortized over the life of the facility and included in interest expense in the Company's consolidated statements of operations.

F-42

The J.G. Wentworth Company
(Debtor-in-Possession)
Notes to Consolidated Financial Statements

In May 2016, the commitment period of the $100.0 million credit facility of JGW-S III, LLC was modified to end on May 19, 2018 followed by an 18-month amortization period. The facility originally had a two-year revolving period upon notice by the issuer or the note holder with all principal and interest outstanding payable no later than October 15, 2048. This facility was terminated on September 25, 2017.
Interest expense, including unused fees, for the years ended December 31, 2017, 2016 and 2015 related to borrowings under revolving credit facilities and other similar borrowings was $6.4 million, $8.2 million and $9.0 million, respectively.
The weighted average interest rate on outstanding VIE borrowings under revolving credit facilities and other similar borrowings as of December 31, 2017 and 2016 was 6.69% and 5.00%, respectively.
The above agreements also contain covenants which include certain financial requirements, including minimum tangible net worth, working capital and minimum liquidity, as defined in the agreements. The Company was in compliance with its debt covenants as of December 31, 2017 and 2016.
15. Other Borrowings Under Revolving Credit Facilities and Other Similar Borrowings
The Company had the following lines of credit with various financial institutions, which primarily are used for the funding of mortgage loans held for sale, as of:
 
 
December 31, 2017
 
December 31, 2016
 
 
(In thousands)
$95.0 million warehouse line of credit maturing on February 9, 2018 with an interest rate of LIBOR plus 2.35%, subject to a floor of 2.50% (3.84% as of December 31, 2017 and 3.07% as of December 31, 2016) and a non-usage fee of 0.25%.
 
$
64,494

 
$
65,565

$150.0 million warehouse line of credit maturing on August 15, 2018 with an interest rate of LIBOR plus 2.15%, subject to a floor of 2.40% (3.64% as of December 31, 2017 and 2.97% as of December 31, 2016). The facility does not incur a non-usage fee.
 
117,639

 
39,140

$95.0 million warehouse line of credit maturing on November 15, 2018 with an interest rate of LIBOR plus 2.60%, subject to a floor of 3.10% (4.09% as of December 31, 2017 and 3.32% as of December 31, 2016) and a non-usage fee of 0.25%.
 
66,016

 
39,347

$25.0 million warehouse line of credit with an interest rate of LIBOR plus 2.15%, subject to a floor of 2.50% (2.87% as of December 31, 2016) and a non-usage fee of 0.25%. The facility matured on February 5, 2017.
 
—

 
13,057

$100.0 million warehouse line of credit with an interest rate of LIBOR plus 2.25% (2.97% as of December 31, 2016). The facility did not incur a non-usage fee. The facility was terminated in March 2017.
 
—

 
68,479

$10.0 million operating line of credit maturing August 15, 2018 with an interest rate of Prime plus 0.50%, subject to a floor of 5.00% (5.00% as of December 31, 2017 and 5.00% as of December 31, 2016) and a non-usage fee of 0.50%.
 
5,500

 
4,000

Total other borrowings under revolving credit facilities and other similar borrowings
 
$
253,649

 
$
229,588

In August 2016, the Company increased the capacity of its $6.0 million operating line of credit to $10.0 million.
In August 2017, the Company terminated its $50.0 million warehouse line of credit that was scheduled to mature on May 11, 2018.
On January 8, 2018, the capacity of the $95.0 million warehouse line of credit was extended at that level until March 11, 2018, at which time the capacity reverted back to $70.0 million, and will remain at that level until its maturity on November 15, 2018.
In February 2018, the maturity of the $95.0 million warehouse line of credit, expected to mature on February 9, 2018, was extended for 45 days. On March 26, 2018, the capacity of the $95.0 million warehouse line of credit was increased to $125.0 million and the maturity was extended through April 30, 2019.

F-43

The J.G. Wentworth Company
(Debtor-in-Possession)
Notes to Consolidated Financial Statements

Interest expense, including unused fees, for the years ended December 31, 2017 and 2016 related to other borrowings under revolving credit facilities and other similar borrowings was $8.0 million and $5.8 million, respectively. The weighted average interest rate on outstanding other borrowings under revolving credit facilities and other similar borrowings as of December 31, 2017 and 2016 was 3.84% and 2.86%, respectively.
As of December 31, 2017 and 2016, the Company had pledged mortgage loans held for sale as collateral under the above warehouse lines of credit. Additionally, as of December 31, 2017 and 2016, the Company had pledged MSRs as collateral under its operating line of credit.
The above agreements also contain covenants which include certain financial requirements, including maintenance of maximum adjusted leverage ratio, minimum net worth, minimum tangible net worth, minimum liquidity, minimum current ratio, minimum unencumbered cash, positive net income, and limitations on additional indebtedness and sale of assets, as defined in the agreements. The Company was in compliance with its debt covenants as of December 31, 2017 and 2016.
16. VIE Long-Term Debt
The debt issued by the Company's special purpose entities ("SPEs") is recourse only to the respective entities that issued the debt and is non-recourse to the Company and its other subsidiaries. Certain subsidiaries of the Company continue to receive fees for servicing the securitized assets which are eliminated upon consolidation. In addition, the risk to the Company's non-SPE subsidiaries from SPE losses is limited to cash reserves, residual interest amounts and the repurchase of structured settlement payment streams that are subsequently determined to be ineligible for inclusion in the securitization or permanent financing trusts. The VIE long-term debt consisted of the following as of:
 
December 31, 2017
 
December 31, 2016
 
(In thousands)
PLMT Permanent Facility
$
34,199

 
$
37,630

Long-Term Pre-settlement Facility
5,118

 
5,427

2012-A Facility
488

 
708

LCSS Facility (2010-C)
11,516

 
12,015

LCSS Facility (2010-D)
7,159

 
7,159

Total VIE long-term debt
$
58,480

 
$
62,939

PLMT Permanent Facility
The Company has a $75.0 million floating rate asset backed loan with interest payable monthly at one-month LIBOR plus 1.25% which is currently in a runoff mode with the outstanding balance being reduced by periodic cash collections on the underlying lottery receivables. The interest rate on this loan was 2.61% and 1.87% at December 31, 2017 and 2016, respectively. The loan matures on October 30, 2040.
The debt agreement with the counterparty requires Peachtree Lottery Master Trust ("PLMT") to hedge the notional amount of the debt with a pay fixed and receive variable interest rate swap with the counterparty. The swaps are included within VIE derivative liabilities, at fair value, on the Company's consolidated balance sheets.
Residual Term Facility
On September 2, 2016, the Company issued $207.5 million in notes collateralized by the residual asset cash flows and reserve cash associated with 36 of the Company's securitizations with outstanding principal balances. Proceeds from the issuance of the notes were used, in part, to repay the $131.4 million outstanding principal balance on the Residual Term Facility (the "Residual Term Facility"). The Company incurred $0.4 million in debt termination costs and expensed $3.3 million of unamortized debt issuance costs in connection with the termination of the Residual Term Facility, which were included in interest expense in the Company's consolidated statements of operations. Previously, the Company had a $133.0 million Residual Term Facility that was scheduled to mature on May 15, 2021 and was collateralized by the cash flows from residual interests related to 28 securitizations. Interest accrued on the notes issued under the Residual Term Facility at a rate of 7.25% per annum with interest and principal payable monthly from cash flows from the collateralized residual interests.
Long-Term Pre-settlement Facility
In 2011, the Company issued three fixed rate notes totaling $45.1 million collateralized by pre-settlement funding transactions, of which, $5.1 million and $5.4 million principal amount remained outstanding as of December 31, 2017 and 2016,

F-44

The J.G. Wentworth Company
(Debtor-in-Possession)
Notes to Consolidated Financial Statements

respectively. In June 2016, the maturity date of each of the notes was extended until the sale of the collateral, at which point the proceeds will be distributed to the holders of the notes in full satisfaction of the Company's debt obligations. To the extent that there are sufficient cash receipts from collateralized pre-settlement funding transactions to pay for interest and principal due on the notes, interest expense will be recognized monthly on the notes at a rate of 9.25% per annum.
2012-A Facility
In December 2012, the Company issued a series of notes collateralized by structured settlements. The proceeds to the Company from the issuance of the notes were $2.5 million and interest accrues on the notes at a fixed interest rate of 9.25% per annum. Interest and principal are payable monthly from cash receipts of collateralized structured settlement receivables. The notes mature on June 15, 2024.
Long-Term Debt for Life Contingent Structured Settlements (2010-C & 2010-D)
Long-Term Debt (2010-C)
In November 2010, the Company issued a private asset class securitization note ("2010-C") registered under Rule 144A under the Securities Act ("Rule 144A"). The 2010-C bond issuance of $12.9 million is collateralized by life contingent structured settlements. 2010-C accrues interest at 10% per annum and matures on March 15, 2039.
The interest and, if available, principal payments are payable monthly from cash receipts of collateralized life contingent structured settlements receivables.
Long-Term Debt (2010-D)
In December 2010, the Company paid $0.2 million to purchase the membership interests of LCSS, LLC from JLL Partners, Inc., a related party. LCSS, LLC owns 100% of the membership interests of LCSS III, LLC, which owns 100% of the membership interests of LCSS II, LLC ("LCSS II"). In November 2010, LCSS II issued $7.2 million of long-term debt ("2010-D") collateralized by life contingent structured settlements. 2010-D accrues interest at 10% per annum and matures on July 15, 2040.
The interest and, if available, principal payments are payable monthly from cash receipts of collateralized life contingent structured settlements receivables.
VIE Long-Term Debt
As of December 31, 2017, estimated principal payments on VIE long-term debt for the next five years and thereafter are as follows:
Year Ending December 31,
 
Estimated Principal Payments 
 
 
(In thousands)
2018
 
$
4,707

2019
 
5,026

2020
 
5,643

2021
 
5,614

2022
 
5,990

Thereafter
 
30,834

Total
 
$
57,814

 
Interest expense for the years ended December 31, 2017, 2016 and 2015 related to VIE long-term debt was $6.1 million, $17.6 million and $16.8 million, respectively.
17. VIE Long-Term Debt Issued by Securitization and Permanent Financing Trusts, at Fair Value
Securitization Debt
The Company elected the fair value option under ASC 825 to measure the securitization issuer debt and related finance receivables. The Company has determined that measurement of the securitization debt issued by SPEs at fair value better correlates with the value of the finance receivables held by SPEs, which are held to provide the cash flows for the note obligations. The debt issued by the Company's SPEs is recourse only to the respective entities that issued the debt and is non-recourse to the Company and its other subsidiaries. Certain subsidiaries of the Company continue to receive fees for servicing the securitized assets which

F-45

The J.G. Wentworth Company
(Debtor-in-Possession)
Notes to Consolidated Financial Statements

are eliminated upon consolidation. In addition, the risk to the Company's non-SPE subsidiaries from SPE losses is limited to cash reserves, residual interest amounts and the repurchase of structured settlement payment streams that are subsequently determined to be ineligible for inclusion in the securitization or permanent financing trusts.
During the year ended December 31, 2017, the Company completed the pre-funding associated with the 2016-1 securitization, and three securitization transactions that were registered under Rule 144A. The following table summarizes these securitization transactions:
 
2017-3
 
2017-2
 
2017-1
 
(Bonds issued in millions)
Issue date
12/19/2017
 
8/9/2017
 
3/22/2017
Bonds issued
$58.7
 
$144.2
 
$131.8
Receivables securitized
1,017
 
2,201
 
2,129
Deal discount rate
4.27%
 
3.95%
 
4.35%
Retained interest %
5.50%
 
5.50%
 
5.50%
Class allocation (Moody's)
 
 
 
 
 
Aaa
84.75%
 
84.25%
 
84.75%
Baa2
9.75%
 
10.25%
 
9.75%
During the year ended December 31, 2016, the Company completed the initial close associated with the 2016-1 securitization transaction that was registered under Rule 144A. The following table summarizes the securitization transaction:
 
2016-1
 
(Bonds issued in millions)
Issue date
10/26/2016
Bonds issued
$117.3
Receivables securitized
861
Deal discount rate
3.89%
Retained interest %
5.50%
Class allocation (Moody's)
 
Aaa
84.00%
Baa2
10.50%
The following table summarizes notes issued by securitization trusts as of December 31, 2017 and 2016 for which the Company has elected the fair value option and which are recorded as VIE long-term debt issued by securitization and permanent financing trusts, at fair value, on the Company's consolidated balance sheets:
Securitization VIE Issuer
 
Note(s)
 
Maturity
Date
 
Outstanding Principal as of December 31, 2017
 
Fair Value as of December 31, 2017
 
Stated
Rate
 
Outstanding Principal as of December 31, 2016
 
Fair Value as of December 31, 2016
 
 
 
 
 
 
(In thousands)
 
 
 
(In thousands)
321 Henderson Receivables I, LLC
 
2003-A
 
11/15/2033
 
$
5,776

 
$
5,898

 
4.86%
 
$
9,971

 
$
10,381

321 Henderson Receivables I, LLC
 
2004-A A-1
 
9/15/2045
 
14,604

 
15,015

 
Libor+0.35%
 
20,265

 
21,084

321 Henderson Receivables I, LLC
 
2004-A A-2
 
9/15/2045
 
18,432

 
19,725

 
5.54%
 
18,581

 
19,943

321 Henderson Receivables I, LLC
 
2005-1 A-1
 
11/15/2040
 
30,865

 
32,005

 
Libor+0.23%
 
39,548

 
41,233

321 Henderson Receivables I, LLC
 
2005-1 A-2
 
11/15/2046
 
35,395

 
37,934

 
5.58%
 
35,603

 
37,344

321 Henderson Receivables I, LLC
 
2005-1 B
 
10/15/2055
 
2,157

 
2,143

 
5.24%
 
2,169

 
2,089

321 Henderson Receivables II, LLC
 
2006-1 A-1
 
3/15/2041
 
6,059

 
6,305

 
Libor+0.20%
 
7,969

 
8,439

321 Henderson Receivables II, LLC
 
2006-1 A-2
 
3/15/2047
 
15,650

 
16,982

 
5.56%
 
16,826

 
18,015


F-46

The J.G. Wentworth Company
(Debtor-in-Possession)
Notes to Consolidated Financial Statements

321 Henderson Receivables II, LLC
 
2006-2 A-1
 
6/15/2041
 
9,833

 
10,407

 
Libor+0.20%
 
12,011

 
12,815

321 Henderson Receivables II, LLC
 
2006-2 A-2
 
6/15/2047
 
18,984

 
20,828

 
5.93%
 
19,781

 
21,158

Securitization VIE Issuer
 
Note(s)
 
Maturity
Date
 
Outstanding Principal as of December 31, 2017
 
Fair Value as of December 31, 2017
 
Stated
Rate
 
Outstanding Principal as of December 31, 2016
 
Fair Value as of December 31, 2016
 
 
 
 
 
 
(In thousands)
 
 
 
(In thousands)
321 Henderson Receivables II, LLC
 
2006-3 A-1
 
9/15/2041
 
8,310

 
8,839

 
Libor+0.20%
 
11,832

 
12,630

321 Henderson Receivables II, LLC
 
2006-3 A-2
 
9/15/2047
 
24,583

 
26,678

 
5.60%
 
25,367

 
26,997

321 Henderson Receivables II, LLC
 
2006-4 A-1
 
12/15/2041
 
8,752

 
9,049

 
Libor+0.20%
 
12,378

 
12,964

321 Henderson Receivables II, LLC
 
2006-4 A-2
 
12/15/2047
 
20,215

 
22,067

 
5.43%
 
20,587

 
21,814

321 Henderson Receivables II, LLC
 
2007-1 A-1
 
3/15/2042
 
20,434

 
20,902

 
Libor+0.20%
 
22,942

 
23,080

321 Henderson Receivables II, LLC
 
2007-1 A-2
 
3/15/2048
 
16,338

 
16,932

 
5.59%
 
16,526

 
16,281

321 Henderson Receivables II, LLC
 
2007-2 A-1
 
6/15/2035
 
26,040

 
26,554

 
Libor+0.21%
 
29,606

 
29,481

321 Henderson Receivables II, LLC
 
2007-2 A-2
 
7/16/2040
 
16,106

 
16,785

 
6.21%
 
16,367

 
16,182

321 Henderson Receivables II, LLC
 
2007-3 A-1
 
10/15/2048
 
45,033

 
51,631

 
6.15%
 
49,401

 
55,937

321 Henderson Receivables III, LLC
 
2008-1 A
 
1/15/2044
 
37,123

 
41,578

 
6.19%
 
42,759

 
48,723

321 Henderson Receivables III, LLC
 
2008-1 B
 
1/15/2046
 
3,235

 
4,427

 
8.37%
 
3,235

 
4,401

321 Henderson Receivables III, LLC
 
2008-1 C
 
1/15/2048
 
3,235

 
4,796

 
9.36%
 
3,235

 
4,746

321 Henderson Receivables III, LLC
 
2008-1 D
 
1/15/2050
 
3,529

 
5,755

 
10.81%
 
3,529

 
5,595

321 Henderson Receivables IV, LLC
 
2008-2 A
 
11/15/2037
 
51,554

 
59,420

 
6.27%
 
57,937

 
66,949

321 Henderson Receivables IV, LLC
 
2008-2 B
 
3/15/2040
 
6,194

 
8,982

 
8.63%
 
6,194

 
8,542

321 Henderson Receivables V, LLC
 
2008-3 A-1
 
6/15/2045
 
37,878

 
48,078

 
8.00%
 
40,923

 
51,960

321 Henderson Receivables V, LLC
 
2008-3 A-2
 
6/15/2045
 
4,682

 
5,923

 
8.00%
 
5,058

 
6,357

321 Henderson Receivables V, LLC
 
2008-3 B
 
3/15/2051
 
4,695

 
6,366

 
10.00%
 
4,695

 
5,937

321 Henderson Receivables VI, LLC
 
2010-1 A-1
 
7/15/2059
 
96,514

 
106,464

 
5.56%
 
109,598

 
122,048

321 Henderson Receivables VI, LLC
 
2010-1 B
 
7/15/2061
 
17,216

 
21,579

 
9.31%
 
19,550

 
24,827

JG Wentworth XXI, LLC
 
2010-2 A
 
1/15/2048
 
38,992

 
40,593

 
4.07%
 
45,655

 
48,163

JG Wentworth XXI, LLC
 
2010-2 B
 
1/15/2050
 
5,566

 
6,461

 
7.45%
 
6,517

 
7,674

JG Wentworth XXII, LLC
 
2010-3 A
 
10/15/2048
 
73,486

 
75,855

 
3.82%
 
87,140

 
91,069

JG Wentworth XXII, LLC
 
2010-3 B
 
10/15/2050
 
10,679

 
12,183

 
6.85%
 
12,663

 
14,618

JG Wentworth XXIII, LLC
 
2011-1 A
 
10/15/2056
 
132,542

 
142,439

 
4.89%
 
147,447

 
157,209

JG Wentworth XXIII, LLC
 
2011-1 B
 
10/15/2058
 
16,662

 
20,164

 
7.68%
 
18,536

 
22,063

JGWPT XXIV, LLC
 
2011-2 A
 
1/15/2063
 
118,314

 
128,821

 
5.13%
 
128,231

 
137,433

JGWPT XXIV, LLC
 
2011-2 B
 
1/15/2065
 
13,437

 
17,286

 
8.54%
 
14,564

 
18,327

JGWPT XXV, LLC
 
2012-1 A
 
2/16/2065
 
143,311

 
148,990

 
4.21%
 
155,623

 
159,282

JGWPT XXV, LLC
 
2012-1 B
 
2/15/2067
 
17,921

 
21,559

 
7.14%
 
19,460

 
22,890

JGWPT XXVI, LLC
 
2012-2 A
 
10/15/2059
 
101,448

 
102,601

 
3.84%
 
108,942

 
107,986

JGWPT XXVI, LLC
 
2012-2 B
 
10/17/2061
 
12,605

 
14,882

 
6.77%
 
13,537

 
15,328

JGWPT XXVII, LLC
 
2012-3 A
 
9/15/2065
 
128,462

 
125,365

 
3.22%
 
138,206

 
132,530

JGWPT XXVII, LLC
 
2012-3 B
 
9/15/2067
 
15,868

 
18,048

 
6.17%
 
17,071

 
18,210

JGWPT XXVIII, LLC
 
2013-1 A
 
4/15/2067
 
142,052

 
138,028

 
3.22%
 
153,545

 
146,476

JGWPT XXVIII, LLC
 
2013-1 B
 
4/15/2069
 
17,526

 
18,535

 
4.94%
 
18,589

 
18,273

JGWPT XXIX, LLC
 
2013-2 A
 
3/15/2062
 
121,960

 
126,354

 
4.21%
 
131,085

 
132,864

JGWPT XXIX, LLC
 
2013-2 B
 
3/17/2064
 
14,565

 
15,888

 
5.68%
 
14,985

 
15,298

JGWPT XXX, LLC
 
2013-3 A
 
1/17/2073
 
148,457

 
152,601

 
4.08%
 
160,527

 
161,722

JGWPT XXX, LLC
 
2013-3 B
 
1/15/2075
 
18,018

 
18,726

 
5.54%
 
18,248

 
18,462

JGWPT XXXI, LLC
 
2014-1 A
 
3/15/2063
 
166,591

 
169,999

 
3.96%
 
180,486

 
180,784


F-47

The J.G. Wentworth Company
(Debtor-in-Possession)
Notes to Consolidated Financial Statements

JGWPT XXXI, LLC
 
2014-1 B
 
3/15/2065
 
21,776

 
21,778

 
4.94%
 
21,776

 
21,097

JGWPT XXXII, LLC
 
2014-2 A
 
1/17/2073
 
166,529

 
165,011

 
3.61%
 
180,127

 
174,022

JGWPT XXXII, LLC
 
2014-2 B
 
1/15/2075
 
25,284

 
24,191

 
4.48%
 
25,284

 
23,260

Securitization VIE Issuer
 
Note(s)
 
Maturity
Date
 
Outstanding Principal as of December 31, 2017
 
Fair Value as of December 31, 2017
 
Stated
Rate
 
Outstanding Principal as of December 31, 2016
 
Fair Value as of December 31, 2016
 
 
 
 
 
 
(In thousands)
 
 
 
(In thousands)
J.G. Wentworth XXXIII, LLC
 
2014-3 A
 
6/15/2077
 
155,393

 
152,534

 
3.50%
 
167,353

 
159,993

J.G. Wentworth XXXIII, LLC
 
2014-3 B
 
6/15/2079
 
21,408

 
20,254

 
4.40%
 
21,408

 
19,396

J.G. Wentworth XXXIV, LLC
 
2015-1 A
 
9/15/2072
 
164,602

 
158,861

 
3.26%
 
177,632

 
167,124

J.G. Wentworth XXXIV, LLC
 
2015-1 B
 
9/17/2074
 
20,957

 
19,574

 
4.25%
 
20,957

 
18,730

J.G. Wentworth XXXV, LLC
 
2015-2 A
 
3/15/2058
 
134,479

 
135,298

 
3.87%
 
139,521

 
136,423

J.G. Wentworth XXXV, LLC
 
2015-2 B
 
3/15/2060
 
16,350

 
15,820

 
4.83%
 
16,350

 
15,110

J.G. Wentworth XXXVI, LLC
 
2015-3 A
 
3/17/2070
 
82,822

 
84,351

 
4.08%
 
89,315

 
88,382

J.G. Wentworth XXXVI, LLC
 
2015-3 B
 
3/15/2072
 
10,383

 
10,556

 
5.68%
 
10,383

 
9,978

J.G. Wentworth XXXVII, LLC
 
2016-1 A
 
6/15/2067
 
101,412

 
99,519

 
3.41%
 
104,293

 
101,414

J.G. Wentworth XXXVII, LLC
 
2016-1 B
 
6/17/2069
 
13,000

 
12,988

 
5.19%
 
13,000

 
12,640

J.G. Wentworth XXXVIII, LLC
 
2017-1 A
 
8/16/2060
 
115,432

 
116,962

 
3.99%
 
—

 
—

J.G. Wentworth XXXVIII, LLC
 
2017-1 B
 
8/15/2062
 
13,377

 
13,386

 
5.43%
 
—

 
—

J.G. Wentworth XXXIX, LLC
 
2017-2 A
 
9/15/2072
 
125,774

 
122,216

 
3.53%
 
—

 
—

J.G. Wentworth XXXIX, LLC
 
2017-2 B
 
9/17/2074
 
15,398

 
14,840

 
5.09%
 
—

 
—

J.G. Wentworth XL, LLC
 
2017-3 A
 
2/15/2067
 
51,876

 
51,625

 
3.80%
 
—

 
—

J.G. Wentworth XL, LLC
 
2017-3 B
 
2/15/2069
 
5,968

 
5,899

 
5.43%
 
—

 
—

Structured Receivables Finance #2, LLC
 
2005-A A
 
5/15/2025
 
1,239

 
1,244

 
5.05%
 
5,013

 
5,138

Structured Receivables Finance #2, LLC
 
2005-A B
 
5/15/2025
 
7,047

 
7,440

 
6.95%
 
7,713

 
8,565

Peachtree Finance Company #2, LLC
 
2005-B A
 
4/15/2048
 
149

 
149

 
4.71%
 
5,154

 
5,245

Peachtree Finance Company #2, LLC
 
2005-B B
 
4/15/2048
 
4,376

 
4,468

 
6.21%
 
4,782

 
5,104

Structured Receivables Finance #3, LLC
 
2006-A A
 
1/15/2030
 
13,928

 
14,624

 
5.55%
 
19,194

 
20,726

Structured Receivables Finance #3, LLC
 
2006-A B
 
1/15/2030
 
6,873

 
7,747

 
6.82%
 
7,643

 
8,847

Structured Receivables Finance 2006-B, LLC
 
2006-B A
 
3/15/2038
 
27,100

 
29,215

 
5.19%
 
31,779

 
34,927

Structured Receivables Finance 2006-B, LLC
 
2006-B B
 
3/15/2038
 
6,271

 
7,204

 
6.30%
 
6,791

 
7,761

Structured Receivables Finance 2010-A, LLC
 
2010-A A
 
1/16/2046
 
41,540

 
44,700

 
5.22%
 
49,032

 
53,905

Structured Receivables Finance 2010-A, LLC
 
2010-A B
 
1/16/2046
 
9,322

 
11,511

 
7.61%
 
10,016

 
12,391

Structured Receivables Finance 2010-B, LLC
 
2010-B A
 
8/15/2036
 
33,386

 
34,332

 
3.73%
 
38,637

 
40,295

Structured Receivables Finance 2010-B, LLC
 
2010-B B
 
8/15/2036
 
11,456

 
14,529

 
7.97%
 
12,167

 
15,417

Total
 
 
 
 
 
$
3,492,790

 
$
3,618,251

 
 
 
$
3,460,820

 
$
3,550,503

In connection with its 2015-1 securitization, the Company repaid in February 2015 approximately $6.9 million of long term debt issued by Structured Receivables Finance #1, LLC and recorded a gain on debt extinguishment of approximately $0.6 million, which was included in realized and unrealized gains on VIE and other finance receivables, long-term debt and derivatives in the Company's consolidated statements of operations.

F-48

The J.G. Wentworth Company
(Debtor-in-Possession)
Notes to Consolidated Financial Statements

Permanent financing facilities 
The following table summarizes notes issued by permanent financing facilities as of December 31, 2017 and 2016, respectively, for which the Company has elected the fair value option and are recorded as VIE long-term debt issued by securitization and permanent financing trusts, at fair value, on the Company's consolidated balance sheets:
Securitization
VIE Issuer
 
Maturity
Date
 
Note(s)
 
Outstanding Principal as of December 31, 2017
 
Stated
Rate
 
Fair Value as of December 31, 2017
 
 
 
 
 
 
(In thousands)
 
 
 
(In thousands)
JGW-S LC II
 
8/15/2040
 
2011-A
 
$
91,768

 
12.35%
 
$
91,769

PSS
 
7/14/2033
 
—
 
120,317

 
Libor + 1%
 
117,610

Crescit
 
6/15/2039
 
—
 
22,608

 
8.10%
 
28,523

JGW Residual I, LLC
 
3/22/2077
 
—
 
189,847

 
N/A
 
246,138

JGW Residual II, LLC
 
6/15/2067
 
—
 
2,046

 
N/A
 
2,487

Total
 
 
 
 
 
$
426,586

 
 
 
$
486,527

Securitization
VIE Issuer
 
Maturity
Date
 
Note(s)
 
Outstanding Principal as of December 31, 2016
 
Stated
Rate
 
Fair Value as of December 31, 2016
 
 
 
 
 
 
(In thousands)
 
 
 
(In thousands)
JGW-S LC II
 
8/15/2040
 
2011-A
 
$
82,997

 
12.48%
 
$
82,997

PSS
 
7/14/2033
 
—
 
134,742

 
Libor + 1%
 
128,897

Crescit
 
6/15/2039
 
—
 
24,512

 
8.10%
 
30,991

JGW Residual I, LLC
 
3/22/2077
 
—
 
203,088

 
N/A
 
221,062

Total
 
 
 
 
 
$
445,339

 
 
 
$
463,947

 
In connection with the refinancing of the Residual Term Facility, which was completed on September 2, 2016, the Company issued $207.5 million in notes collateralized by the residual asset cash flows and reserve cash associated with 36 of the Company's securitizations with outstanding principal balances. Proceeds from the issuance of the notes were used, in part, to repay the $131.4 million outstanding principal balance on the Residual Term Facility.
In March 2017, the Company issued $2.3 million in notes collateralized by the residual asset cash flows and reserve cash associated with one of the Company's securitizations with an outstanding principal balance. The Company incurred $0.2 million of debt issuance costs, which were included in debt issuance expense in the Company's consolidated statements of operations. Principal and interest are paid monthly from the cash flows from the collateralized residual interests.
Future repayment of VIE long-term debt issued by securitization trusts and permanent financing facilities is dependent on the receipt of cash flows from the corresponding encumbered VIE finance receivables. As of December 31, 2017, estimated maturities for VIE long-term debt issued by securitization trusts and permanent financing facilities, at fair value, for the next five years and thereafter are as follows:
Year Ending December 31,
 
Estimated Maturities
 
 
(In thousands)
2018
 
$
323,094

2019
 
325,067

2020
 
309,798

2021
 
293,981

2022
 
280,023

Thereafter
 
2,387,413

Total
 
$
3,919,376


F-49

The J.G. Wentworth Company
(Debtor-in-Possession)
Notes to Consolidated Financial Statements

Interest expense for the years ended December 31, 2017, 2016 and 2015 related to VIE long-term debt issued by securitization trusts and permanent financing facilities, at fair value, was $169.4 million, $152.1 million and $140.9 million, respectively.
18. Derivative Financial Instruments
Interest Rate Swaps
The Company utilizes interest rate swaps to manage its exposure to changes in interest rates related to borrowings on its revolving credit facilities and other similar borrowings. Hedge accounting has not been applied to any of the Company's interest rate swaps.
As of December 31, 2017 and 2016, the Company did not have any outstanding interest rate swaps related to its borrowings on revolving credit facilities. During the years ended December 31, 2017, 2016 and 2015 and in connection with its securitizations, the Company terminated interest rate swaps with notional values of $21.8 million, $75.2 million, and $61.1 million, respectively. The total gain (loss) on the termination of these interest rate swaps for the years ended December 31, 2017, 2016 and 2015 was $0.2 million, $(1.5) million, and $(0.2) million, respectively. These gains (losses) were recorded in realized and unrealized gains on VIE and other finance receivables, long-term debt and derivatives in the Company's consolidated statements of operations. There were no unrealized gain for these swaps for all three of the years ended December 31, 2017, 2016 and 2015.
The Company also has interest rate swaps to manage its exposure to changes in interest rates related to its VIE long-term debt issued by securitization and permanent financing trusts. As of December 31, 2017, the Company had eight outstanding swaps for VIE long-term debt with a total notional amount of $124.9 million. The Company pays fixed rates ranging from 4.50% to 5.77% and receives floating rates equal to one-month LIBOR plus an applicable margin. As of December 31, 2016, the Company had eight outstanding swaps with total notional amounts of $156.6 million. The Company paid fixed rates ranging from 4.50% to 5.77% and received floating rates equal to 1-month LIBOR rate plus an applicable margin.
These interest rate swaps were designed to closely match the borrowings under the respective floating rate asset backed loans in amortization. As of December 31, 2017 and 2016, the terms of these interest rate swaps range from approximately 4.5 years to approximately 18.1 years and approximately 5.5 to approximately 19.1 years, respectively. For the years ended December 31, 2017, 2016 and 2015, the amount of unrealized gain recognized was $5.8 million, $7.0 million and $5.6 million, respectively. These gains were recorded in realized and unrealized gains on VIE and other finance receivables, long-term debt and derivatives in the Company's consolidated statements of operations.
Additionally, the Company has interest-rate swaps to manage its exposure to changes in interest rates related to its borrowings under Peachtree Structured Settlements, LLC ("PSS"), a permanent financing VIE, and PLMT. As of December 31, 2017, the Company had 133 outstanding swaps for PSS and PLMT with a total notional amount of $165.4 million. The Company pays fixed rates ranging from 4.90% to 8.70% and receives floating rates equal to one-month LIBOR plus an applicable margin. As of December 31, 2016, the Company had 137 outstanding swaps with total notional amount of $181.2 million. The Company paid fixed rates ranging from 4.90% to 8.70% and received floating rates equal to 1-month LIBOR rate plus an applicable margin.
The PSS and PLMT interest rate swaps were designed to closely match the borrowings under the respective floating rate asset backed loans in amortization. During the year ended December 31, 2016, the Company terminated an interest rate swap for PSS with a notional value of $13.8 million and recorded a loss on the termination of $3.1 million. This was the only interest rate swap termination related to PSS and PLMT in the periods presented on the Company's consolidated statement of operations. As of December 31, 2017 and 2016, the terms of the interest rate swaps for PSS and PLMT range from approximately 1 month to approximately 16.6 years and approximately 5 months to approximately 17.6 years, respectively. For the years ended December 31, 2017, 2016 and 2015 the amount of unrealized gain recognized was $6.3 million, $9.3 million and $3.8 million, respectively. These gains were recorded in realized and unrealized gains on VIE and other finance receivables, long term debt and derivatives in the Company's consolidated statements of operations.

F-50

The J.G. Wentworth Company
(Debtor-in-Possession)
Notes to Consolidated Financial Statements

The notional amounts and fair values of interest rate swaps are as follows as of:
 
 
 
 
December 31, 2017
 
December 31, 2016
Entity
 
Securitization
 
Notional Amount
 
Fair Value
 
Notional Amount
 
Fair Value
 
 
 
 
(In thousands)
321 Henderson I, LLC
 
2004-A A-1
 
$
14,604

 
$
(973
)
 
$
20,265

 
$
(1,610
)
321 Henderson I, LLC
 
2005-1 A-1
 
30,865

 
(3,064
)
 
39,548

 
(4,495
)
321 Henderson II, LLC
 
2006-1 A-1
 
6,059

 
(417
)
 
7,969

 
(714
)
321 Henderson II, LLC
 
2006-2 A-1
 
9,833

 
(1,163
)
 
12,011

 
(1,654
)
321 Henderson II, LLC
 
2006-3 A-1
 
8,310

 
(972
)
 
11,832

 
(1,394
)
321 Henderson II, LLC
 
2006-4 A-1
 
8,752

 
(526
)
 
12,378

 
(965
)
321 Henderson II, LLC
 
2007-1 A-2
 
20,434

 
(3,131
)
 
22,942

 
(3,965
)
321 Henderson II, LLC
 
2007-2 A-3
 
26,040

 
(5,471
)
 
29,606

 
(6,664
)
PSS
 
—
 
126,017

 
(17,865
)
 
137,361

 
(22,190
)
PLMT
 
—
 
39,397

 
(4,878
)
 
43,792

 
(6,781
)
Total
 
 
 
$
290,311

 
$
(38,460
)
 
$
337,704

 
$
(50,432
)
 
Interest Rate Lock Commitments and Forward Sale Commitments
The Company enters into IRLCs to originate residential mortgage loans held for sale, at specified interest rates and within a specified period of time (generally between 30 and 90 days), with customers who have applied for a loan and meet certain credit and underwriting criteria. These IRLCs meet the definition of a derivative and are reflected in other assets or other liabilities on the Company's consolidated balance sheets at fair value with changes in fair value recognized in the realized and unrealized gains on sale of mortgage loans held for sale, net of direct costs, in the Company's consolidated statements of operations. The fair value of the IRLCs are measured based on the value of the underlying mortgage loan, quoted GSE MBS prices, estimates of the fair value of the MSRs and the pull-through rate, net of commission expense and broker fees.
The Company manages the interest rate price risk associated with its outstanding IRLCs and mortgage loans held for sale by entering into derivative loan instruments such as forward sale commitments and mandatory delivery commitments. Management expects these derivatives will experience changes in fair value opposite to changes in the fair value of the derivative loan commitments and mortgage loans held for sale, thereby reducing earnings volatility. The Company takes into account various factors and strategies in determining the portion of the mortgage pipeline (IRLCs) and mortgage loans held for sale it wants to economically hedge.
The notional amounts and fair values associated with IRLCs and forward sale commitments were as follows as of:
 
 
December 31, 2017
 
December 31, 2016
 
 
Notional Amount
 
Fair Value
 
Notional Amount
 
Fair Value
 
 
(In thousands)
Derivative Assets:
 
 
 
 
 
 
 
 
Interest rate lock commitments
 
$
574,198

 
$
16,134

 
$
355,870

 
$
6,072

Forward sale commitments
 
—

 
—

 
406,000

 
659

Total
 
$
574,198

 
$
16,134

 
$
761,870

 
$
6,731

 
 
 
 
 
 
 
 
 
Derivative Liabilities:
 
 
 
 
 
 
 
 
Forward sale commitments
 
$
513,000

 
$
623

 
$
—

 
$
—

Total
 
$
513,000

 
$
623

 
$
—

 
$
—

The Company has exposure to credit loss in the event of contractual non-performance by its trading counterparties in derivative financial instruments that the Company uses in its interest rate risk management activities. The Company manages this

F-51

The J.G. Wentworth Company
(Debtor-in-Possession)
Notes to Consolidated Financial Statements

credit risk by selecting only counterparties that the Company believes to be financially strong, by spreading the risk among multiple counterparties, by placing contractual limits on the amount of unsecured credit extended to any single counterparty and by entering into netting agreements with counterparties, as appropriate. 
19. Income Taxes
On December 22, 2017, the United States enacted significant changes to the U.S. tax law following the passage and signing of H.R.1, “An Act to Provide the Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018” (the “Act”) (previously known as “The Tax Cuts and Jobs Act”). As a result, we are required to re-measure our deferred tax assets and liabilities using the enacted rate at which we expect them to be recovered or settled. The effect of this re-measurement is recorded to income tax expense in the year the tax law is enacted. For the year ended December 31, 2017, the re-measurement of our net deferred tax asset resulted in additional income tax benefit of $0.1 million. Concurrent with the enactment of the Act, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”), which allows companies to recognize the cumulative impact of the income tax effects triggered by the enactment of the Act over a period of up to twelve months in the reporting period in which the adjustment is identified. We applied SAB 118 effective December 22, 2017, and will continue to refine the measurement of the net deferred tax balance during the preparation of our 2017 tax return as additional guidance and information becomes available.
The Corporation is required to file federal and applicable state corporate income tax returns and recognizes income taxes on its pre-tax income, which historically has consisted primarily of its share of JGW LLC's pre-tax income. JGW LLC is organized as a limited liability company which is treated as a "flow-through" entity for income tax purposes and therefore is not subject to income taxes. As a result, the Company's consolidated financial statements do not reflect a benefit or provision for income taxes on the pre-tax income or loss attributable to the non-controlling interests in JGW LLC.

F-52

The J.G. Wentworth Company
(Debtor-in-Possession)
Notes to Consolidated Financial Statements

The Company's (benefit) provision for income taxes for the years ended December 31, 2017, 2016 and 2015, respectively, consists of the following:
 
For the Year Ended December 31,
 
2017
 
2016
 
2015
 
(In thousands)
Current:
 

 
 

 
 

Federal
$
81

 
$
183

 
$
(234
)
State
20

 
42

 
(71
)
 
101

 
225

 
(305
)
 
 
 
 
 
 
Deferred:
 

 
 

 
 

Federal
353

 
(12,910
)
 
(15,062
)
State
9,191

 
(2,655
)
 
(2,849
)
 
9,544

 
(15,565
)
 
(17,911
)
Income tax (benefit) provision
$
9,645

 
$
(15,340
)
 
$
(18,216
)
The difference between the Company's effective income tax rate and the United States statutory rate is reconciled below: 
 
For the Year Ended December 31,
 
2017
 
2016
 
2015
Federal
35.0
 %
 
35.0
 %
 
35.0
 %
Income passed through to non-corporate members
(2.9
)
 
(15.6
)
 
(15.9
)
Permanent items
(0.5
)
 
(2.1
)
 
(11.1
)
State income tax
6.1

 
3.0

 
1.4

Deferred rate change
(13.8
)
 
—

 
—

Valuation allowance
(29.5
)
 
(10.5
)
 
(1.9
)
Other
0.8

 
3.7

 
1.0

Effective tax rate
(4.8
)%
 
13.5
 %
 
8.5
 %
  
The change in the Company's effective tax rate for the year ended December 31, 2017 compared to the year ended December 31, 2016 was primarily the result of: (i) the differences in the projected book and taxable income for the respective years as of the balance sheet dates; (ii) the impact of permanent differences between book and taxable income; (iii) a greater share of the Company's pre-tax book income (loss) being attributable to entities that are taxed as corporations, of which most record a full valuation allowance; (iv) the recording of additional valuation allowance as a result of legislative changes during the fourth quarter in Pennsylvania that caused more of our deferred tax assets to not be more likely than not to be realized; and (v) the increase in state income tax liabilities for the additional states relating to the mortgage company activity that does not have historical NOLs to offset future taxable income. The difference in effective tax rates between the two legal entities arises because JGW LLC is treated as a "flow-through" entity for income tax purposes and therefore is not subject to corporate-level income taxes.
It should be noted, the reconciliation above includes an item for deferred rate change associated with the 2017 Tax Act. This deferred rate change is offset with the related change to valuation allowance. The rate change has minimal impact on tax expense.
The change in the Company's effective tax rate for the year ended December 31, 2016 compared to the year ended December 31, 2015 was primarily the result of: (i) the differences in the projected book and taxable income for the respective years as of the balance sheet dates; (ii) the impact of permanent differences between book and taxable income; (iii) a greater share of the Company's pre-tax book income (loss) being attributable to separate subsidiary entities that are taxed as corporations, of which most record a full valuation allowance; (iv) the recording of the valuation allowance discussed above; and (v) the increase in state income tax liabilities for the additional states relating to the mortgage company activity that does not have historical NOLs to offset future taxable income. The difference in effective tax rates between the two legal entities

F-53

The J.G. Wentworth Company
(Debtor-in-Possession)
Notes to Consolidated Financial Statements

arises because JGW LLC is treated as a "flow-through" entity for income tax purposes and therefore is not subject to corporate-level income taxes.
Deferred income taxes reflect the net tax effects of temporary differences that may exist between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes using the enacted tax rates for the year in which the differences are expected to reverse. A summary of the components of deferred tax assets and deferred tax liabilities follows:
 
December 31, 2017
 
December 31, 2016
 
(In thousands)
Deferred tax assets:
 
Net operating loss carryforwards
$
61,119

 
$
63,127

Disallowed TRA obligations settlement accrual
46,789

 
—

Other deferred assets
1,001

 
—

Lottery winnings
574

 
880

Total deferred tax assets
109,483

 
64,007

Valuation allowance
(74,224
)
 
(14,893
)
Total deferred tax assets, net
35,259

 
49,114

 
 
 
 
Deferred tax liabilities:
 

 
 

Basis difference in partnership
45,210

 
48,101

Lottery winnings fair value adjustments
—

 
2,023

Other deferred liabilities
603

 
—

Total deferred tax liabilities
45,813

 
50,124

Deferred tax liabilities, net
$
(10,554
)
 
$
(1,010
)
As of December 31, 2017 and 2016, the Company had federal income tax net operating loss carry forwards of $210.8 million and $152.3 million, and state income tax net operating loss carry forwards of $222.8 million and $151.1 million, respectively, which will expire at various dates from 2033 through 2037.
Future realization of tax benefits depends on the expectation of taxable income within a period of time that the tax benefits will reverse. The Company assesses available positive and negative evidence to determine if it is more likely than not that it will be able to realize its deferred tax assets prior to expiration. In accordance with ASC 740-10-30-18, the Company’s assessment involves analyzing the four possible sources of taxable income that may be available under tax law to realize a tax benefit for deductible temporary differences and carryforwards: (i) future taxable income exclusive of reversing temporary differences and carryforwards; (ii) future reversals of existing taxable temporary differences; (iii) taxable income in prior carryback period(s) if carryback is permitted by tax law; and (iv) tax planning strategies that would, if necessary, be implemented.
Since its inception in 2013 and through December 31, 2017, the Company has been in a cumulative loss position from both a book and tax perspective. As such, the Company is not relying on future taxable income exclusive of reversing temporary differences or taxable income in carryback periods. Additionally, the Company has not identified any tax planning strategies it could implement to realize the gross deferred tax assets. As a result, the Company is relying exclusively on the future reversal of existing deferred tax liabilities to support the realization of the deferred tax assets. The deferred tax liability primarily relates to the difference in the accretion of the Company's assets for book and tax purposes. The Company scheduled out the reversal of the deferred tax liability and concluded the future taxable income from the existing deferred tax liabilities would be sufficient to realize the deferred tax assets for NOLs. As such, the company has established a valuation allowance for any deferred tax assets in excess of these reversing deferred tax liabilities. Further, as a result of certain restructuring activities and taxable income limitations associated with the utilization of existing deferred tax assets, the Company is recording deferred tax liabilities associated with certain state jurisdictions.
The Tax Reform Act of 1986 (the "Act") provides for a limitation on the annual use of net operating loss and tax credit carryforwards following certain ownership changes (as defined by the Act) that could limit the Company's ability to utilize these carryforwards. Generally, under Section 382 of the Internal Revenue Code, a change in ownership of a company of greater than

F-54

The J.G. Wentworth Company
(Debtor-in-Possession)
Notes to Consolidated Financial Statements

50% within a three-year period results in an annual limitation on that company’s ability to utilize its carryforwards from the tax periods prior to the ownership change. The Company completed a Section 382 study and determined that no limitation has been applied to its NOLs as of December 31, 2017. The Company will continue to monitor any changes in its ownership.
As of December 31, 2017 and 2016, the Company recorded valuation allowances in the amount of $74.2 million and $14.9 million, respectively, against the portion of its federal and state deferred tax assets that it has determined are not more likely than not of being realized.
As of December 31, 2017 and 2016, the Company had no gross unrecognized tax benefits. The Company does not expect any material increase or decrease in its gross unrecognized tax benefits during the next twelve months. If and when the Company does record unrecognized tax benefits in the future, any interest and penalties related to these unrecognized tax benefits will be recorded in the income tax expense line in the applicable statements of operations.
The Company files its tax returns as prescribed by the tax laws of the jurisdictions in which it operates. In the normal course of business, the Company may be subject to examination by federal and certain state and local tax authorities. As of December 31, 2017, the Company and its subsidiaries' U.S. federal income tax returns for the years 2014 through 2017 are open under the normal three-year statute of limitations from when the returns were filed and therefore subject to examination. State and local tax returns are generally subject to audit from 2013 through 2017. Currently, no tax authorities are auditing the Company on any income tax matters.
20. Installment Obligations Payable
The Company's Asset Advantage® program generates income and losses from both the related trust accounts and the corresponding installment obligation for each trust account. Income or loss from the trust accounts will be offset in equal amount with income or loss from the installment obligations. Each obligation has an installment payment schedule agreed to by the obligee prior to the time of issuance of the obligation. An obligee may request an unscheduled installment payment, which must be agreed to by the Company, and if so agreed, the Company may generally charge a penalty of up to 20% of the unscheduled installment amount. Virtually all of the obligations are guaranteed by corporate guarantees issued by third party financial institutions to the extent of assets held in related trust accounts.
The actual maturities of the obligations depend on, among other things, the obligees' designated payment schedules, the performance of the obligees' index choices and the extent to which the obligees have taken any unscheduled installment payments. As of December 31, 2017, estimated maturities for the next five years and thereafter are as follows:
Year Ended December 31,
 
Estimated Maturities 
 
 
(In thousands)
2018
 
$
13,486

2019
 
10,826

2020
 
8,834

2021
 
6,612

2022
 
6,137

Thereafter
 
39,649

Total
 
$
85,544

 
21. Stockholders' (Deficit) Equity
The following reflects the stockholders' (deficit) equity prior to the effects of the Plan on January 25, 2018:
On November 14, 2013, the Corporation consummated an initial public offering ("IPO") and amended and restated its certificate of incorporation to provide for, among other things, the authorization of 500,000,000 shares of Class A common stock, (the "Class A common stock"), par value $0.00001 per share, 500,000,000 shares of Class B common stock, (the "Class B common stock"), par value $0.00001 per share, 500,000,000 shares of Class C "non-voting" common stock, par value $0.00001 per share (the "Class C common stock"), and 100,000,000 shares of blank check preferred stock. Also, concurrent with the consummation of the Corporation's IPO, JGW LLC merged with and into a newly formed subsidiary of the Corporation.
In November 2017, the Company filed post-effective amendments to its Registration Statements to remove from registration any shares that remain unsold at the termination of the offering covered by the Registration Statements.

F-55

The J.G. Wentworth Company
(Debtor-in-Possession)
Notes to Consolidated Financial Statements

As of December 31, 2017, there were 16,352,775 shares of Class A common stock issued and 15,810,703 shares outstanding. Additionally, there were 8,629,738 shares of Class B common stock issued and outstanding as of December 31, 2017. There were no shares of Class C common stock issued or outstanding as of December 31, 2017.
Repurchases of Class A Common Stock
On May 2, 2014, the Company's Board of Directors approved the repurchase of an aggregate of $15.0 million of Class A common stock (the "Stock Repurchase Program") under Rule 10b5-1 of the Securities Exchange Act of 1934, as amended. Purchases under the Stock Repurchase Program were to be made from time to time in open market purchases, privately negotiated transactions, accelerated stock repurchase programs, issuer self-tender offers or otherwise in accordance with applicable federal securities laws. The Stock Repurchase Program did not obligate the Company to acquire any particular amount of Class A common stock and the pace of repurchase activity depended on factors such as levels of cash generation from operations, cash requirements for investment in the Company's business, repayment of debt, current stock price, market conditions and other factors. The Stock Repurchase Program could be suspended, modified or discontinued at any time and had no set expiration date.
Since the inception of the Stock Repurchase Program and through December 31, 2015, the Company had repurchased 1,546,017 shares of Class A common stock for an aggregate purchase price of $15.0 million. As of December 31, 2015, the Company had repurchased the maximum amount of shares authorized by the Board of Directors.
On May 26, 2015, the Company repurchased in a privately negotiated transaction 426,332 shares of its Class A common stock held by the former President and Chief Operating Officer of the Company for an aggregate purchase price of $3.9 million. The purchase price of $9.24 per share represented a 3.0% discount from the closing price of the Company's Class A common stock on May 22, 2015, the date the parties executed the associated agreement.
Class A Common Stock
Holders of Class A common stock are entitled to one vote for each share held of record on all matters submitted to a vote of stockholders. Holders of Class A common stock are entitled to share ratably (based on the number of shares of Class A common stock held) if and when any dividend is declared by the Board of Directors. Upon dissolution, liquidation or winding up, holders of Class A common stock are entitled to a pro rata distribution of any assets available for distribution to common stockholders, and do not have preemptive, subscription, redemption, or conversion rights.
Class B Common Stock
Shares of Class B common stock will only be issued in the future to the extent that additional common membership interests in JGW LLC (the "Common Interests," and the holders of such Common Interests, the "Common Interestholders") are issued by JGW LLC, in which case the Company would issue a corresponding number of shares of Class B common stock.
Holders of Class B common stock are entitled to ten votes for each share held of record on all matters submitted to a vote of stockholders. Holders of Class B common stock do not have any right to receive dividends and upon liquidation, dissolution or winding up and will only be entitled to receive an amount per share equal to the $0.00001 par value. Holders of Class B common stock do not have preemptive rights to purchase additional shares of Class B common stock.
Subject to the terms and conditions of the operating agreement of JGW LLC, each Common Interestholder has the right to exchange their Common Interests in JGW LLC, together with the corresponding number of shares of Class B common stock, for shares of Class A common stock or, at the option of JGW LLC, cash equal to the market value of one share of Class A common stock.
Class C Common Stock
Holders of Class C common stock are generally not entitled to vote on any matters. Holders of Class C common stock are entitled to share ratably (based on the number of shares of Class C common stock held) if and when any dividend is declared by the Board of Directors. Upon dissolution, liquidation or winding up, holders of Class C common stock will be entitled to a pro rata distribution of any assets available for distribution to common stockholders (except the de minimis par value of the Class B common stock), and do not have preemptive rights to purchase additional shares of Class C common stock.
Subject to the terms and conditions of the operating agreement of JGW LLC, Peach Group Holdings, Inc. ("PGHI Corp.") and its permitted transferees have the right to exchange the non-voting Common Interests in JGW LLC they hold for shares of Class C common stock or, at the option of JGW LLC, cash equal to the market value of Class C common stock.
Each share of Class C common stock may, at the option of the holder, be converted at any time into a share of Class A common stock on a one-for-one basis.

F-56

The J.G. Wentworth Company
(Debtor-in-Possession)
Notes to Consolidated Financial Statements

Preferred Stock
The Company's certificate of incorporation provides that the Board of Directors has the authority, without action by the stockholders, to designate and issue up to 100,000,000 shares of preferred stock in one or more classes or series and to fix the powers, rights, preferences, and privileges of each class or series of preferred stock, including dividend rights, conversion rights, voting rights, terms of redemption, liquidation preferences, and the number of shares constituting any class or series, which may be greater than the rights of the holders of the common stock. No preferred stock had been issued or was outstanding as of December 31, 2017 and 2016.
Warrants Issued to PGHI Corp.
In connection with the IPO and the related restructuring, the Class C Profits Interests of JGW LLC held by PGHI Corp. were canceled and holders received in exchange warrants to purchase shares of Class A common stock. The warrants issued in respect of the Tranche C-1 Profits Interests of JGW LLC entitle the holders thereof to purchase up to 483,217 shares of Class A common stock and have an exercise price of $35.78 per share. The warrants issued in respect of the Tranche C-2 Profits Interests of JGW LLC also entitle the holders thereof to purchase up to 483,217 shares of Class A common stock and have an exercise price of $63.01 per share. All of the warrants issued are currently exercisable, terminate on January 8, 2022, and may not be transferred. No warrants were exercised during the years ended December 31, 2017 or 2016.
JGW LLC Operating Agreement
Pursuant to the operating agreement of JGW LLC, the holders of JGW LLC Common Interests (other than the Company) have the right, subject to terms of the operating agreement as described therein, to exchange their Common Interests and an equal number of shares of Class B common stock for an equivalent number of shares of Class A common stock, or in the case of PGHI Corp., an equivalent number of shares of Class C common stock. During the years ended December 31, 2017, 2016 and 2015, 70,549, 196,101 and 984,949 Common Interests in JGW LLC, in addition to an equal number of shares of Class B common stock, were exchanged for 70,549, 196,101 and 984,949 shares of the Class A common stock pursuant to the operating agreement, respectively.
22. Non-Controlling Interests
The Corporation consolidates the financial results of JGW LLC whereby it records a non-controlling interest for the economic interest in JGW LLC held by the Common Interestholders. Pursuant to an agreement between the Corporation and JGW LLC, any time the Corporation cancels, issues or repurchases shares of Class A common stock, JGW LLC cancels, issues or repurchases, as applicable, an equivalent number of Common Interests. In addition, any time Common Interestholders exchange their Common Interests for shares of Class A common stock, JGW LLC is required to transfer an equal number of Common Interests to the Corporation. Changes in the non-controlling and the Corporation's interest in JGW LLC for the year ending December 31, 2017 are presented in the following table:
 
Total Common Interests Held By:
 
The J.G. Wentworth Company
 
Non-controlling
Interests
 
Total
Balance as of December 31, 2016
15,730,473

 
13,070,781

 
28,801,254

Common Interests acquired by The J.G. Wentworth Company as a result of the exchange of units for shares of Class A common stock
70,549

 
(70,549
)
 
—

Issuance of Class A common stock for vested equity awards
9,681

 
—

 
9,681

Common Interests forfeited
—

 
(9,871
)
 
(9,871
)
Balance as of December 31, 2017
15,810,703

 
12,990,361

 
28,801,064

The non-controlling interests include the Common Interestholders who were issued shares of Class B common stock in connection with the IPO as well as other Common Interestholders who may convert their Common Interests into 4,360,623 shares of Class C common stock.
In accordance with the Plan, on the Effective Date, the non-controlling interests in the Company's consolidated statements of operations were canceled. Refer to Note 1 for additional information.

F-57

23. Risks and Uncertainties
The Company's finance receivables are primarily obligations of insurance companies. The exposure to credit risk with respect to these finance receivables is generally limited due to the large number of insurance companies of generally high credit quality comprising the receivable base, their dispersion across geographical areas, and possible availability of state insurance guarantee funds. As of December 31, 2017 and 2016, three insurance companies and related subsidiaries comprised approximately 35% and 33%, respectively, of the Company's gross finance receivables balance. The Company is also subject to numerous risks associated with structured settlements. These risks include, but are not limited to, restrictions on assignability of structured settlements, potential changes in the U.S. tax law related to taxation of structured settlements, diversion by a seller of scheduled payments to the Company, and other potential risks of regulation and/or legislation. A majority of states have regulated the business by passing statutes that govern the sale of structured settlement payments. Generally, the laws require a court approval to consummate a sale. The Company's earnings are dependent upon the fair value of the finance receivables it purchases relative to the value it can obtain by financing these assets in securitization or other transactions. Accordingly, earnings are subject to risks and uncertainties surrounding exposure to changes in the interest rate environment, competitive pressures affecting the ability to maintain sufficient effective purchase yields, and the ability to sell or securitize finance receivables at profitable levels in the future. For the years ended December 31, 2017, 2016 and 2015, the Company's structured settlement business accounted for 73%, 66% and 83% of total revenues, respectively.
In the normal course of business, companies in the mortgage banking industry encounter certain economic and regulatory risks. Economic risks include interest rate and credit risk. The Company is subject to interest rate risk to the extent that in a rising interest rate environment, the Company may experience a decrease in loan production, as well as decreases in the value of mortgage loans held for sale and in commitments to originate loans, which may negatively impact the Company's operations. Credit risk is the risk of default that may result from the borrowers' inability or unwillingness to make contractually required payments during the period in which loans are being held for sale.
The Company sells mortgage loans to investors without recourse. As such, the investors have assumed the risk of loss or default by the borrower. However, the Company is usually required by these investors to make certain standard representations and warranties relating to credit information, loan documentation and collateral. To the extent that the Company does not comply with such representations, or there are early payment defaults, the Company may be required to repurchase the mortgage loans or indemnify these investors for any losses from borrower defaults. In addition, if mortgage loans pay-off within a specified time frame, the Company may be required to refund a portion of the sales proceeds to the investors. As of December 31, 2017, 17.8% and 22.8% of the mortgage loans the Company serviced as measured by unpaid principal balances were concentrated in Virginia and California, respectively. As of December 31, 2016, 21.1% and 21.0% of the mortgage loans the Company serviced as measured by unpaid principal balances were concentrated in Virginia and California, respectively.
24. Commitments and Contingencies
Arrangements
The Company had an arrangement (the "Arrangement") with a counterparty for the sale of LCSS assets that met certain eligibility criteria, which expired on June 30, 2012. Pursuant to the Arrangement, the Company also has a borrowing agreement (the "Borrowing Agreement") with the counterparty that gave the counterparty a borrowing base to draw on from the Company for the purchase of LCSS assets. As of December 31, 2017 and 2016, the amount owed from the counterparty pursuant to this Borrowing Agreement is $11.4 million and $10.8 million, respectively, is earning interest at an annual rate of 5.35% and is included in Other receivables, net of allowance for losses, on the Company's consolidated balance sheets.
The Arrangement also has put options, which expire on December 30, 2019 and 2020, that give the counterparty the option to sell, on those dates, purchased LCSS assets back to the Company if the underlying claimant is still alive on that date. The put options, if exercised by the counterparty, require the Company to purchase LCSS assets at a target internal rate of return ("IRR") of 3.5% above the original target IRR paid by the counterparty.
Tax Receivable Agreement
Common Interestholders may exchange their Common Interests for shares of Class A common stock, or, in the case of PGHI Corp., shares of Class C common stock, on a one-for-one basis or, in each case, at the option of JGW LLC, cash. For income tax purposes, such exchanges are treated as sales of Common Interests in JGW LLC to the Corporation. JGW LLC made an election under Section 754 of the Internal Revenue Code of 1986 in connection with the filing of its 2014 federal income tax return which, upon each exchange, effectively treats the Corporation as having purchased an undivided interest in each of the assets owned by JGW LLC. As such, each exchange may result in increases (or decreases) in the Corporation's tax basis in the tangible and intangible assets of JGW LLC that otherwise would not have been available. Any such increases (decreases) in tax basis are, in turn, anticipated

F-58

The J.G. Wentworth Company
(Debtor-in-Possession)
Notes to Consolidated Financial Statements

to create incremental tax deductions (income) that would reduce (increase) the amount of income tax the Corporation would otherwise be required to pay in the future.
In connection with the IPO, the Corporation entered into the TRA with Common Interestholders who held in excess of approximately 1% of the Common Interests outstanding immediately prior to the IPO. The TRA requires the Company to pay those Common Interestholders 85% of the amount of cash savings, if any, in U.S. federal, state and local income tax that the Company actually realizes in any tax year from increases in tax basis realized as a result of any future exchanges by Common Interestholders of their Common Interests for shares of Class A or Class C common stock (or cash). The cash savings in income tax paid to any such Common Interestholders will reduce the cash that may otherwise be available to the Corporation for operations and to make future distributions to holders of Class A common stock.
For purposes of the TRA, cash savings in income tax will be computed by comparing the Corporation's actual income tax liability for a covered tax year to the amount of such taxes that the Corporation would have been required to pay for such covered tax year had there been no increase to the Corporation's share of the tax basis of the tangible and intangible assets of JGW LLC as a result of such sale and any such exchanges and had the Corporation not entered into the TRA. The TRA continues until all such tax benefits have been utilized or expired, unless the Corporation exercises its right to terminate the TRA upon a change of control for an amount based on the remaining payments expected to be made under the TRA.
The exchange of Common Interests for shares of Class A common stock in 2015 and 2014 resulted in a $53.3 million and $207.0 million increase, respectively, in the Corporation's share of the tax basis of JGW LLC's assets, which created current and future income tax deductions for the Corporation. The increase in tax basis, however, did not result in an income tax cash savings for the years ended December 31, 2015 and 2014, because the Corporation would not have been a tax payer in the absence of such tax basis increase. Consequently, there is no liability associated with the 2015 or 2014 exchanges pursuant to the TRA. The Corporation will compute any tax liability for similar exchanges in 2017 in conjunction with the preparation of its 2017 Federal tax returns. The Corporation, however, does not expect to have any tax liability associated with the 2017 tax year and does not expect to benefit from income tax cash savings related to basis adjustments associated with the 2017 exchanges pursuant to the TRA, or have any liability in connection with exchanges pursuant to the TRA made in 2017.
The filing by the Company of Chapter 11 Cases qualified as a Material Breach under the foregoing agreement. Upon the triggering of a Material Breach following such filing, all obligations under the TRA were accelerated and the claimants were owed the present value of all future tax attributes to be distributed to such claimants, subject to certain discounting and based on assumptions regarding the remaining payments expected to be made under the TRA. It is estimated that, the occurrence of a Material Breach in December 2017 resulted in claims against the Company held by the TRA's claimants in the aggregate amount of $160.1 million, which were included within reorganization items, net in the Company's consolidated statements of operations and within LSTC on the Company's consolidated balance sheet.
As part of the Chapter 11 Cases and in accordance with the previously announced Plan, which became effective on January 25, 2018, the claims under the TRA were discharged and, in consideration, each TRA claimant received its pro rata share of the New Class A common stock and the New Class B common stock of the Company or cash consideration, at the sole election of each holder of a TRA claim. Consequently, as of January 25, 2018, the TRA claimants now hold, in the aggregate, 161,961 shares of New Class A common stock and 141,384 shares of New Class B common stock and received $4.8 million of cash consideration. The aggregate fair value of the total settlement was $6.6 million.
Loss on Contingencies
In the normal course of business, the Company is subject to various legal proceedings and claims. These proceedings and claims have not been finally resolved and the Company cannot make any assurances as to their ultimate disposition. It is management's opinion, based on the information currently available at this time, that the expected outcome of these matters will not have a material adverse effect on the financial position, the results of operations, or cash flows of the Company.
Commitments to Extend Credit
The Company enters into IRLCs with customers who have applied for residential mortgage loans and meet certain credit and underwriting criteria. These commitments expose the Company to market risk if interest rates change and the loan is not economically hedged or committed to an investor. The Company is also exposed to credit loss if the loan is originated and not sold to an investor and the mortgagor does not perform. The collateral upon extension of credit typically consists of a first deed of trust in the mortgagor's residential property. Commitments to originate loans do not necessarily reflect future cash requirements as some commitments are expected to expire without being drawn upon. Total commitments to originate loans as of December 31, 2017 and 2016 approximated $574.2 million and $355.9 million, respectively.

F-59

The J.G. Wentworth Company
(Debtor-in-Possession)
Notes to Consolidated Financial Statements

25. Share-based Compensation
 Under the Company's 2013 Omnibus Incentive Plan (the "2013 Plan"), stock options, restricted stock, restricted stock units and stock appreciation rights units may be granted to officers, employees, non-employee directors and consultants of the Company. As of December 31, 2017 and 2016, 1.1 million shares and 1.2 million shares of unissued Class A common stock were available to grant under the 2013 Plan.
As of December 31, 2017, the Company had granted non-qualified stock options and performance-based restricted stock units to its employees under the 2013 Plan. The Company recognizes compensation cost, net of a forfeiture rate, in compensation and benefits expense in the Company's consolidated statements of operations only for those awards that are expected to vest. The forfeiture rate is estimated based on historical experience taking into account the Company's expectations about future forfeitures.
Stock Options
The Company has granted options to purchase Class A common stock. These stock options have exercise prices equal to the fair value of the Class A common stock on the date of grant, a contractual term of ten years and vest generally in equal annual installments over a five-year period following the date of grant, subject to the holder's continued employment with the Company through the applicable vesting date. 
The fair value of stock option awards granted during the years ended December 31, 2017 and 2016 was estimated using the Black-Scholes valuation model and included the following assumptions:
 
Year Ended December 31, 2017
 
Year Ended December 31, 2016
Fair value
$
0.19

 
$0.17 - $0.62

Risk-free interest rate
2.07
%
 
1.35% - 1.86%

Expected volatility
43.58
%
 
40.84% - 44.50%

Expected life of options in years
6.5

 
6.5

Expected dividend yield
—

 
—

The Company recognizes compensation expense for the fair value of the stock options on a straight-line basis over the requisite service period of the awards. During the years ended December 31, 2017, 2016 and 2015, the Company recognized $1.2 million, $1.1 million and $1.2 million of share-based compensation expense, respectively, in connection with the stock options issued under the 2013 Plan.
A summary of stock option activity for the year ended December 31, 2017 is as follows:
 
 
Shares
 
Weighted-
 Average
 Exercise Price
 
Weighted-
 Average
 Remaining
 Contractual
 Term (In Years)
 
Aggregate
 Intrinsic
 Value (In
 Millions)
Outstanding as of December 31, 2016
 
1,376,549

 
$
5.77

 
7.73
 
$
—

Granted
 
206,500

 
0.41

 

 


Exercised
 
—

 
—

 

 


Canceled
 
—

 
—

 
 
 
 
Forfeited
 
(81,261
)
 
1.05

 

 


Expired
 
(9,058
)
 
9.23

 
 
 
 
Outstanding as of December 31, 2017
 
1,492,730

 
$
1.69

 
6.98
 
$
—

Expected to vest as of December 31, 2017
 
1,447,343

 
1.72

 
6.97
 
—

Vested as of December 31, 2017
 
142,586

 
8.72

 
6.98
 
—

During the years ended December 31, 2017, 2016 and 2015, stock options representing the right to acquire 73,497, 141,540 and 233,713 shares vested with an aggregate grant date fair value of $0.2 million, $0.7 million and $1.2 million, respectively.

F-60

The J.G. Wentworth Company
(Debtor-in-Possession)
Notes to Consolidated Financial Statements

The aggregate intrinsic value represents the total pre-tax value of the difference between the closing price of Class A common stock on the last trading day of the period and the exercise price of the options, multiplied by the number of in-the-money stock options that would have been received by the option holders had all the option holders exercised their options on December 31, 2017. The intrinsic value of the Company's stock options changes based on the closing price of the Company's stock. As of December 31, 2017, $2.0 million of total unrecognized compensation expense related to the outstanding stock options is expected to be recognized over a weighted average period of 1.7 years.
In April 2016, the Board authorized a one-time stock modification program for 1,266,125 outstanding options that were issued prior to January 1, 2016 and held by 45 participants. The stock modification program was approved by shareholders at the Annual Meeting on June 2, 2016. On July 29, 2016, the Tender Offer and Consent Solicitation Statement was sent to 33 eligible employees, who were employed as of that date by the Company, who were given 20 business days to consent to the modification. On August 26, 2016, the solicitation period expired with 32 employees electing to participate for an aggregate of 1,195,927 shares to be modified.
Pursuant to the approved stock modification program, on August 29, 2016, the exercise price of the outstanding options to purchase an aggregate of 147,963 shares of Class A common stock by all persons, other than a key executive officer of the Company as described in detail below, was modified to $0.32 per share, which was the closing price per share of the Class A common stock on the OTCQX Market on August 29, 2016. In addition, the vesting date of such modified options was changed to August 29, 2019.
Also on August 29, 2016, options to purchase 180,000 shares of Class A common stock held by the key executive officer were canceled and the Company simultaneously granted new stock options to purchase 180,000 shares of Class A common stock to the key executive officer, at an exercise price equal to $0.32 per share, with an expiration date of August 29, 2029. On the same date, the exercise price of outstanding options held by the key executive officer to purchase an aggregate of 180,000 shares of Class A common stock was modified to $0.32 per share, and the vesting date was changed to August 29, 2019.
Pursuant to the approved stock modification program, on August 29, 2017, the exercise price of outstanding options to purchase an aggregate of 486,953 shares of Class A common stock by all persons was modified to $0.17 per share, which was the closing price per share of the Class A common stock on the OTCQX Market on August 29, 2017. In addition, the vesting date of such modified options was changed to August 29, 2019.
Except with respect to the modified exercise price and expiration date, the modified options remain subject to all terms and conditions of their original grant agreements, including termination provisions. As provided in the Tender Offer and Consent Solicitation Statement, the remainder of the options with respect to which elections were properly tendered and not withdrawn prior to the expiration of the solicitation period will be modified on one or more future modification dates (to the extent not then exercised, expired or terminated), if the closing price of the Company's Class A common stock on each such future modification date is less than the original exercise price of such options. There are options to purchase a maximum of 180,000 shares of Class A common stock potentially subject to modification on August 29, 2018.
The valuation of the options that were modified on August 29, 2017 and 2016 is based on the following terms:
 
 
Year Ended December 31, 2017
 
Year Ended December 31, 2016
Fair value
 
$0.06 - $0.07

 
$0.13 - $0.15

Risk-free interest rate
 
1.58% - 1.67%

 
1.19% - 1.37%

Expected volatility
 
43.31% - 44.73%

 
43.81% - 44.52%

Expected life of options in years
 
4.1 - 6.5

 
5.1 - 6.5

Expected dividend yield
 
—

 
—

For the year ended December 31, 2017, the stock option modification resulted in an incremental compensation cost of less than $0.1 million which will be recognized over the two-year vesting period. For the year ended December 31, 2016, the stock option modification resulted in an incremental compensation cost of less than $0.1 million which will be recognized over the three-year vesting period. There was no stock option modification for the year ended December 31, 2015.
Performance-Based Restricted Stock Units
A summary of performance-based restricted stock units for the year ended December 31, 2017 is as follows:

F-61

The J.G. Wentworth Company
(Debtor-in-Possession)
Notes to Consolidated Financial Statements

 
Performance-Based Restricted Stock Units
 
Weighted-Average Grant-Date Fair Value
Outstanding as of December 31, 2016
207,500

 
$
1.18

Granted
103,250

 
0.41

Vested
(9,681
)
 
1.23

Forfeited
(72,819
)
 
6.51

Outstanding as of December 31, 2017
228,250

 
$
0.97

Expected to vest as of December 31, 2017
87,000

 
0.41

Each performance-based restricted stock unit will vest into 0 to 1.5 shares of Class A common stock depending on the degree to which the performance goals are met. Compensation expense resulting from these awards is: (i) recognized ratably from the date of the grant until the date the restrictions lapse; (ii) based on the trading price of the Class A common stock on the date of grant; and (iii) based on the probability of achievement of the specific performance-based goals.
In February 2017, the Company modified the performance goals associated with the performance-based restricted stock units granted in 2015 and 2016. As of December 31, 2017, management concluded that it was (i) improbable that the modified performance goals associated with the performance-based restricted stock units granted in 2015 and 2016 would vest and (ii) probable that the performance goals associated with the performance-based restricted stock units granted in 2017 would be met and the corresponding performance-based restricted stock units would vest.
In April 2016, the Company modified the performance goals associated with the performance-based restricted stock units granted in 2014 and 2015. As of December 31, 2017, management concluded that it was probable that the modified performance goals associated with the performance-based restricted stock units granted in 2014 would be met and the corresponding performance-based restricted stock units would vest. As of December 31, 2017, management concluded that (i) it was improbable that the modified performance goals associated with the performance-based restricted stock units granted in 2015 would be met and (ii) it was improbable that the performance goals associated with the performance-based restricted stock units granted in 2016 would be met. 
During the years ended December 31, 2017, 2016 and 2015, the Company recognized share-based compensation expense (income) of less than $0.1 million, less than $0.1 million and $(0.3) million, respectively, in connection with the performance-based restricted stock units.
The aggregate grant-date fair value of the performance-based restricted stock units granted during the years ended December 31, 2017, 2016 and 2015 was less than $0.1 million, less than $0.1 million and $1.5 million, respectively.
As of December 31, 2017, there was less than $0.1 million of total unrecognized compensation cost relating to outstanding performance-based restricted stock units that is not expected to be recognized. As of December 31, 2017, 9,681 of the performance-based restricted stock units had vested.
Restricted Stock
Restricted stock granted to independent directors under the 2013 Plan cliff vest on the first anniversary after the grant date. The fair value of restricted stock is determined based on the trading price of the Class A common stock on the date of grant. There was no restricted stock granted during the year ended December 31, 2017. The aggregate grant date fair value of the restricted stock granted was $0.1 million for each of the years ended December 31, 2016 and 2015. As of December 31, 2017, there was no unrecognized compensation cost relating to restricted stock.
The Company recognizes compensation expense for the fair value of restricted stock on a straight-line basis over the one-year cliff vesting period. During each of the years ended December 31, 2016 and 2015, the Company recognized $0.1 million of share-based compensation expense in connection with the restricted stock. As of December 31, 2017, there was no recognized compensation cost relating to restricted stock.

F-62

The J.G. Wentworth Company
(Debtor-in-Possession)
Notes to Consolidated Financial Statements

Unvested Restricted Common Interests in JGW LLC
The following table summarizes the activities of unvested Restricted Common Interests in JGW LLC for the year ended December 31, 2017:
 
 
Unvested Restricted Common
Interests
 
Weighted - Average
Grant - Date 
Fair Value
Outstanding as of December 31, 2016
 
9,871

 
$
9.06

Vested in period
 
—

 
—

Forfeited
 
(9,871
)
 
9.06

Outstanding as of December 31, 2017
 
—

 
$
—

Expected to vest as of December 31, 2017
 
—

 
—

There were no Restricted Common Interests in JGW LLC granted during the years ended December 31, 2017, 2016 or 2015. The aggregate grant-date fair value of the Restricted Common Interests in JGW LLC that vested during the years ended December 31, 2017, 2016 and 2015 was less than $0.1 million, $0.1 million and $0.5 million, respectively.
As of December 31, 2017, there was no unrecognized compensation cost related to outstanding unvested Restricted Common Interests in JGW LLC. Total share-based compensation expense recognized for the years ended December 31, 2016 and 2015 related to the Restricted Common Interests JGW LLC was less than $0.1 million and $0.3 million, respectively. There was no share-based compensation expense recognized for the year ended December 31, 2017 related to the Restricted Common Interests JGW LLC.
Effects of Chapter 11 Cases on share-based compensation
During the bankruptcy period, the accounting for share-based payments, including modifications or extinguishments, continued in accordance with ASC 718 and ASC 505-50, and consequently the Company continued to recognize compensation cost during the requisite service period.
As part of the Chapter 11 Cases and in accordance with the previously announced Plan, which became effective on January 25, 2018, a new Management Incentive Plan was adopted, the terms of which were set forth in the Plan and are further described in Note 31. All prior share-base compensation under the 2013 Plan was canceled on the Effective Date. Refer to Note 1 for additional information.
26. Employee Benefit Plan
The Company maintains a saving plan under Section 401(k) of the Internal Revenue Code that covers all employees who have attained 21 years of age and achieved the applicable and requisite service period. Matching contributions are at the discretion of the Company's Board of Directors. For certain employees, matching contributions by the Company were 50% on the first 8% of compensation contributed each pay period. For other employees, matching contributions by the Company were 15% of the employee's contributed amount on a per pay basis.
Employee benefit plan expense was included in compensation and benefits expense in the Company's consolidated statements of operations and was as follows for the years ended December 31:
 
2017
 
2016
 
2015
 
 

 
(In thousands)
 
 

Employee benefit plan expense
$
920

 
$
862

 
$
668

27. Cost Savings Activities
In late 2015, the Company initiated a cost reduction plan to reduce excess capacity and improve efficiency within the business units. The associated workforce reductions in connection with the Company's cost savings activities were substantially complete as of June 30, 2016. The Company recorded severance charges of less than $0.1 million and $2.9 million for the years ended December 31, 2017, and 2016, respectively, which were included within compensation and benefits in the Company's consolidated statements of operations.

F-63

In addition, the Company recorded lease termination charges of $2.0 million and $0.8 million for the years ended December 31, 2017 and 2016, which were included within general and administrative in the Company's consolidated statements of operations. The lease termination charges represent the fair value of the liability at the cease use date and were determined based on the remaining lease rental payments obligation reduced by estimated and actual sublease income for the property. The Company did not record severance or lease termination charges for the year ended December 31, 2015.
Both the severance liability and the lease termination costs are included in accrued expenses and accounts payable on the Company's consolidated balance sheets. A reconciliation of the liabilities associated with the cost reduction plan by reportable segment is as follows:
 
 
Structured Settlements
 
Home Lending
 
Consolidated
 
 
(In thousands)
Balance at December 31, 2016
 
$
1,201

 
$
90

 
$
1,291

Payments
 
(1,460
)
 
(149
)
 
(1,609
)
Adjustments
 
1,944

 
71

 
2,015

Balance at December 31, 2017
 
$
1,685

 
$
12

 
$
1,697

28. Earnings per share
Basic earnings per share ("EPS") measures the performance of an entity over the reporting period. Diluted EPS measures the performance of an entity over the reporting period while giving effect to all potentially dilutive common shares that were outstanding during the period.
In accordance with ASC 260, Earnings Per Share, all outstanding unvested share-based payments that contain rights to non-forfeitable dividends and participate in the undistributed earnings with the common stockholders are considered participating securities. The shares of Class B common stock do not share in the earnings of the Company and are therefore not considered participating securities. Accordingly, basic and diluted net earnings per share of Class B common stock have not been presented.
In connection with the IPO, Class C Profits Interests of JGW LLC held by PGHI Corp. were exchanged for a total of 966,434 warrants to purchase shares of Class A common stock. For the years ended December 31, 2017, 2016 and 2015, these warrants were not included in the computation of diluted loss per common share because they were antidilutive under the treasury stock method.
During the years ended December 31, 2017, 2016 and 2015, 1,506,729, 1,399,304 and 1,455,645 of weighted average stock options outstanding, respectively, were not included in the computation of diluted earnings (loss) per common share because they were antidilutive under the treasury stock method. During the years ended December 31, 2017, 2016 and 2015, 241,888, 225,822 and 188,218 of weighted-average performance-based restricted stock units, respectively, were antidilutive and, therefore, excluded, from the computation of diluted loss per common share.
The operating agreement of JGW LLC gives Common Interestholders the right (subject to the terms of the operating agreement as described therein) to exchange their Common Interests for shares of Class A common stock on a one-for-one basis at fair value, subject to customary conversion rate adjustments for stock splits, stock dividends and reclassifications. The Company applies the "if-converted" method to the Common Interests and vested Restricted Common Interests in JGW LLC to determine the dilutive weighted average shares of Class A common stock outstanding. The Company applies the treasury stock method to the unvested Restricted Common Interests and the "if-converted" method on the resulting number of additional Common Interests to determine the dilutive weighted average shares of Class A common stock outstanding represented by these interests.
In computing the dilutive effect that the exchange of Common Interests and Restricted Common Interests would have on EPS, the Company considered that net loss attributable to holders of Class A common stock would decrease due to the elimination of non-controlling interests (including any tax impact). Based on these calculations, the 13,016,480, 13,075,774 and 13,623,240 weighted average Common Interests and vested Restricted Common Interests outstanding, respectively, and the 3,673, 19,306 and 102,562 weighted average unvested Restricted Common Interests outstanding, respectively, for the years ended December 31, 2017, 2016 and 2015, respectively, were antidilutive and excluded from the computation of diluted loss per common share.

F-64

The J.G. Wentworth Company
(Debtor-in-Possession)
Notes to Consolidated Financial Statements

The following table is a reconciliation of the numerator and denominator used in the basic and diluted EPS calculations for the years ended December 31, 2017, 2016 and 2015: 
 
 
Years Ended December 31,
 
 
2017
 
2016
 
2015
 
 
(Dollars in thousands, except per share data)
Numerator:
 
 
 
 
 
 

Numerator for basic EPS - Net (loss) income attributable to holders of The J.G. Wentworth Company Class A common stock
 
$
(191,333
)
 
$
(46,857
)
 
$
(95,312
)
Effect of dilutive securities:
 
 
 
 
 
 
JGW LLC Common Interests and vested Restricted Common Interests
 
—

 
—

 
—

JGW LLC unvested Restricted Common Interests
 
—

 
—

 
—

Numerator for diluted EPS - Net (loss) income attributable to holders of The J.G. Wentworth Company Class A common stock
 
$
(191,333
)
 
$
(46,857
)
 
$
(95,312
)
Denominator:
 
 
 
 
 
 

Denominator for basic EPS -Weighted average shares of Class A common stock
 
15,782,303

 
15,649,474

 
14,690,746

Effect of dilutive securities:
 
 
 
 
 
 

Stock options
 
—

 
—

 
—

Warrants
 
—

 
—

 
—

Restricted common stock and performance-based restricted stock units
 
—

 
—

 
—

JGW LLC Common Interests and vested Restricted Common Interests
 
—

 
—

 
—

JGW LLC unvested Restricted Common Interests
 
—

 
—

 
—

Dilutive potential common shares
 
—

 
—

 
—

Denominator for diluted EPS - Adjusted weighted average shares of Class A common stock
 
15,782,303

 
15,649,474

 
14,690,746

 
 
 
 
 
 
 
Basic loss per share of Class A common stock
 
$
(12.12
)
 
$
(2.99
)
 
$
(6.49
)
Diluted loss per share of Class A common stock
 
$
(12.12
)
 
$
(2.99
)
 
$
(6.49
)
29. Business Segments
The Company's business segments are determined based on products and services offered, as well as the nature of the related business activities, and reflect the manner in which financial information is currently evaluated by management. The Company has identified the following two reportable segments: (i) Structured Settlements and (ii) Home Lending.
The Company's Chief Operating Decision Maker ("CODM") evaluates reportable segments using Segment Adjusted Earnings Before Interest Expense, Income Taxes, Depreciation and Amortization ("Segment Adjusted EBITDA") for purposes of making decisions about allocating resources and evaluating their performance. The Company defines Segment Adjusted EBITDA as net income (loss) under U.S. GAAP before non-cash compensation expenses, certain other expenses, provision for or benefit from income taxes, depreciation and amortization and, for the Structured Settlements segment, amounts related to the consolidation of the securitization and permanent financing trusts the Company uses to finance its business, interest expense associated with its senior secured credit facility, debt issuance costs and broker and legal fees incurred in connection with sales of finance receivables.
During 2016, the CODM began using Segment Adjusted EBITDA as the primary means by which he evaluates segment performance since (i) Segment Adjusted EBITDA represents a better measure of the Company's operating performance, especially for the Structured Settlements segment because the operations of the VIEs do not impact the business segments' performance and (ii) Segment Adjusted EBITDA is the metric used in determining whether performance-based restricted stock units issued to management will vest. Prior periods have been adjusted to reflect the current measurement method.

F-65

The J.G. Wentworth Company
(Debtor-in-Possession)
Notes to Consolidated Financial Statements

The application and development of management reporting methodologies is a dynamic process and is subject to periodic enhancements. The implementation of these enhancements to the internal management reporting methodology may materially affect the results disclosed for each segment with no impact on consolidated results. Whenever significant changes to management reporting methodologies take place, prior period information is reclassified whenever practicable. Additionally, Segment Adjusted EBITDA is not indicative of cash flow generation.
Below is a summary of Segment Adjusted EBITDA, a measure of the Company's segments' profitability.
 
 
Structured Settlements
 
Home Lending
 
Other Adjustments/Eliminations
 
Subtotal Reportable Segments
 
 
(In thousands)
Year Ended December 31, 2017
 
 
 
 
 
 
 
 
Segment Adjusted EBITDA
 
$
16,834

 
$
14,139

 
$
—

 
$
30,973

 
 
 
 
 
 
 
 
 
Year Ended December 31, 2016
 
 
 
 
 
 
 
 
Segment Adjusted EBITDA
 
$
16,165

 
$
31,189

 
$
—

 
$
47,354

 
 
 
 
 
 
 
 
 
Year Ended December 31, 2015 (1)
 
 
 
 
 
 
 
 
Segment Adjusted EBITDA
 
$
49,619

 
$
2,727

 
$
—

 
$
52,346

(1) Home Lending was acquired on July 31, 2015, and, therefore, the results include only five months of Home Lending's operations.
The following table presents certain information regarding the Company's business segments.
 
 
Structured Settlements
 
Home Lending
 
Other Adjustments/Eliminations
 
Consolidated
 
 
(In thousands)
Year Ended December 31, 2017
 
 
 
 
 
 
 
 
Total revenues
 
$
313,935

 
$
114,777

 
$
—

 
$
428,712

Total assets
 
4,633,094

 
418,371

 
—

 
5,051,465

 
 
 
 
 
 
 
 
 
Year Ended December 31, 2016
 
 
 
 
 
 
 
 
Total revenues
 
$
215,399

 
$
109,273

 
$
—

 
$
324,672

Total assets
 
4,611,705

 
381,202

 
—

 
4,992,907

 
 
 
 
 
 
 
 
 
Year Ended December 31, 2015 (1)
 
 
 
 
 
 
 
 
Total revenues
 
$
269,635

 
$
26,732

 
$
—

 
$
296,367

Total assets
 
4,801,965

 
249,133

 
—

 
5,051,098

(1) Home Lending was acquired on July 31, 2015, and, therefore, the results include only five months of Home Lending's operations.

F-66

The J.G. Wentworth Company
(Debtor-in-Possession)
Notes to Consolidated Financial Statements

Below is a reconciliation of Segments' Adjusted EBITDA, a measure of the Company's segments' profitability, for the Company's two reportable segments to loss before income taxes for the years ended December 31, 2017, 2016 and 2015:
 
 
Year Ended December 31, 2017
 
Year Ended December 31, 2016
 
Year Ended December 31, 2015 (1)
 
 
(In thousands)
Structured Settlements Segment Adjusted EBITDA
 
$
16,834

 
$
16,165

 
$
49,619

Home Lending Segment Adjusted EBITDA
 
14,139

 
31,189

 
2,727

Subtotal Segment Adjusted EBITDA for Reportable Segments
 
$
30,973

 
$
47,354

 
$
52,346

 
 
 
 
 
 
 
Securitization-related adjustments:
 
 
 
 
 
 
Unrealized gain (loss) on finance receivables, long-term debt and derivatives post securitization due to changes in interest rates
 
10,859

 
(77,652
)
 
(75,802
)
Interest income from securitized finance receivables
 
176,754

 
177,781

 
171,773

Interest income on retained interests in finance receivables
 
(1,955
)
 
(16,149
)
 
(21,652
)
Servicing income on securitized finance receivables
 
(5,117
)
 
(5,181
)
 
(5,284
)
Interest expense on long-term debt related to securitization and permanent financing trusts
 
(175,565
)
 
(162,442
)
 
(147,723
)
Swap termination expense related to securitization entities
 
—

 
(3,053
)
 
—

Professional fees relating to securitizations
 
(5,314
)
 
(5,605
)
 
(5,913
)
(Provision) credit for losses associated with permanently financed VIEs
 
(113
)
 
60

 
(25
)
Subtotal of securitization-related adjustments
 
$
(451
)
 
$
(92,241
)
 
$
(84,626
)
Other adjustments:
 
 
 
 
 
 
Share-based compensation
 
(1,038
)
 
(1,448
)
 
(1,291
)
Impact of pre-funding on unsecuritized finance receivables
 
3,199

 
(3,199
)
 
(1,618
)
Lease termination, severance and other restructuring related expenses
 
(15,544
)
 
(3,602
)
 
(3,095
)
Merger and acquisition related expense
 
—

 
(550
)
 
(2,946
)
Debt modification expense
 
(223
)
 
(2,399
)
 
(792
)
Impairment charges and loss on disposal of assets
 
(8,369
)
 
(5,483
)
 
(121,594
)
Term loan interest expense
 
(39,469
)
 
(40,559
)
 
(40,386
)
TRA obligations
 
(160,113
)
 
—

 
—

Debt issuance
 
(5,881
)
 
(4,455
)
 
(6,741
)
Broker and legal fees incurred in connection with sale of finance receivables
 
—

 
(1,959
)
 
—

Depreciation and amortization
 
(4,147
)
 
(4,814
)
 
(4,613
)
Loss before income taxes
 
$
(201,063
)
 
$
(113,355
)
 
$
(215,356
)
(1) Home Lending was acquired on July 31, 2015, and, therefore, the results include only five months of Home Lending's operations.
30. Condensed Combined Debtor-in-Possession Financial Information
In accordance with ASC 852, aggregate financial information of the Debtors is presented below as of December 31, 2017 for the condensed combined balance sheet and for the year ended December 31, 2017 for the condensed combined statement of operations, condensed combined statement of other comprehensive loss, condensed combined statement of changes in stockholders' deficit and condensed combined statement of cash flows.
All of the operations of the Company are conducted by affiliates of the Company who are not Debtors (the "Non-Debtor Affiliates"). The Non-Debtor Affiliates did not file for bankruptcy. The principal operating Non-Debtor Affiliates are: Green Apple Management Company, LLC ("Green Apple"), J.G. Wentworth Management Company, LLC ("JGM"), Settlement Funding Management Company, LLC ("SFM"), J.G. Wentworth Originations LLC ("Originations"), Peachtree Originations LLC

F-67

The J.G. Wentworth Company
(Debtor-in-Possession)
Notes to Consolidated Financial Statements

("Peachtree," and collectively with Green Apple, JGM, SFM and Originations, the "Structured Settlements Operating Affiliates") and J.G. Wentworth Home Lending, LLC ("JGHL").
Most of the Debtors’ obligations are paid by the Structured Settlements Operating Affiliates, with certain obligations paid by other Non-Debtor Affiliates. Since the Debtors do not independently generate revenue, the Non-Debtor Affiliates collect and move funds through the accounts of the Structured Settlements Operating Affiliates and other Non-Debtor Affiliates to ensure the continued operation of the Company’s businesses. Consequently, most inter-company transactions occur among the Non-Debtor Affiliates, given the limited obligations of the Debtor entities. To the extent, however, certain liabilities are paid by Non-Debtor Affiliates on behalf of the Debtors, the Debtors incur inter-company liabilities (the Inter-company Liabilities) to Non-Debtor Affiliates that are reflected on the Company’s books and records. None of the Debtors provide services to, or satisfies liabilities on behalf of, any Non-Debtor Affiliates, and therefore no Inter-company Liabilities are owed and reflected by any of the Debtors from Non-Debtor Affiliates.
LSTC include the "Term Loan Claims" and "TRA obligations." Reorganization items, net represent amounts incurred after the Petition Date as a direct result of the bankruptcy. The filing by the Company of Chapter 11 Cases qualified as a Material Breach under the TRA. Consequently, all obligations under the TRA were accelerated and the claimants were owed the present value of all future tax attributes, subject to certain discounting and based on assumptions regarding the remaining payments expected to be made under the TRA. The TRA obligations was estimated to be $160.1 million. In addition, Reorganization items, net, comprise of legal and professional fees in the amount of $1.3 million.
As a result of the foregoing, the Non-Debtor Affiliates are accounted for as non-consolidated subsidiaries in these financial statements. Inter-company transactions among the Debtors have been eliminated in the Debtors' financial information. Inter-company transactions amongst the Debtors and Non-Debtor Affiliates have not been eliminated in the Debtors’ financial information.

F-68

The J.G. Wentworth Company
(Debtor-in-Possession)
Notes to Consolidated Financial Statements

Debtors' Condensed Combined Balance Sheets
 
December 31, 2017
 
(Dollars in thousands)
ASSETS
 
Cash and cash equivalents
$
—

Due from affiliates
209,580

Intangible assets, net of accumulated amortization
566

Investment in non-debtor subsidiaries
512,565

Other assets
1,380

Total Assets
$
724,091

 
 
LIABILITIES AND STOCKHOLDERS’ DEFICIT
 
Accrued expenses and accounts payable
$
15

Deferred tax liabilities, net
9,362

Due to affiliates
357,698

Total liabilities not subject to compromise
$
367,075

Liabilities subject to compromise (1)
607,109

Total Liabilities
$
974,184

 
 
Class A common stock, par value $0.00001 per share; 500,000,000 shares authorized, 16,352,775 and 15,810,703 issued and outstanding, respectively as of December 31, 2017
$
—

Class B common stock, par value $0.00001 per share; 500,000,000 shares authorized, 8,629,738 issued and outstanding as of December 31, 2017
—

Class C common stock, par value $0.00001 per share; 500,000,000 shares authorized, 0 issued and outstanding as of December 31, 2017
—

Additional paid-in-capital
106,217

Accumulated deficit
(308,955
)
 
(202,738
)
Less: treasury stock at cost, 542,072 shares as of December 31, 2017
(2,138
)
Total stockholders' deficit, The J.G. Wentworth Company
(204,876
)
Non-controlling interests
(45,217
)
Total Stockholders' Deficit
$
(250,093
)
Total Liabilities and Stockholders’ Deficit
$
724,091

(1) Liabilities subject to compromise as of December 31, 2017 are presented in accordance with ASC 852. These liabilities include the "Term Loan Claims" and the "TRA Claims" as defined in the Plan.

F-69

The J.G. Wentworth Company
(Debtor-in-Possession)
Notes to Consolidated Financial Statements

Debtors' Condensed Combined Statement of Operations
 
Year Ended December 31,
 
2017
 
(Dollars in thousands)
REVENUES
 

Income from investment in non-debtor subsidiaries
$
18,764

Total revenues
$
18,764

 
 
EXPENSES
 

Interest expense
$
39,469

Compensation and benefits
1,038

General and administrative
1,775

Professional and consulting
15,789

Depreciation and amortization
487

Reorganization items, net (2)
161,370

Total expenses
$
219,928

Loss before income taxes
(201,164
)
Provision for income taxes
9,544

Net loss
$
(210,708
)
Less: net loss attributable to non-controlling interests
(19,375
)
Net loss attributable to The J.G. Wentworth Company
$
(191,333
)
(2) Reorganization items, net for the year ended December 31, 2017 are presented in accordance with ASC 852 and include (i) $160.1 million of TRA obligations and, (ii) $1.3 million of professional and consulting fees incurred in connection with the Company's bankruptcy proceedings from the Petition Date through December 31, 2017.

F-70

The J.G. Wentworth Company
(Debtor-in-Possession)
Notes to Consolidated Financial Statements

Debtors' Condensed Combined Statement of Other Comprehensive Loss
 
Year Ended December 31,
 
2017
 
(In thousands)
Net loss
$
(210,708
)
Other comprehensive loss:
 

Reclassification adjustment for gain in net income
—

Unrealized gains on notes receivable arising during the year
—

Total other comprehensive loss
—

Total comprehensive loss
(210,708
)
Less: comprehensive loss allocated to non-controlling interests
(19,375
)
Comprehensive loss attributable to The J.G. Wentworth Company
$
(191,333
)


F-71

The J.G. Wentworth Company
(Debtor-in-Possession)
Notes to Consolidated Financial Statements

Debtors' Condensed Combined Statement of Changes in Stockholders' Deficit
 
 
Accumulated
Deficit
 
Non-controlling Interest
 
Additional Paid-In-
Capital
 
Treasury Stock
 
Common Stock - Class A
 
Common Stock - Class B
 
Total
Stockholders’
Deficit 
 
 
 
 
 
Shares
 
Dollars
 
Shares
 
Dollars
 
Shares
 
Dollars
 
December 31, 2016
 
$
(117,622
)
 
$
(26,471
)
 
$
105,823

 
542,072

 
$
(2,138
)
 
15,730,473

 
$
—

 
8,710,158

 
$
—

 
$
(40,408
)
Net loss
 
(191,333
)
 
(19,375
)
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(210,708
)
Share-based compensation
 
—

 
468

 
570

 
—

 
—

 
—

 
—

 
(9,871
)
 
—

 
1,038

Capital distributions
 
—

 
(15
)
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(15
)
Issuance of Class A common stock for vested equity awards
 
—

 
—

 
—

 
—

 
—

 
9,681

 
—

 
—

 
—

 
—

Exchange of JGW LLC common interests into Class A common stock
 
—

 
176

 
(176
)
 
—

 
—

 
70,549

 
—

 
(70,549
)
 
—

 
—

December 31, 2017
 
$
(308,955
)
 
$
(45,217
)
 
$
106,217

 
542,072

 
$
(2,138
)
 
15,810,703

 
$
—

 
8,629,738

 
$
—

 
$
(250,093
)


F-72

The J.G. Wentworth Company
(Debtor-in-Possession)
Notes to Consolidated Financial Statements

Debtors' Condensed Combined Statement of Cash Flows
 
Year Ended December 31,
 
2017
 
(In thousands)
Cash flows from operating activities:
 
Net loss
$
(210,708
)
Adjustments to reconcile net loss to net cash used in operating activities:
 

Amortization of intangibles
487

Amortization of debt issuance costs
5,370

Accretion of interest expense
2,998

Share-based compensation expense
1,038

Deferred income taxes, net
9,348

(Increase) decrease in operating assets:
 
Due from affiliates
(98,852
)
Investment in non-debtor subsidiaries
(17,373
)
Other assets
(1,304
)
(Decrease) increase in operating liabilities:
 
Accrued expenses and accounts payable
(76
)
Accrued interest
6,581

Due to affiliates
142,390

TRA obligations
160,113

Net cash provided by operating activities
$
12

 
 
Cash flows from financing activities:
 

Capital distributions
$
(17
)
Net cash used in financing activities
$
(17
)
Net decrease in cash
(5
)
Cash and cash equivalents at beginning of the year
5

Cash and cash equivalents at the end of the year
$
—

 
 
Supplemental disclosure of cash flow information:
 

Reorganization items, net:
 
   TRA obligations
$
160,113

   Professional and consulting
$
1,257



F-73

The J.G. Wentworth Company
(Debtor-in-Possession)
Notes to Consolidated Financial Statements

31. Subsequent Events
The Company has assessed subsequent events through April 2, 2018.
Amended and Restated Certificate of Incorporation of The J.G. Wentworth Company
On January 25, 2018, in connection with the Company’s emergence from bankruptcy and upon the filing of the New Certificate of Incorporation with the Secretary of State of the State of Delaware, the Class A common stock, Class B common stock and Class C common stock that were issued and outstanding under the Company’s prior certificate of incorporation were canceled. In addition, the warrants issued to PGHI Corp. were canceled.
On January 25, 2018, the Company amended and restated its certificate of incorporation (the "New Certificate of Incorporation") to provide for, among other things, the authorization of 225,000,000 shares of new Class A common stock, (the "New Class A common stock"), par value $0.00001 per share, and 25,000,000 shares of new Class B common stock, (the "New Class B common stock"), par value $0.00001 per share.
The Company is not authorized to issue any shares of preferred stock under the New Certificate of Incorporation. The powers, preferences, and rights and the qualifications, limitations, and restrictions of the New Class A Common Stock and the New Class B Common Stock are included the New Certificate of Incorporation.
Holders of New Class A common stock, which include previous holders of the Term Loan Claims, TRA Claims and participants in the Management Incentive Plan, are entitled to one vote for each share held of record on all matters submitted to a vote of stockholders. Upon dissolution, liquidation or winding up, holders of New Class A common stock are entitled to a pro rata distribution of any assets available for distribution to common stockholders, and do not have preemptive, subscription, redemption, or conversion rights. Holders of New Class B common stock, which include the JLL Holders, are entitled to one vote for each share held of record on all matters submitted to a vote of stockholders. Holders of New Class B common stock do not have any right to receive dividends and upon liquidation, dissolution or winding up.
In addition, on the Effective Date, the Company entered into a stockholders agreement with all of its stockholders. The stockholders agreement provides that our Board of Directors will include one director designated by Axar Capital Management LP, one director designated by HPS Investor Partners, LLC and one director designated by Waddell & Reed Investment Management Company, in each case so long as such stockholder has an ownership percentage of at least 13% of the Company’s stock. The stockholders agreement also provides for other customary rights and obligations, including “tag along” rights, “drag along” obligations and information rights.
Amended and Restated JGW LLC Operating Agreement
On January 25, 2018, the Operating Agreement of JGW LLC was amended and restated. Pursuant to the operating agreement of JGW LLC, the holders of JGW LLC Common Interests have the right, subject to terms of the operating agreement, to exchange their Common Interests and an equal number of shares of New Class B common stock for an equivalent number of shares of New Class A common stock.
Other than those previously disclosed herein and within Note 1, there have been no subsequent events that occurred during such period that would require disclosure in, or would be required to be recognized in, these consolidated financial statements.
Impact on Net Operating Loss Carryforwards
Under the Plan, the Company's pre-petition debt and certain other obligations were canceled and extinguished. Absent an exception, the Company will recognize significant cancellation of debt income ("CODI") upon discharge of its outstanding indebtedness for an amount of consideration that is less than its adjusted issue price. In accordance with Section 108 Internal Revenue Code of 1986 (the "Code"), the Company will exclude the amount of discharged indebtedness from taxable income since the Code provides that a debtor in a bankruptcy may exclude CODI from income but must reduce certain tax attributes by the amount of CODI realized as a result of the consummation of a plan of reorganization. The amount of CODI is the adjusted issue price of any indebtedness discharged less than the sum of (i) the amount of cash paid, (ii) the issue price of any new indebtedness issued, and (iii) the fair market value of any other consideration, including equity, issued.   As a result of the CODI and in accordance with Code, the Company will reduce our NOL carryovers and limit its ability to utilize its NOLs.


Item 9.   Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

F-74

None.
Item 9A. Controls and Procedures
Disclosure Controls and Procedures
Our management is responsible for establishing and maintaining adequate controls over financial reporting (as that term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act). Our management, with the participation of our principal executive officer and principal financial officer, conducted an evaluation of the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act), as of the end of the period covered by this report. Based on this evaluation, our principal executive officer and principal financial officer each concluded that, as of the end of such period, our disclosure controls and procedures were effective in ensuring that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported on a timely basis, and is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
Internal Control Over Financial Reporting 
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance of the reliability of financial reporting and of the preparation of financial statements for external reporting purposes, in accordance with U.S. GAAP.
Internal control over financial reporting includes policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and disposition of assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP, and that receipts and expenditures are being made only in accordance with the authorization of its management and directors; and (3) provide reasonable assurance regarding the prevention or timely detection of unauthorized acquisition, use, or disposition of its assets that could have a material effect on its financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of the effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures included in such controls may deteriorate.
Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2017. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control - Integrated Framework issued in 2013. Based upon the assessments, management has concluded that as of December 31, 2017 our internal control over financial reporting was effective to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with U.S. GAAP.
Changes in Internal Control Over Financial Reporting
Our management, including our principal executive officer and principal financial officer, conducted an evaluation of any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during our most recently completed fiscal quarter. Based on that evaluation, our principal executive officer and principal financial officer concluded that there has not been any change in our internal control over financial reporting during that quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information
None.
PART III 
Item 10. Directors, Executive Officers, and Corporate Governance
Directors
As part of the Chapter 11 Cases and in accordance with the previously announced Plan, which became effective on January 25, 2018, the Company appointed the following directors:     

77

Director
Age
Current Position
Stewart A. Stockdale
56
Chief Executive Officer, The J.G. Wentworth Company
Grant Mitchell
31
Senior Analyst, Axar Capital Management LP
Eugene I. Davis
63
Chairman and Chief Executive Officer, PIRINATE Consulting Group, LLC
Vikas M. Keswani
35
Managing Director, HPS Investment Partners, LLC
Jonathan Miller
46
Senior Managing Director, FTI Consulting
Immediately after the Plan became effective, on January 25, 2018, the Board, upon receiving a consent from the Lead Holders and holders of a majority of Voting Power (as such terms are defined in the Stockholders Agreement), agreed to increase the number of directors on the Board from five to six and thereafter appointed Mr. David Miller, as a director and to serve as the Chairman of the Board.
Director
Age
Current Position
David Miller
58
Chairman of the Board of Directors, The J.G. Wentworth Company
Stewart A. Stockdale. Mr. Stockdale has served as Chief Executive Officer and Director of The J.G. Wentworth Company since July 2014. He is responsible for the company’s vision, strategic planning, and business growth. He is also responsible for overall fiscal management. Prior to joining the Company, Mr. Stockdale served as an Executive Partner at Summit Partners, a global growth equity investor. Previously, Mr. Stockdale was President, Global Consumer Financial Services ("GCFS") for The Western Union Company, a segment that represented approximately 90% of the company’s revenues. GCFS consists of Western Union’s Money Transfer and Consumer Payments businesses across five global regions (North America, Latin America & Caribbean, Europe & CIS, Middle East Africa, and Asia Pacific). Prior to joining Western Union, Mr. Stockdale served as President of Simon Brand Ventures and as Chief Marketing Officer of Simon Property Group, a global leader in the retail real estate industry. At Simon, he was responsible for all Marketing and Consumer Venture businesses within the company. Prior to Simon, Mr. Stockdale held senior positions with multinational companies including Conseco, MasterCard Worldwide, American Express and Procter & Gamble. Mr. Stockdale holds a Bachelor of Science in Business Administration in marketing from the University of Denver and completed The Executive Program at the University of Virginia’s Darden Graduate School of Business Administration.
Mr. Stockdale's experience described above, including his knowledge and leadership of the Company, his extensive background in the consumer financial services industry and his management experience, provides him with the qualifications and skills to serve as a director on our Board.
David Miller. Mr. Miller currently serves as our Chairman of the Board. Mr. Miller served as a Senior Advisor to the Blackstone Tactical Opportunities Fund from March 2015 until February 2018. Prior to Blackstone, Mr. Miller served as Chief Executive Officer and Chairman of JGWPT Inc. (the holding company for J.G.Wentworth and Peachtree) which, over the course of his five-year tenure he transformed from a bankrupt private company to a NYSE listed company with over $800 million in enterprise value. Prior to JGWPT, Mr. Miller was Executive Vice-President responsible for Ace’s $1.2 billion International Accident and Health Insurance Business. Prior to Ace, Mr. Miller was President and CEO of Kemper Auto and Home Insurance (KAH), a joint venture between Mr. Miller and Kemper, which sold auto and homeowner’s insurance via direct response and the internet. Starting as the only employee, in three years Mr. Miller built KAH into an insurance company with $76 million in earned premium and over 220 employees, making KAH one of the largest sellers of auto insurance on the internet. Mr. Miller sold his interest in KAH in 2000. Prior to Kemper, Mr. Miller was Chief Operating Officer of Providian Direct Insurance where he was responsible for over $800 million in revenue, over $110 million in profit and 1,800 employees. Mr. Miller began his insurance career with Progressive Insurance where he held various positions over his seven-year career including Division Controller, Senior Product Manager and National Customer Manager.
Mr. Miller has a BSEE in electrical engineering from Duke University and a MBA in Finance from The Wharton School of the University of Pennsylvania. Mr. Miller was a member of the NYSE.
Mr. Miller’s experience described above, including his knowledge and leadership of the Company, his extensive background in the financial services industry and his management experience, provides him with the qualifications and skills to serve as a director and Chairman of the Board.
Grant Mitchell. Mr. Mitchell is a Senior Analyst at Axar Capital Management, LP, which he joined at the firm's inception.  Previously, Mr. Mitchell was an Associate at Strategic Value Partners (“SVP”) from 2014 to 2015. Prior to SVP, from 2012 to 2014, Mr. Mitchell was an Analyst at Warburg Pincus LLC in the Financial Services Group. Mr. Mitchell began his career in 2010 as an investment banking analyst at Goldman Sachs Group Inc. in the Financial Institutions Group. Mr. Mitchell received a B.S. in Business Administration from University of California, Berkeley.

78

Mr. Mitchell's experience described above, including his extensive background in the financial services industry and his management experience, provides him with the qualifications and skills to serve as a Director of the Board.
Eugene I. Davis. Mr. Davis is Chairman and Chief Executive Officer of PIRINATE Consulting Group, LLC, a privately held consulting firm specializing in turnaround management, merger and acquisition consulting, hostile and friendly takeovers, proxy contests, and strategic planning advisory services for domestic and international public and private business entities. Since forming PIRINATE in 1997, Mr. Davis has advised, managed, sold, liquidated and served as a chief executive officer, chief restructuring officer, director, committee chairman or chairman of a number of businesses operating in diverse sectors. From 1990 to 1997, Mr. Davis served as President, Vice Chairman, and director of Emerson Radio Corporation and from 1996 to 1997 as Chief Executive Officer and Vice Chairman of Sport Supply Group, Inc. He began his career as an attorney and international negotiator with Exxon Corporation and Standard Oil Company (Indiana) and was in private practice from 1984 to 1998. Mr. Davis currently serves as Chairman of the Board of Atlas Iron Limited (ASX: AGO) and U.S. Concrete, Inc. (Nasdaq: USCR), and also serves as a director of Verso Corporation (NYSE: VRS) and Titan Energy, LLC (OTC: TTEN), as well as certain non-SEC reporting companies. During the past five years, Mr. Davis has also been a director of the following SEC registrants: Atlas Air Worldwide Holdings, Inc. (Nasdaq: AAWW), The Cash Store Financial Services, Inc. (NYSE: CSFS), DexOne Corp. (NYSE: DEXO), Genco Shipping & Trading Limited (NYSE: GNK), Global Power Equipment Group, Inc. (NYSE: GLPW), Goodrich Petroleum Corp. (NYSE: GDP), Great Elm Capital Corporation (Nasdaq: GECC), GSI Group, Inc. (Nasdaq: GSIG), Hercules Offshore, Inc., HRG Group, Inc. (NYSE: HRG), Knology, Inc. (Nasdaq: KNOL), SeraCare Life Sciences, Inc. (Nasdaq: SRLS), Spansion, Inc. (NYSE: CODE) and SpectrumBrands Holdings, Inc. (NYSE: SPB) and WMIH Corp. (Nasdaq: WMIH). Mr. Davis’ prior experience also includes having served on the board of directors of each of ALST Casino Holdco, LLC and Trump Entertainment Resorts, Inc.
Mr. Davis holds a bachelor’s degree from Columbia College, a master of international affairs degree (MIA) in international law and organization from the School of International Affairs of Columbia University, and a Juris Doctorate from Columbia University School of Law.
Mr. Davis’ deep knowledge of the management and operation of public and private companies and extensive service in public and private company boards in many industries, including in the casino, entertainment and real estate industries, and in particular with respect to companies emerging from bankruptcy, will be valuable to our board of directors providing it with insight into the operation of a company following restructuring. The Board also recognizes Mr. Davis’ qualifications as a “financial expert” on the Audit and Compliance Committee.
Vikas M. Keswani. Mr. Keswani is a Managing Director at HPS Investment Partners, a global investment platform with a focus on non-investment grade credit. Prior to joining HPS Investment Partners in 2010, Mr. Keswani was a Vice President at Abraaj Capital, an emerging markets dedicated private investment firm with more than $5 billion under management. Mr. Keswani spent the early part of his career at BlackRock where he was a part of the initial team that established, structured and capitalized BlackRock Kelso Capital Corporation (NASDAQ: BKCC), a publicly traded private investment vehicle with capital resources in excess of $1.5 billion. Mr. Keswani holds a B.S.E. magna cum laude from the Wharton School at the University of Pennsylvania and is a CFA Charterholder.
Mr. Keswani’s experience described above, including his extensive background in the financial services industry and his management experience, provides him with the qualifications and skills to serve as a Director of the Board.
     Jonathan Miller. Mr. Miller is currently a Senior Managing Director at FTI Consulting, Inc., where he provides restructuring advisory, turnaround management, value enhancement and mergers and acquisition services to companies, private equity firms, banks and investment funds.  Mr. Miller joined FTI Consulting, Inc. in June 2017 in connection with its acquisition of CDG Group, LLC, where Mr. Miller was a Senior Managing Director.  Mr. Miller joined CDG Group, LLC in 2009.  Prior to joining CDG Group, LLC, Mr. Miller worked, from 2008 to 2009, at a publicly traded business development company that provided debt and equity capital primarily to middle market private equity firms in the context of completing leveraged buyout transactions.  Mr.  Miller also worked in the investment banking department at Bear, Stearns & Co. Inc. from 1998 to 2008, most recently as a Managing Director in the Leveraged Finance and Financial Restructuring Group.  Mr. Miller also worked as a certified public accountant at Coopers & Lybrand LLP from 1993 to 1996.  Mr. Miller previously served as Chairman of the Audit Committee, member of the Compensation Committee and Director of Hydra Industries Acquisition Corp.  Mr. Miller has a B.S. in Accounting from New York University, as well as an M.B.A. with a concentration in Finance from the Wharton School of Business at the University of Pennsylvania.
Mr. Miller’s experience described above, including his extensive background in the financial services industry and his management experience, provides him with the qualifications and skills to serve as a Director of the Board. The Board also recognizes Mr. Miller’s qualifications as a “financial expert” on the Audit and Compliance Committee.

79

Executive Officers
The executive officers of the Company as of the Effective Date are as follows:
Stewart A. Stockdale, Chief Executive Officer. Mr. Stockdale, who became our Chief Executive Officer in July 2014, is described above as a director. Mr. Stockdale is 56.
Stephen A. Kirkwood, Executive Vice President, Chief Legal & Compliance Officer and Corporate Secretary. Mr. Kirkwood serves as our Executive Vice President, Chief Legal & Compliance Officer and Corporate Secretary. He joined the Peachtree family of companies in March 1999. Mr. Kirkwood was responsible for the legal matters involving or relating to the Peachtree family of companies, and, since the merger with Peachtree companies in July 2011, Mr. Kirkwood has continued to manage legal, regulatory and compliance matters for us. He graduated from Union College in 1992 with a Bachelor of Science degree and received his law degree from Albany Law School. Mr. Kirkwood is 47.
Gregory A. Schneider, Executive Vice President and Chief Information Officer. Mr. Schneider serves as our Executive Vice President and Chief Information Officer, a position he has held since 2014. Prior to joining us in August 2014, he served as a consultant to SCA Promotions Inc., a marketing agency, from 2013 to 2014 and as a Senior Vice President at Western Union from 2008 through 2013. Prior to these engagements, Mr. Schneider held leadership positions in consumer and financial services businesses, including Simon Property Group, Conseco and Banc One Corporation dating back to 1984. He holds a B.B.A. with honors from Ohio University. Mr. Schneider is 55.
Katerina Cozza, Interim Chief Financial Officer. Ms. Cozza serves as our Interim Chief Financial Officer, a position she has held since May 2017. Prior to joining us in May 2017, she served as a consultant of Attolon, providing accounting and controller services to Attolon’s clients. From September 2014 to October 2016, she served as the chief accounting officer of Philadelphia Energy Solutions Inc., the operator of the largest oil refining complex on the U.S. Eastern seaboard, where she led the company’s accounting and controlling functions and was a member of its audit committee. From September 1999 to July 2014, Ms. Cozza served as the corporate controller of Universal Display Corporation, a leader in the research, development and commercialization of organic light emitting diode technologies and materials for use in display and solid-state lighting applications, where she led the company’s accounting and controlling functions. Ms. Cozza is a Certified Public Accountant and a member of the Pennsylvania Institute of Certified Public Accountants. Ms. Cozza holds a B.B.A. in accounting from Temple University. Ms. Cozza is 44.
Michael Shaw, Chief Accounting Officer. Mr. Shaw serves as our Chief Accounting Officer, a position he has held since August 2017. Mr. Shaw has, most recently, served as the Company’s vice president and corporate controller. Prior to joining the Company, from 2011 to 2015, Mr. Shaw served as vice president of accounting policy for Santander Bank N.A., one of the country’s top retail banks by deposits and a wholly owned subsidiary of Banco Santander, where he was responsible for the accounting policies and transaction advisory of the bank. Previously, Mr. Shaw was an assistant vice president of reporting compliance at Capmark Financial Group and an audit manager with Ernst & Young. Mr. Shaw is a Certified Public Accountant licensed in Pennsylvania, a Chartered Accountant in the United Kingdom and an Attorney. Mr. Shaw received his Bachelor of Laws (LLB) and his Master of Business Administration from the University of Sheffield in the United Kingdom. Mr. Shaw is 44.
    Phil Buscemi, President - Home Lending Division. Mr. Buscemi serves as the President of our Home Lending Division, a position he has held since January 2016. Mr. Buscemi joined the Company in connection with the acquisition of WestStar Mortgage, Inc. in July 2015 and served as our SVP of Capital Markets from July 2015 to January 2016. He joined WestStar Mortgage, Inc. in 2008 and served as the Director of Capital Markets through July 2015. Prior to joining WestStar Mortgage, Inc., he held senior leadership roles at Union Bank and Trust, Federal Agricultural Mortgage Corporation, Mortgage Edge Corporation, and Perpetual Savings Bank. Mr. Buscemi holds a Bachelor’s degree from Virginia Polytechnic Institute and State University - Pamplin College of Business. Mr. Buscemi is 57.
Corporate Governance
We are committed to conducting our business in a way that reflects best practices, as well as the highest standards of legal and ethical conduct. We want to be a company of integrity and to be perceived as such by everyone who comes in contact with us. To that end, the Board of Directors has approved a comprehensive system of corporate governance documents. These documents meet or exceed the requirements established by SEC rules and are reviewed periodically and updated as necessary to reflect changes in regulatory requirements and evolving oversight practices. These policies embody the principles, policies, processes and practices followed by the Board, executive officers and employees in governing the Company, and serve as a flexible framework for sound corporate governance.
Corporate Governance Guidelines
In connection with our November 2013 initial public offering, the Board of Directors adopted Corporate Governance Guidelines to assist the Board in the exercise of its fiduciary duties and responsibilities to the Company and to promote the effective functioning of the Board of Directors and its committees. The Corporate Governance Guidelines cover, among other topics, director independence and qualification requirements, board leadership and executive sessions, limitations on other board and executive

80

service, director responsibilities, director compensation, directors orientation and continuing education, board and committee resources, including access to officers and employees, succession planning and board and committee self-evaluations.
A copy of the Corporate Governance Guidelines can be obtained without charge by contacting the Company directly at (866) 930-6480 or via email at information@jgwentworth.com.
Code of Business Conduct and Ethics
Properly reflecting our desire and commitment to conducting business in compliance with the highest ethical and legal standards, the Board of Directors adopted a Code of Business Conduct and Ethics. The Company’s Code of Business Conduct and Ethics includes provisions ranging from restrictions on gifts and respect for colleagues to conflicts of interest and fraud.  Upon employment with the Company, all employees are required to affirm in writing their acceptance of the Code of Business Conduct and Ethics.  Our employees are encouraged to anonymously report any suspected violations of laws, regulations, unethical business practices, and/or the Code of Business Conduct and Ethics, via a web-based reporting system or a continuously monitored hotline.
A copy of the Code of Business Conduct and Ethics can be obtained without charge by contacting the Company directly at (866) 930-6480 or via email at information@jgwentworth.com.
In addition, within four business days of:  (i) any amendment to our Code of Business Conduct and Ethics that applies to the registrant's principal executive officer, principal financial officer, principal accounting officer or controller or persons performing similar functions, or (ii) the grant of any waiver, including an implicit waiver, from a provision of the Code of Business Conduct and Ethics to one of these officers, and the amendment or waiver relates to the code of ethics definition enumerated in Item 406(b) of Regulation S-K, we will provide information regarding any such amendment or waiver (including the nature of any waiver, the name of the person to whom the waiver was granted and the date of the waiver).
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires our executive officers, directors, and persons who beneficially own more than 10% of a registered class of our equity securities to file with the SEC reports of ownership and changes in ownership of the Company’s equity securities. Executive officers, directors, and beneficial owners of greater than 10% of our outstanding securities are required by SEC regulations to provide us with copies of all Section 16(a) forms that they file. Based solely on review of the copies of such forms furnished to us and written representations from our executive officers and directors that no other reports were required, we believe that during the fiscal year ended December 31, 2017, all reports required to be filed by our executive officers, directors and greater than 10% beneficial owners pursuant to Section 16(a) were filed on a timely basis, except for the following:
•Gregory A. Schneider filed a Form 4 on April 28, 2017 for a transaction that occurred on March 28, 2017;
•Roger O. Gasper filed a Form 4 on April 28, 2017 for a transaction that occurred on March 28, 2017; and
•Stephen Kirkwood filed a Form 4 on April 28, 2017 for a transaction that occurred on March 28, 2017.
Audit and Compliance Committee
The functions of our Audit and Compliance Committee are, among other things, to: review our financial statements, including any significant financial items and/or changes in accounting policies, with our senior management and independent registered public accounting firm; review our financial risk and control procedures, compliance programs and significant tax, legal and regulatory matters; appoint and determine the compensation for our independent auditors; establish procedures for the receipt, retention and treatment of complaints regarding accounting, internal accounting controls or auditing matters; and review and oversee our independent registered public accounting firm. 
The Audit and Compliance Committee is comprised of two directors, Messrs. Jonathan Miller and Eugene Davis. Our Board of Directors has affirmatively determined that each of Messrs. Jonathan Miller and Eugene Davis qualifies as an “audit committee financial expert” as such term is defined in Item 407(d)(5) of Regulation S-K and is independent as independence is defined in Rule 10A-3 of the Exchange Act.  Our Board of Directors also has affirmatively determined that all Audit and Compliance Committee members are “Independent Directors” as such term is defined in the OTC listing requirements. Mr. Davis serves as the Chairman of the Audit and Compliance Committee.
Our Audit and Compliance Committee oversees management of enterprise risks and financial risks, as well as potential conflicts of interests.
Item 11. Executive Compensation

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Introduction
As a “smaller reporting company,” as such term is defined under the Securities Act, we have opted to comply with the scaled executive compensation rules applicable and available to us. This section includes a discussion of fiscal 2017 compensation for our named executive officers, which consist of: (i) our Chief Executive Officer, (ii) our two other most highly compensated executive officers who were serving as executive officers as of December 31, 2017 and (iii) one individual who would have been identified as one of our most highly compensated executive officers, but for the fact that this individual was not serving as an executive officer as of December 31, 2017, are as follows:
•Stewart A. Stockdale, our Chief Executive Officer;
•Stephen A. Kirkwood, our Executive Vice President and Chief Legal & Compliance Officer;
•Gregory A. Schneider, our Executive Vice President and Chief Information Officer; and
•Randi A. Sellari, our prior President and Chief Operating Officer who resigned effective February 13, 2015.
Summary Compensation Table
The following table summarizes the total compensation paid to or earned by each of our named executive officers for services rendered during the last two fiscal years.
Name and Principal Position
 
Year
 
Salary
($)
 
Bonus
($)(1)
 
Stock
Awards
($)(2)
 
Option
Awards
($)(3)
 
Non-Equity
Incentive Plan
Compensation
($)
 
All Other
Compensation
($)(4)(5)
 
Total ($)
Stewart A. Stockdale
Chief Executive Officer
 
2017
 
732,875

 
—

 
—

 
23,999

 
—

 
70,726

 
827,600

 
 
2016
 
726,000

 
715,000

 
—

 
47,522

 
—

 
67,375

 
1,555,897

Stephen A. Kirkwood
Executive Vice President and Chief Legal & Compliance Officer
 
2017
 
484,080

 
—

 
5,815

 
7,942

 
 
 
8,371

 
506,208

 
 
2016
 
339,872

 
205,000

 
16,735

 
21,147

 
—

 
8,412

 
591,166

Gregory A. Schneider
Executive Vice President and Chief Information Officer
 
2017
 
355,996

 
—

 
4,652

 
5,933

 
 
 
9,906

 
376,487

 
 
2016
 
360,462

 
177,500

 
13,388

 
16,062

 
—

 
9,887

 
577,299

Randi A. Sellari
former President and Chief Operating Officer(6)
 
2017
 
—

 
—

 
—

 
—

 
—

 
623,257

 
623,257

 
 
2016
 
—

 
—

 
—

 
—

 
—

 
623,257

 
623,257

___________________________________________________________
(1)
The amounts represent the annual performance-based cash bonuses paid to our named executive officers with respect to 2016, which were paid in March 2017. For more information relating to our annual cash incentive program, see the section entitled “Overview of Our Executive Compensation Program—Elements of Compensation—Annual Cash Incentive Bonus,” below. No bonuses were paid to the named executive officers related to fiscal year 2017.
(2)
Represents the aggregate grant date fair value of performance-based stock units calculated in accordance with FASB ASC Topic 718. The assumptions used in the valuation are discussed in Note 25 to the Consolidated Financial Statements under "Part II, Item 8 'Financial Statements and Supplementary Data.'"
(3)
Represents the aggregate grant date fair value of options to purchase shares of our Class A common stock calculated in accordance with FASB ASC Topic 718. The assumptions used in the valuation are discussed in Note 25 the Consolidated Financial Statements under "Part II, Item 8 'Financial Statements and Supplementary Data.'"

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(4)
The 2017 amounts represent: (1) for Mr. Stockdale, a travel, automobile and housing allowance of $60,753, and a 401(k) plan matching contribution of $9,973; (2) for Mr. Kirkwood, a gym reimbursement of $360, and a 401(k) plan matching contribution of $8,011; (3) for Mr. Schneider a 401(k) plan matching contribution of $9,906; (4) for Ms. Sellari, an automobile allowance of $20,562, a club allowance of $12,000 and severance payments of $590,695.
(5)
The 2016 amounts represent: (1) for Mr. Stockdale, a travel, automobile and housing allowance of $58,992, and a 401(k) plan matching contribution of $8,383; (2) for Mr. Kirkwood, a gym reimbursement of $360, and a 401(k) plan matching contribution of $8,052; (3) for Mr. Schneider a 401(k) plan matching contribution of $9,887; (4) for Ms. Sellari, an automobile allowance of $20,562, a club allowance of $12,000 and severance payments of $590,695.
(6)
Ms. Sellari resigned as our President and Chief Operating Officer on February 13, 2015.
Employment Agreements with Named Executive Officers
Certain of our named executive officers are parties to written employment arrangements. The material terms of each of those arrangements is described below. For a description of the compensation actually paid to the named executive officers for 2017, please refer to the “Summary Compensation Table,” above.
Employment Agreements with Stewart A. Stockdale
Mr. Stockdale and the Company entered into an employment agreement on July 27, 2014 (the "2014 Employment Agreement"). Pursuant to the 2014 Employment Agreement, Mr. Stockdale was entitled to an initial annual base salary of $700,000, subject to increase, and was eligible to receive an annual cash bonus with a target amount of 100% of his then-current base salary (maximum of 200%) based on the achievement of annual performance objectives and other conditions. His annual base salary as of December 31, 2017 was $736,450. The 2014 Employment Agreement provided that Mr. Stockdale was eligible to receive equity compensation awards. In lieu of fringe benefits provided to other senior executive officers generally, the 2014 Employment Agreement entitled Mr. Stockdale to reimbursement of the following costs actually incurred by him (not to exceed $8,000 per month in the aggregate): (i) reasonable monthly rent paid by Mr. Stockdale, including utilities and other reasonable expenses of maintaining a suitable apartment in the vicinity of the Company's headquarters, (ii) reasonable monthly lease payments for a non-luxury automobile and (iii) the monthly cost of transportation service between Pennsylvania and Mr. Stockdale's residence.  Mr. Stockdale was also eligible to receive employee health and welfare benefits as are provided to senior executive officers generally.
The 2014 Employment Agreement provided that if Mr. Stockdale’s employment was terminated by the Company without “cause” (as defined in the 2014 Employment Agreement) or by Mr. Stockdale for “good reason” (as defined in the 2014 Employment Agreement), and Mr. Stockdale executes a general release of claims, then he would receive (i) continued base salary and health and welfare benefits for 24 months following the date of termination and (ii) a pro-rated annual incentive bonus for the year of termination, payable when, as and if such bonuses are paid to senior executives with respect to the year of termination.
The 2014 Employment Agreement also provided that during Mr. Stockdale’s employment and for the one year period following termination of his employment for any reason, Mr. Stockdale would not compete with, or solicit any vendors, customers, suppliers, employees, consultants or agents of the Company or certain related entities. The 2014 Employment Agreement further provided that Mr. Stockdale may not disclose any proprietary, trade secret or confidential information involving the Company and certain related entities and would assign all applicable intellectual property rights to them.
On December 1, 2017, the Company and Mr. Stockdale entered into an amendment (the “Amendment”) to the 2014 Employment Agreement. The Amendment provided that the rights, privileges and obligations of the parties pursuant to the 2014 Employment Agreement would be terminated and be of no further force or effect as of the Effective Date of the Plan, except that certain provisions remain in full force and effect on and after the Effective Date. The Amendment further provided that certain of the Company's lenders would negotiate in good faith with Mr. Stockdale regarding a new employment agreement to be effective as of the Effective Date, which would supersede the 2014 Employment Agreement. Were the new employment agreement not entered into and effective as of the Effective Date, the Amendment provided that Mr. Stockdale would be entitled, in the event of his resignation (with or without good reason) or his termination by the reorganized Company without cause, to receive severance of $1,400,000 (paid in equal installments during the twenty-four (24) month following termination of employment), subject to his compliance with certain conditions specified in the 2014 Employment Agreement.
On January 25, 2018 and in conjunction with the Plan, Mr. Stockdale and the Company entered into a new employment agreement that replaced the 2014 Employment Agreement (the “2018 Employment Agreement”). The 2018 Employment Agreement provides that he will serve as Chief Executive Officer under the agreement for an initial period that began on January 25, 2018 (the “New Effective Date”) and ends on the second anniversary of the New Effective Date, subject to automatic extensions for subsequent one-year periods thereafter unless his employment is terminated or either party provides at least 90 days’ advance notice of non-renewal prior to the end of the applicable period.

83

Pursuant to the 2018 Employment Agreement, Mr. Stockdale is entitled to an initial annual base salary of $736,450, subject to increase, and is eligible to receive an annual cash bonus equal to 4% of the portion of the Company’s EBITDA (as defined in the New RCF Agreement) that exceeds $35 million. The 2018 Employment Agreement entitles Mr. Stockdale to receive a one-time grants of (i) stock options to purchase shares of New Class A common stock and (ii) restricted stock units relating to the New Class A common stock. The 2018 Employment Agreement also entitles Mr. Stockdale to reimbursement of reasonable commuting expenses actually incurred by him (not to exceed $8,000 per month in the aggregate), including: (i) reasonable monthly rent paid by Mr. Stockdale (including utilities and other reasonable expenses of maintaining) for a suitable apartment in the vicinity of the Company's headquarters, (ii) reasonable monthly lease payments for a non-luxury automobile and (iii) the monthly cost of transportation service between Pennsylvania and Mr. Stockdale's residence. Mr. Stockdale is also eligible to receive employee health and welfare benefits as are provided to senior executive officers generally.
The 2018 Employment Agreement provides that if Mr. Stockdale’s employment is terminated by the Company without “cause” (as defined in the 2018 Employment Agreement) or by Mr. Stockdale for “good reason” (as defined in the 2018 Employment Agreement), and Mr. Stockdale executes a general release of claims, then he will receive (i) continued base salary and health and welfare benefits through the date of termination, (ii) severance in an amount equal to $1,400,000 paid in equal installments during the 24 months following the date of termination and (iii) health and welfare benefits for the 24 months following the date of termination.
The 2018 Employment Agreement also provides that during Mr. Stockdale’s employment and for the one year period following termination of his employment for any reason, Mr. Stockdale will not compete with, or solicit any vendors, customers, suppliers, employees, consultants or agents of the Company or certain related entities. The 2018 Employment Agreement further provides that Mr. Stockdale may not disclose any proprietary, trade secret or confidential information involving the Company and certain related entities and will assign all applicable intellectual property rights to them.
Employment Arrangements with Stephen A. Kirkwood
Mr. Kirkwood entered into a severance letter with The J.G. Wentworth Company, LLC on August 15, 2012. The severance letter provided that if Mr. Kirkwood’s employment was involuntarily terminated for any reason other than “cause” (as defined in the severance letter and which includes, but is not limited to, acts such as theft and fraud), he would receive continued base salary for 52 weeks subject to his execution of a general release of claims.
Employment Arrangements with Gregory A. Schneider
Mr. Schneider entered into an offer letter with The J.G. Wentworth Company, LLC on August 12, 2014, pursuant to which he serves as our Chief Information Officer. The letter provided that Mr. Schneider was entitled to receive an initial annual base salary of $350,000, subject to periodic reviews, and was eligible to receive an annual cash bonus of up to 50% of his then-current base salary based on the achievement of annual performance objectives and other conditions. His current annual base salary is $356,000.
Employment Agreement with Randi A. Sellari 
Ms. Sellari entered into an employment agreement with J.G. Wentworth, LLC, our predecessor, on July 23, 2007. Ms. Sellari’s agreement provides that she will serve as President and Chief Operating Officer under the agreement for an initial period that began on July 23, 2007 and ended on July 23, 2010, and for subsequent one-year periods thereafter unless her employment is terminated or either party provides at least 90 days’ advance notice of non-renewal prior to the end of the applicable period. Pursuant to the agreement, Ms. Sellari is entitled to an initial annual base salary of $425,000, subject to increase, and is eligible to receive an annual cash bonus with a target amount of 100% of her then-current base salary based on the achievement of annual performance objectives and other conditions which are described in more detail in the section entitled “Overview of Our Executive Compensation Program—Elements of Compensation—Annual Cash Incentive Bonus,” above. The agreement further provides that Ms. Sellari is entitled to receive fringe benefits that are no less favorable than those provided to similarly situated executives, including a $1,500 monthly automobile allowance (increased annually based on the Consumer Price Index) and a $1,000 monthly club allowance. Ms. Sellari is also eligible to receive a $35,000 annual cash allowance to purchase life insurance of her choice. In addition, Ms. Sellari is eligible to receive employee health and welfare benefits as are provided to senior executive officers generally.
The agreement provides that if Ms. Sellari’s employment is terminated by the employer without “cause” (as defined in the agreement) or by Ms. Sellari for “good reason” (as defined in the agreement), and Ms. Sellari executes a general release of claims, then she will receive (i) continued base salary and health, welfare and fringe benefits for 36 months following the date of termination and (ii) a pro-rated annual incentive bonus for the year of termination, payable when, as and if such bonuses are paid to senior executives with respect to the year of termination. In addition, if Ms. Sellari’s employment is terminated by the employer without cause or if certain corporate transactions occur, then any stock options referenced in the prior paragraph will vest in full.    

84

The agreement also provides that during Ms. Sellari’s employment and for the three-year period following termination of her employment for any reason, Ms. Sellari will not compete with, or solicit any vendors, customers, suppliers, employees, consultants or agents of, J.G. Wentworth, LLC or certain related entities. The agreement further provides that Ms. Sellari may not disclose any proprietary, trade secret or confidential information involving J.G. Wentworth, LLC and certain related entities and will assign all applicable intellectual property rights to them.
Ms. Sellari tendered her resignation from the Company effective February 13, 2015.
Outstanding Equity Awards at Fiscal Year End for 2017
No outstanding equity awards were held by Ms. Sellari as of December 31, 2017. The following table sets forth certain information regarding outstanding equity awards held by each of our other named executive officers as of December 31, 2017. In accordance with the Plan, on the Effective Date, all of the equity awards listed in the table below were canceled for no consideration.
 
 
 
 
Option Awards
 
Stock Awards
Name
 
Grant Year
 
Number of
Securities
Underlying
Unexercised
Options (#)
Exercisable
 
Number of
Securities
Underlying
Unexercised
Options
(#)
Unexercisable(1)
 
Option
Exercise
Price ($)
 
Option
Expiration
Date
 
Number
of Shares
or Units
of Stock
That
Have Not
Vested
(#)(2)
 
Market
Value of
Shares or
Units of
Stock That
Have
Not Vested
($)(3)
Stewart A. Stockdale
 
2017
 
—
 
—
 
—
 
—
 
—
 
—
 
 
2016 (4)
 
36,000
 
144,000
 
0.32
 
7/29/2029
 
—
 
—
 
 
2015
 
—
 
—
 
—
 
—
 
—
 
—
 
 
2014
 
324,000
 
216,000
 
11.06
 
7/29/2024
 
—
 
—
 
 
2014 (5)
 
—
 
180,000
 
0.17
 
7/29/2029
 
—
 
—
 
 
2013
 
—
 
—
 
—
 
—
 
—
 
—
Stephen A. Kirkwood
 
2017
 
—
 
30,000
 
0.41
 
2/13/2027
 
15,000
 
6,150
 
 
2016
 
6,000
 
24,000
 
1.18
 
4/15/2026
 
15,000
 
17,700
 
 
2015 (5)
 
2,500
 
10,000
 
0.17
 
3/26/2025
 
12,500
 
124,625
 
 
2015 (4)
 
—
 
12,500
 
0.32
 
3/26/2025
 
—
 
—
 
 
2014 (5)
 
2,250
 
9,000
 
0.17
 
5/15/2024
 
—
 
—
 
 
2014 (4)
 
—
 
11,250
 
0.32
 
5/15/2024
 
—
 
—
 
 
2013 (5)
 
3,837
 
15,349
 
0.17
 
11/14/2023
 
—
 
—
 
 
2013 (4)
 
—
 
19,186
 
0.32
 
11/14/2023
 
—
 
—
 
 
2012
 
—
 
—
 
—
 
—
 
—
 
—
 
 
2011
 
—
 
—
 
—
 
—
 
—
 
—
Gregory A. Schneider
 
2017
 
—
 
24,000
 
0.41
 
2/13/2017
 
12,000
 
4,920
 
 
2016
 
4,800
 
19,200
 
1.18
 
4/15/2026
 
12,000
 
14,160
 
 
2015 (5)
 
—
 
12,000
 
0.17
 
3/26/2025
 
12,000
 
119,640
 
 
2015 (4)
 
2,400
 
9,600
 
0.32
 
3/26/2025
 
—
 
—
 
 
2014 (5)
 
—
 
15,000
 
0.17
 
8/26/2024
 
—
 
—
 
 
2014 (4)
 
3,000
 
12,000
 
0.32
 
8/26/2024
 
—
 
—
 
 
2013
 
—
 
—
 
—
 
—
 
—
 
—
___________________________________________________

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(1)
Stock options generally vest and become exercisable in equal 20% installments on the first five anniversaries of the grant date, in each case subject to the holder’s continued employment with us through the applicable vesting date.
(2)
Units issued prior to 2014 represent restricted Common Interests in The J.G. Wentworth Company LLC (and a corresponding number of shares of Class B common stock) which vest in equal 20% installments on the first five anniversaries of the grant date, in each case subject to the holder's continued employment with us through the applicable vesting date. Units issued in 2014, 2015 and 2016 represent performance-based restricted stock units that will vest into 0 to 1.5 shares of Class A common stock depending on the degree to which the performance goals are met.
(3)
The market value is determined by multiplying the market price of a share of Class A common stock as of December 31, 2017 by the number of units of the applicable class.
(4)
These shares were modified on August 29, 2016 in accordance with the stock modification program as approved by shareholders at the Annual Meeting of Stockholders on June 2, 2016.
(5)
These shares were modified on August 29, 2017 in accordance with the stock modification program as approved by shareholders at the Annual Meeting of Stockholders on June 2, 2016.
401(k) Plans
The Company maintains a savings plan under Section 401(k) of the Internal Revenue Code that covers all employees who have attained 21 years of age and achieved the applicable and requisite service period, which allows eligible employees to make pre-tax or post-tax retirement contributions in accordance with applicable Internal Revenue Service limits. Matching contributions are at the discretion of the Company's Board of Directors. For certain employees including the named executive officers, matching contributions by the Company were 50% on the first 8% of compensation contributed each pay period. For other employees, matching contributions by the Company were 15% of the employee's contributed amount on a per pay basis.
Potential Payments Upon Termination or Change in Control
Please refer to the section entitled “Employment Agreements with Named Executive Officers,” above, for a description of severance payments and benefits to be provided to our named executive officers in connection with certain qualifying terminations of their employment.
Information on the Compensation of Directors
In the year ended December 31, 2017, two of our former independent directors (Messrs. Griffin and Morgan) received an annual cash retainer fee of $135,000, which was increased from $65,000 in the prior year. The chairman of our Audit and Compliance Committee received an additional annual cash fee of $15,000, and Mr. Morgan received an additional annual cash fee of $5,000. Any director designated by one of our stockholders pursuant to the Director Designation Agreement (as defined below in under "Part III, Item 13 'Certain Relationships and Related Transactions, and Director Independence—Director Designation Agreement'") will not be compensated by us for their service on the Board of Directors.
The following table provides compensation information for the year ended December 31, 2017 for each of our former non-employee directors. Directors who are not independent do not receive compensation for their services as directors.
Name
 
Fees Earned or Paid in Cash ($)
 
Stock Awards ($)
 
Total ($)
Alexander R. Castaldi
 
—

 
—

 
—

Robert C. Griffin
 
151,535

 
—

 
151,535

William J. Morgan
 
142,630

 
—

 
142,630

Kevin T. Hammond
 
—

 
—

 
—

Robert N. Pomroy
 
—

 
—

 
—

Francisco J. Rodriguez
 
—

 
—

 
—

Gérard van Spaendonck
 
—

 
—

 
—


Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information about the beneficial ownership of our New Class A common stock and New

86

Class B common stock as of March 1, 2018, unless otherwise noted, for:
•each person known to us to be the beneficial owner of more than 5% of the shares of our New Class A common stock or New Class B common stock;
•each of our named executive officers;
•each of our directors; and
•all of our executive officers and directors as a group.
Unless otherwise noted below, the address for each beneficial owner listed on the table is 1200 Morris Drive, Suite 300, Chesterbrook, Pennsylvania 19087-5148. We have determined beneficial ownership in accordance with the rules of the SEC. Except as indicated by the footnotes below, we believe, based on the information furnished to us, that the persons and entities named in the tables below have sole voting and investment power with respect to all shares that they beneficially own, subject to applicable community property laws.
For purposes of the table below, the beneficial ownership amounts and percentages are based on a total of 24,913,370 shares of New Class A common stock and 141,384 shares of New Class B common stock outstanding as of February 28, 2018.
 
 
Shares Beneficially Owned
Name of
Beneficial Owner
 
Number of Class A Shares
 
Percent of
Class A Shares
 
Number of Class B Shares
 
Percent of
Class B Shares
 
% of Combined
Voting Power
HPS Investment Partners, LLC

 
5,926,151
 
23.84%
 
—
 
—
 
23.70%
Waddell and Reed Services Company
 
5,098,639
 
20.51%
 
—
 
—
 
20.39%
Axar Capital Management, LP
 
3,745,203
 
15.07%
 
—
 
—
 
14.98%
Oppenheimer Funds
 
3,194,150
 
12.85%
 
—
 
—
 
12.78%
Rimrock Capital
 
2,159,639
 
8.69%
 
—
 
—
 
8.64%
HG Vora Capital Management LLC
 
1,648,274
 
6.63%
 
—
 
—
 
6.59%
Logen Asset Management
 
1,267,680
 
5.10%
 
—
 
—
 
5.07%
JLL Holders (1)(2)
 
—
 
*
 
141,384
 
100%
 
*
Stewart A. Stockdale
 
33,967
 
*
 
—
 
—
 
*
Grant Mitchell
 
—
 
—%
 
—
 
—
 
—%
Eugene I. Davis
 
—
 
—%
 
—
 
—
 
—%
Vikas M. Keswani
 
—
 
—%
 
—
 
—
 
—%
Jonathan Miller
 
—
 
—%
 
—
 
—
 
—%
David Miller
 
25,534
 
*
 
—
 
—
 
*
Stephen A. Kirkwood
 
8,492
 
*
 
—
 
—
 
*
Gregory A. Schneider
 
4,246
 
*
 
—
 
—
 
*
Randi A. Sellari
 
—
 
—%
 
—
 
—
 
—%
All executive officers and directors as a group (10 groups)
 
77,334
 
*
 
—
 
—
 
*

87

*
Less than 1%.
 
 
(1)
The JLL Holders consist of JLL JGW Distribution, LLC, JGW Holdco, LLC, JLL Fund V AIF II, L.P. (“AIF II”) and JLL Associates V, LP. JLL JGW Distribution, LLC is the direct owner of a portion of the Class B Shares listed next to the JLL Holders above and JGW Holdco, LLC is the direct owner of the remaining Class B Shares. JLL Associates V, LP is the direct owner of a portion of the Class A Shares listed next to the JLL Holders above and AIF II is the direct owner of the remaining Class A Shares. JGW Holdco, LLC’s managing member is Forest Ave. Holdco, Inc., the Board of Directors of which consists of Paul S. Levy, Alexander R. Castaldi, and Francisco J. Rodriguez. JGW Holdco, LLC is more than 99% owned by JLL JGW Distribution, LLC. JLL JGW Distribution, LLC’s board of managers consists of Paul S. Levy, Alexander R. Castaldi and Francisco J. Rodriguez. JLL JGW Distribution, LLC is owned by JLL Fund V AIF I, L.P., a Delaware limited partnership (“AIF I”). JLL Associates V, L.P., a Delaware limited partnership, is the general partner of each of AIF I and AIF II. JLL Associates G.P. V, L.L.C., a Delaware limited liability company, is the general partner of JLL Associates V, L.P. Mr. Paul S. Levy is the sole managing member of JLL Associates G.P. V, L.L.C. As a result, Mr. Levy may be deemed to be the beneficial owner of all of these Class A and Class B Shares, with shared voting and dispositive power with regard to such shares. Mr. Levy has a pecuniary interest in only a portion of these Class A Shares and Class B Shares. Messrs. Castaldi and Rodriguez may also be deemed to have beneficial ownership of these Class A Shares and Class B Shares, but they disclaim any beneficial ownership thereof. The address for the JLL Holders is 450 Lexington Avenue, 31st Floor, New York, New York 10017.
 
 
(2)
The information reported is based in part on a Schedule 13D/A filed with the SEC on October 9, 2014 by JLL Associates V, L.P., JLL JGW Distribution, LLC, JLL Associates G.P. V, L.L.C., AIF I, AIF II, JGW Holdco, LLC and Paul S. Levy with respect to 769,359 Class A Shares. The registered address of the holder is c/o JLL PARTNERS, INC. is 450 Lexington Avenue, 31st Floor, New York, New York 10017. The address of the beneficial owners is 450 Lexington Avenue, 31st Floor, New York, New York 10017.
 
 
Changes in Control
There are no present arrangements or pledges of the Company's securities which may result in a change in control of the Company.
Securities Authorized for Issuance Under Equity Compensation Plans
Plan Category
 
Number of Securities to
be Issued Upon
Exercise of
Outstanding Options,
Warrants and Rights(1)
 
Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights(2)
 
Number of Securities
Remaining Available
for Future Issuance
Under Equity
Compensation Plans
(Excluding Securities reflected in
First Column)
 
 
 
 
 
 
 
Equity compensation plans approved by security holders
 
—
 
—
 
—
 
 
 
 
 
 
 
Equity compensation plans not approved by security holders
 
1,720,980
 
$1.69
 
1,100,000
 
 
 
 
 
 
 
Total
 
1,720,980
 
$1.69
 
1,100,000
(1) Represents 1,492,730 stock options and 228,250 unvested performance-based stock units that were outstanding as of December 31, 2017 and issued pursuant to the 2013 Plan. A description of the 2013 Plan and the stock options and performance-based stock units issued pursuant to it are included in Note 25 to the Consolidated Financial Statements under "Part II, Item 8 'Financial Statements and Supplementary Data.'"
(2) Represents the weighted average exercise stock price of the 1,492,730 stock options outstanding as of December 31, 2017. The Company's performance-based stock units do not have an exercise price but will vest into 0 to 1.5 shares of Class A common stock depending on the degree to which the associated performance goals are met.
Item 13. Certain Relationships and Related Transactions, and Director Independence
We or our affiliates have engaged in the following transactions with our directors, executive officers and holders of more than 5% of our voting securities on an as-converted to Class A common stock basis, and affiliates of our directors, executive officers and holders of more than 5% of our voting securities.
Credit Agreement of Orchard Acquisition Company, LLC

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On the Effective Date, we entered into the New RCF Agreement among Orchard Acquisition Company, LLC, as Parent Borrower (the “Parent Borrower”), JGW LLC, the lending institutions from time to time party thereto, and HPS Investment Partners, LLC, a related party and a holder of more than 5% of our New Class A common stock, as administrative agent (the “Administrative Agent”). The Credit Agreement provides for the four-year New RCF with aggregate commitments in an amount equal to $70.0 million. As of January 25, 2018, the Administrative Agent was the lender holding, directly or indirectly, the greatest share of commitments under the New RCF and the institution holding, directly or indirectly, the greatest share of the equity of the Company, of whom JGW LLC and the Parent Borrower are, respectively, direct and indirect subsidiaries. The New RCF will mature and the commitments thereunder will terminate on January 25, 2022. Amounts repaid under the New RCF may be reborrowed.
All obligations under the New RCF Agreement are guaranteed by each of the material wholly-owned domestic restricted subsidiaries of the Company, subject to certain exceptions. All obligations under the New RCF Agreement, and the guarantees of those obligations, are secured by substantially all of the assets of the Company and each guarantor, subject to customary exceptions including: (i) a pledge of 100% of the equity interests directly held by the Company and each guarantor in any wholly-owned material subsidiary of the Company or any guarantor, subject to certain exceptions; and (ii) a security interest in substantially all of tangible and intangible assets of the Company and each guarantor, subject to certain exceptions.
Interest under the New RCF is payable, at the Company’s option, either at a base rate (subject to a floor of 2.00% and based on the highest of the prime rate, the overnight federal funds rate plus 1/2 of 1.00% and the one-month LIBOR rate plus 1.00%) plus an applicable margin of 4.00% per annum or a LIBOR-based rate (subject to a floor of 1.00%) plus an applicable margin of 5.00% per annum. The non-usage fee is LIBOR plus 3% per annum.
Mandatory prepayments of outstanding borrowings under the New RCF and corresponding permanent reductions of the aggregate commitments thereunder are required in connection with, among other things, certain asset sales, certain issuances of indebtedness and, at the end of each fiscal year, an amount equal to 100% of the excess liquidity of the Parent Borrower in accordance with the terms thereof. Voluntary prepayments and voluntary permanent reductions of the aggregate commitments are permitted subject to, in certain circumstances, the payment of a premium of 2.00% of the principal amount of such prepayment or reduction if occurring prior to the first anniversary of the date of the New RCF Agreement and 1.00% if occurring on or after the first anniversary but prior to the second anniversary of the date of the New RCF Agreement. Voluntary prepayments and voluntary permanent reductions of the aggregate commitments from and after the second anniversary of the date of the New RCF Agreement are not subject to such premium.
The New RCF contains other customary terms, including (i) representations, warranties and affirmative covenants, (ii) negative covenants, including limitations on indebtedness, liens, mergers, acquisitions, asset sales, investments, distributions, prepayments of subordinated debt, and transactions with affiliates, in each case subject to baskets, thresholds and other exceptions, and a financial covenant to maintain a Total Leverage Ratio (as defined in the New RCF Agreement) of 3.50 to 1.00, and (iii) customary events of default, including changes in control.
Stockholders Agreement
On the Effective Date, January 25, 2018, the Company and certain of its affiliates completed the Restructuring pursuant to the Plan that was confirmed by the U.S. Bankruptcy Court for the District of Delaware on January 17, 2018. On the Effective Date, the Company entered into a stockholders agreement with all of its stockholders. The stockholders agreement provides that our board of directors will include one director designated by Axar Capital Management LP, one director designated by HPS Investor Partners, LLC, one director designated by Waddell & Reed Investment Management Company, in each case so long as such stockholder has an ownership percentage of at least 13% of the Company’s stock, one director designated by the remaining stockholders and the Company's Chief Executive Officer. The stockholders agreement also provides for other customary rights and obligations, including “tag along” rights, “drag along” obligations and information rights.
Operating Agreement of The J.G. Wentworth Company, LLC
On the Effective Date, January 25, 2018, The J.G. Wentworth Company, LLC, a subsidiary of the Company through which the Company operates its business, amended and restated its operating agreement in accordance with the Plan. The operating agreement sets forth the rights and obligations of the members of The J.G. Wentworth Company, LLC, of which the Company serves as the sole managing member. As such, the Company controls its business and affairs and is responsible for the management of its business. To the extent permitted by applicable law, The J.G. Wentworth Company, LLC will indemnify the Company, as its managing member, its authorized officers, its other employees and agents from and against any losses, damages, costs, expenses, fees or judgments incurred by any acts or omissions of these persons, provided that the acts or omissions of these indemnified persons are not the result of fraud, willful misconduct or bad faith. The Company, as the managing member, and the authorized officers and other employees and agents of The J.G. Wentworth Company, LLC, will not be liable to The J.G. Wentworth Company, LLC, its members or their affiliates for damages incurred by any acts or omissions of these persons, provided that the acts or omissions of these exculpated persons are not the result of fraud, willful misconduct or bad faith.

89

Registration Rights Agreement
In connection with the completion of our IPO in November 2013, the Company entered into a registration rights agreement (the "Registration Rights Agreement") with all of the holders of Common Interests pursuant to which the Company is required to register the exchange under the federal securities laws of the Common Interests held by them for shares of Class A common stock. The Company has agreed, at its expense, to use the Company’s reasonable best efforts to file with the SEC a shelf registration statement providing for the exchange of the Common Interests for shares of Class A common stock and the resale of such shares of Class A common stock at any time and from time to time thereafter and to cause and maintain the effectiveness of this shelf registration statement until such time as all Common Interests covered by this shelf registration statement have been exchanged. Further, the certain significant holders of Common Interests are entitled to cause the Company, at its expense, to register the resale of the shares of Class A common stock they will receive upon exchange of their Common Interests or upon conversion of their shares of Class C common stock or upon exercise of warrants, which we refer to as their “demand” registration rights.
In accordance with the foregoing requirements, the Company filed registration statements on Form S-1 with the SEC on January 22, 2014, April 7, 2014 and May 21, 2014. In addition, the Company filed a registration statement on Form S-3 with the SEC on March 31, 2015.
All holders of Common Interests party to the Registration Rights Agreement (as well as their permitted transferees) are entitled to exercise “piggyback” rights in connection with any future public underwritten offerings we engage in for our account or for the account of others to whom we have granted registration rights. All fees, costs and expenses of underwritten registrations will be borne by the Company, other than underwriting discounts and selling commissions, which will be borne by each stockholder selling its shares. Our registration obligations will be subject to certain restrictions on, among other things, the frequency of requested registrations, the number of shares to be registered and the duration of these rights.
Tax Receivable Agreement
Prior to the Company's emergence from bankruptcy, holders of Common Interests could exchange Common Interests for (i) one share of Class A common stock, or, in the case of PGHI Corp., one share of Class C common stock, or (ii) at the option of The J.G. Wentworth Company, LLC cash equal to the market value of one share of Class A common stock or Class C common stock. The J.G. Wentworth Company, LLC has in effect an election under Section 754 of the Internal Revenue Code which may result in an adjustment to the Company’s share of the tax basis of the assets owned by The J.G. Wentworth Company, LLC at the time of such initial sale and any subsequent exchanges of Common Interests. The sale and exchanges may result in increases in the Company’s share of the tax basis of the tangible and intangible assets of The J.G. Wentworth Company, LLC that otherwise would not have been available. Any such increases in tax basis are, in turn, anticipated to create incremental tax deductions that would reduce the amount of tax that the Company would otherwise be required to pay in the future.
The Company was a party to a tax receivable agreement with all holders of Common Interests who held in excess of approximately 1% of the Common Interests outstanding on November 7, 2013. The tax receivable agreement required the Company to pay those holders of Common Interests 85% of the amount of cash savings, if any, in U.S. federal, state and local income tax that the Company actually realizes in any tax year, which began with 2013 (a “covered tax year”) from increases in tax basis realized as a result of any future exchanges by holders of Common Interests of such Common Interests for shares of Class A common stock or Class C common stock (or cash). The Company would benefit from the remaining 15% of cash savings, if any, in income tax that the Company actually realizes during a covered tax year. The cash savings in income tax paid to any such holders of Common Interests would reduce the cash that may otherwise be available to the Company for its operations and to make future distributions to holders of shares of Class A common stock.
For purposes of the tax receivable agreement, cash savings in income tax were computed by comparing the Company’s actual income tax liability for a covered tax year to the amount of such taxes that the Company would have been required to pay for such covered tax year had there been no increase to our share of the tax basis of the tangible and intangible assets of The J.G. Wentworth Company, LLC as a result of such sale and any such exchanges and had the Company not entered into the tax receivable agreement.
On October 7, 2014, we executed a merger pursuant to which a subsidiary of the Company merged with and into JGW Holdings, Inc., a wholly owned subsidiary of certain affiliates of JLL Partners, Inc. (the "JLL Holders"), through which JLL Partners and its affiliates own a portion of their investment in the Company, with JGW Holdings, Inc. surviving the merger. Pursuant to the terms of the tax receivable agreement, upon consummation of such merger, the Company succeeded to certain tax attributes of JGW Holdings, Inc. and was required to pay the stockholders of JGW Holdings, Inc. for use of such tax attributes in the same manner as payments made for cash savings from increases in tax basis as described above.
The owners of PGHI Corp., including DLJ Merchant Banking Partners IV, L.P. and affiliates of Credit Suisse Group AG, own their investment through PGHI Corp. In the event the Company engages in a merger with such corporation in which the stockholders of that corporation receive the shares of Class C common stock directly, the Company will succeed to certain tax attributes, if any, of such corporation. The tax receivable agreement required the Company to pay the stockholders of such

90

corporation for the use of any such attributes above a specific amount in the same manner as payments made for cash savings from increases in tax basis as described above.
The Company bears the costs of implementing the provisions of the tax receivable agreement. A tax authority may challenge all or part of the tax basis increases or the amount or availability of any tax attributes discussed above, as well as other related tax positions the Company takes, and a court could sustain such a challenge. The holders of Common Interests that are party to the tax receivable agreement will not reimburse us for any payments previously made to them in the event that, due to a successful challenge by the Internal Revenue Service or any other tax authority of the amount of any tax basis increase or the amount or availability of any tax attributes, our actual cash tax savings are less than the cash tax savings previously calculated and upon which prior payments under the tax receivables were based. As a result, in certain circumstances the Company could make payments under the tax receivable agreement to the holders of Common Interests that are party thereto that significantly exceed the cash tax or other benefits, if any, that the Company actually realizes. A successful challenge to our tax reporting positions could also adversely affect our other tax attributes and could materially increase our tax liabilities.
The filing by the Company of Chapter 11 Cases qualified as a Material Breach under the tax receivable agreement. Upon the triggering of a Material Breach following such filing, all obligations under the tax receivable agreement were accelerated and the claimants were owed the present value of all future tax attributes to be distributed to such claimants, subject to certain discounting and based on assumptions regarding the remaining payments expected to be made under the tax receivable agreement. It is estimated that the occurrence of a Material Breach in December 2017 resulted in claims against the Company held by the claimants under the tax receivable agreement in the aggregate amount of $160.1 million.
As part of the Plan, the claims under the tax receivable agreement were discharged and, in consideration, each claimant received its pro rata share of the New Class A common stock and the New Class B common stock of the Company or cash consideration. Consequently, on January 25, 2018, the Tax Receivable Agreement claimants received, in the aggregate, 161,961 shares of New Class A common stock, 141,384 shares of New Class B common stock and $4.8 million of cash consideration.
Director Designation Agreement
The Company entered into the director designation agreement with the JLL Holders and PGHI Corp. ("Director Designation Agreement"). Under this agreement, the JLL Holders had the right to designate four director designees to our Board of Directors so long as the JLL Holders owned at least 934,488 Common Interests and at least 20% of the aggregate number of Common Interests held on such date by members of The J.G. Wentworth Company, LLC who were members of The J.G. Wentworth Company, LLC (or its predecessor) on July 12, 2011, and PGHI Corp. had the right to designate one director so long as PGHI Corp. (together with its then-current stockholders) or its assignee held in the aggregate at least 436,104 Common Interests. The director designation agreement was terminated in connection with the Company's emergence from bankruptcy.
Voting Agreement
In connection with the completion of our IPO in November 2013, the JLL Holders, PGHI Corp. and certain other holders of Common Interests entered into a voting agreement (the "Voting Agreement") pursuant to which they agreed to vote all of their shares of Class A common stock (if any) and Class B common stock (if any) in favor of the election to the Board of Directors of our Chief Executive Officer, four designees of the JLL Holders, and one designee of PGHI Corp. (provided certain conditions were met). By virtue of the Voting Trust Agreement described below, the JLL Holders were entitled to vote all shares of Class B common stock held by certain of the employee members of the J.G. Wentworth Company, LLC (“Members”), representing, together with the shares of Class B common stock held by the JLL Holders, 84.7% of the combined voting power of our common stock as of December 31, 2017, in favor of the election to the Board of Directors of the foregoing board designees. The Voting Agreement was terminated in connection with the Company's emergence from bankruptcy.
Voting Trust Agreement
In connection the completion of our IPO in November 2013, the JLL Holders and certain of the Members who are employees of the Company or its subsidiaries entered into a voting trust agreement (the "Voting Trust Agreement") pursuant to which, subject to the terms and conditions specified therein, such employee Members deposited their shares of Class B common stock into a voting trust and appointed the JLL Holders as trustees. Pursuant to the Voting Trust Agreement, all shares of Class B common stock subject to the voting trust were voted proportionately with the shares of Class A common stock (if any) and shares of Class B common stock (if any) held by the JLL Holders directly or indirectly. The shares of Class B common stock held by the parties to the Voting Trust Agreement as of December 31, 2017 represented approximately 84.7% of the combined voting power of our common stock (these holders held no shares of Class A common stock immediately after the completion of the IPO). The Voting Trust Agreement was terminated in connection with the Company's emergence from bankruptcy.

91

Director Independence
The Board of Directors applies standards in affirmatively determining whether a director is “independent,” in compliance with applicable rules of the SEC and an “Independent Director” as such term is defined in the rules and listing requirements of the OTCQX.
On January 25, 2018 in connection with the Plan, the Board of Directors, in applying the above-referenced standards, affirmatively determined that Messrs. Eugene I. Davis, Jonathan Miller, Grant Mitchell and David Miller are “independent” and “Independent Directors”. As part of the process in making such determination, the Board of Directors also determined that Messrs. Eugene I. Davis, Jonathan Miller, Grant Mitchell and David Miller are not executive officers or employees of the Company, and do not have a “material relationship” or any other relationships with the Company that could interfere with their ability to exercise independent judgment in carrying out their duties as directors.
The Board of Directors includes one management director, Mr. Stockdale, who is the Company’s Chief Executive Officer. The Board of Directors has determined that Mr. Stockdale is not independent under the rules and listing requirements of the OTCQX. In addition, our Board of Directors includes the following non-management directors about whom the Board of Directors has made no determination with respect to independence: Mr. Vikas M. Keswani.
The former Board of Directors, in applying the independence standards of the SEC and the OTCQX, affirmatively determined that Messrs. Robert C. Griffin, William J. Morgan and Robert N. Pomroy, each of whom served as directors from January 1, 2017 through January 25, 2018, were “independent” and “Independent Directors”. In addition, the former Board of Directors did not make a determination with respect to independence as to the following non-management directors who served as directors from January 1, 2017 through January 25, 2018: Messrs. Alexander R. Castaldi, Kevin T. Hammond, Gérard van Spaendonck and Francisco J. Rodriguez, each of whom is affiliated with JLL Partners.
As part of its annual evaluation of director independence, the Board of Directors examines (among other things) whether any transactions or relationships exist currently, between each independent director and the Company, its subsidiaries, affiliates, equity investors, or independent auditors and the nature of those relationships under the relevant OTC and SEC standards. The Board of Directors also examines whether there are any transactions or relationships between each independent director and any executive officer of the Company or its affiliates. As a result of this evaluation, the current and former Board has affirmatively determined that each independent director is independent under those criteria.
Item 14. Principal Accounting Fees and Services
Principal Accountant Fees and Services
The Audit and Compliance Committee of our Board of Directors is responsible for the appointment, oversight, and evaluation of our independent registered public accounting firm. The Audit and Compliance Committee has the sole and direct authority to engage, appoint, and replace our independent auditors. In addition, the Audit and Compliance Committee has established in its charter a policy that every engagement of the Company’s independent registered public accounting firm to perform audit or permissible non-audit services on behalf of the Company or any of its subsidiaries requires pre-approval from the Audit and Compliance Committee or its designee before such independent registered public accounting firm is engaged to provide those services. Our independent registered public accounting firm may not be retained to perform the non-audit services specified in Section 10A(g) of the Exchange Act. Pursuant to the Audit and Compliance Committee Charter, the Audit and Compliance Committee reviews and, in its sole discretion, approves in advance the Company’s independent registered public accounting firm’s annual engagement letter, including the proposed fees contained therein, as well as all audit and, as provided in the Sarbanes-Oxley Act of 2002 and the SEC rules and regulations promulgated thereunder, all permitted non-audit engagements and relationships between the Company and such independent registered public accounting firm (which approval should be made after receiving input from the Company’s management, if desired).
With respect to the audit for the year ended December 31, 2017, the Audit and Compliance Committee approved the audit services performed by Ernst & Young LLP as well as certain categories and types of audit-related, tax, and permitted non-audit services.

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Fees Paid to Ernst & Young LLP
Aggregate fees for professional services rendered by Ernst & Young LLP for the years ended December 31, 2017 and 2016 were as follows:
 
Fiscal Year Ended December 31, 2017
 
Fiscal Year Ended December 31, 2016
Audit fees (1)
$
2,013,719

 
$
1,791,266

Audit-related fees (2)
731,185

 
558,387

Tax fees (3)
—

 
—

All other fees
—

 
—

Total
$
2,744,904

 
$
2,349,653

_______________________________________
(1)
Fees for audit services include fees associated with the annual audit of the Company's Form 10-K and the review of the Company’s quarterly reports on Form 10-Q.
(2)
Audit-related fees principally include fees associated with due diligence in connection with agreed-upon procedures performed in connection with Company's securitizations.
(3)
Fees for tax services include the preparation, review, and filing of tax returns and tax advisory services.
PART IV
Item 15. Exhibits, Financial Statements and Financial Statement Schedules
(a)(1) Financial Statements:
(a)(2) Financial Statement Schedules:
All financial statement schedules have been omitted because the information required is included in the consolidated financial statements and notes thereto included in this Annual Report on Form 10-K.
(a)(3) Exhibits:
2.1†
Stock Purchase Agreement, dated as of March 6, 2015, by and among The J.G. Wentworth Company, WestStar Mortgage, Inc., Walter F. Jones, Kathleen Murphy-Zimpel, and Roger W. Jones. Filed as Exhibit 2.1 to Amendment No. 1 to The J.G. Wentworth Company's Registration Statement on Form S-3 (File No. 333-205699), filed with the SEC on July 28, 2015, and incorporated herein by reference.
Amended and Restated Certificate of Incorporation of The J.G. Wentworth Company.
Amended and Restated Bylaws of The J.G. Wentworth Company.
4.1
Form of Stock Certificate representing Class A Common Stock, par value $0.00001 per share of The J.G. Wentworth Company. Filed as Exhibit 4.1 to The J.G. Wentworth Company's Current Report on Form 8-K (File No. 001-36170), filed with the SEC on September 22, 2014, and incorporated herein by reference.
4.2
Warrant Certificate No. 1, issued to PGHI Corp. on November 14, 2013. Filed as Exhibit 4.1 to The J.G. Wentworth Company's Quarterly Report on Form 10-Q (File No. 001-36170), filed with the SEC on December 23, 2013, and incorporated herein by reference.
4.3
Warrant Certificate No. 2, issued to PGHI Corp. on November 14, 2013. Filed as Exhibit 4.2 to The J.G. Wentworth Company's Quarterly Report on Form 10-Q (File No. 001-36170), filed with the SEC on December 23, 2013, and incorporated herein by reference.

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4.4
Registration Rights Agreement, dated as of November 14, 2013, by and among The J.G. Wentworth Company, JLL JGW Distribution, LLC and JGW Holdco, LLC and the other stockholders signatory thereto. Filed as Exhibit 4.3 to The J.G. Wentworth Company's Quarterly Report on Form 10-Q (File No. 001-36170), filed with the SEC on December 23, 2013, and incorporated herein by reference.
4.5
Voting Agreement, dated as of November 14, 2013, by and among JLL JGW Distribution, LLC, JGW Holdco, LLC, PGHI Corp., and the other stockholders named therein. Filed as Exhibit 4.4 to The J.G. Wentworth Company's Quarterly Report on Form 10-Q (File No. 001-36170), filed with the SEC on December 23, 2013, and incorporated herein by reference.
4.6
Director Designation Agreement, dated as of November 14, 2013, by and among The J.G. Wentworth Company, JLL JGW Distribution, LLC, JGW Holdco, LLC and PGHI Corp. Filed as Exhibit 4.5 to The J.G. Wentworth Company's Quarterly Report on Form 10-Q (File No. 001-36170), filed with the SEC on December 23, 2013, and incorporated herein by reference.
9.1
Voting Trust Agreement, dated as of November 14, 2013, by and among The J.G. Wentworth Company, the trustees named therein, and the stockholders named therein. Filed as Exhibit 9.1 to The J.G. Wentworth Company's Quarterly Report on Form 10-Q (File No. 001-36170), filed with the SEC on December 23, 2013, and incorporated herein by reference.
10.1
Credit Agreement by and among J.G. Wentworth, LLC, Orchard Acquisition Company, LLC, as Parent Borrower, the Lending Institutions from Time to Time Parties Thereto, Jefferies Finance LLC, as Administrative Agent and Jefferies Group, Inc. as Swing Line Lender and an LC Issuer, dated as of February 8, 2013. Filed as Exhibit 4.4 to the J.G. Wentworth Company's Registration Statement on Form S-1 (File No. 333-191585), filed with the SEC on October 7, 2013, and incorporated herein by reference.
10.2
First Amendment to Credit Agreement by and among J.G. Wentworth, LLC, Orchard Acquisition Company, LLC, as Parent Borrower, the Lending Institutions from Time to Time Parties Thereto, Jefferies Finance LLC, as Administrative Agent and Jefferies Group, Inc. as Swing Line Lender and an LC Issuer, dated as of May 31, 2013. Filed as Exhibit 4.5 to The J.G. Wentworth Company's Registration Statement on Form S-1 (File No. 333-191585), filed with the SEC on October 7, 2013, and incorporated herein by reference.
10.3
Second Amendment to Credit Agreement by and among J.G. Wentworth, LLC, Orchard Acquisition Company, LLC, as Parent Borrower, the Lending Institutions from Time to Time Parties Thereto, Jefferies Finance LLC, as Administrative Agent and Jefferies Group, Inc. as Swing Line Lender and an LC Issuer, dated as of December 6, 2013. Filed as Exhibit 4.8 to The J.G. Wentworth Company's Current Report on Form 8-K (File No. 001-36170), filed with the SEC on December 9, 2013, and incorporated herein by reference.
10.4
Third Amendment to Credit Agreement by and among J.G. Wentworth, LLC, Orchard Acquisition Company, LLC, as Parent Borrower, the Lending Institutions from Time to Time Parties Thereto, Jefferies Finance LLC, as Administrative Agent and Jefferies Group, Inc. as Swing Line Lender and an LC Issuer, dated as of July 15, 2015. Filed as Exhibit 10.1 to The J.G. Wentworth Company's Quarterly Report on Form 10-Q (File No. 001-36170), filed with the SEC on November 9, 2015, and incorporated herein by reference.
10.5
Amended and Restated Limited Liability Company Agreement, dated as of November 13, 2013, of The J.G. Wentworth Company, LLC. Filed as Exhibit 10.1 to The J.G. Wentworth Company's Quarterly Report on Form 10-Q (File No. 001-36170), filed with the SEC on December 23, 2013, and incorporated herein by reference.
10.6
Tax Receivable Agreement, dated as of November 14, 2013, by and among The J.G. Wentworth Company, JLL JGW Distribution LLC, JGW Holdco, LLC, Candlewood Special Situations Fund L.P., R3 Capital Partners Master, L.P., The Royal Bank of Scotland PLC, DLJ Merchant Banking Funding, Inc., PGHI Corp., David Miller, Randi Sellari, and Stefano Sola and, to the extent described therein, JLL Fund V AIF II, L.P. and the shareholders of PGHI Corp. Filed as Exhibit 10.2 to The J.G. Wentworth Company's Quarterly Report on Form 10-Q (File No. 001-36170), filed with the SEC on December 23, 2013, and incorporated herein by reference.
10.7
Administrative Services Agreement, dated as of July 12, 2011, by and between Settlement Funding, LLC and PGHI Corp. Filed as Exhibit 10.3 to Amendment No. 1 to The J.G. Wentworth Company's Registration Statement on Form S-1 (File No. 333-191585), filed with the SEC on October 28, 2013, and incorporated herein by reference.
10.8
Custodial Agreement, dated July 12, 2011, by and between J.G. Wentworth, LLC and PGHI Corp. Filed as Exhibit 10.4 to Amendment No. 1 to The J.G. Wentworth Company's Registration Statement on Form S-1 (File No. 333-191585), filed with the SEC on October 28, 2013, and incorporated herein by reference.
10.9#
Employment Agreement by and between The J.G. Wentworth Company and Stewart A. Stockdale, dated July 27, 2014. Filed as Exhibit 10.1 to The J.G. Wentworth Company's Current Report on Form 8-K (File No. 001-36170), filed with the SEC on July 28, 2014, and incorporated herein by reference.
10.10#
Amendment, dated December 1, 2017, to the Employment Agreement by and between The J.G. Wentworth Company and Stewart A. Stockdale, dated July 27, 2014. Filed as Exhibit 10.1 to The J.G. Wentworth Company's Current Report on Form 8-K (File No. 001-36170), filed with the SEC on December 1, 2017, and incorporated herein by reference.
10.11#
Amended and Restated Employment Agreement by and between J.G. Wentworth, LLC and Randi Sellari, dated July 23, 2007. Filed as Exhibit 10.8 to The J.G. Wentworth Company's Registration Statement on Form S-1 (File No. 333-191585), filed with the SEC on October 7, 2013, and incorporated herein by reference.

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10.12
Lease by and between Radnor Properties-201 KOP, L.P. and Green Apple Management Company, LLC, dated September 9, 2010, as amended by the First Amendment, dated February 21, 2011, the Second Amendment, dated January 9, 2012, the Third Amendment, dated August 23, 2012, and the Fourth Amendment, dated March 29, 2013. Filed as Exhibit 10.10 to The J.G. Wentworth Company's Registration Statement on Form S-1 (File No. 333-191585), filed with the SEC on October 7, 2013, and incorporated herein by reference.
10.13#
Form of The J.G. Wentworth Company 2013 Omnibus Incentive Plan. Filed as Exhibit 10.11 to Amendment No. 1 to The J.G. Wentworth Company's Registration Statement on Form S-1 (File No. 333-191585), filed with the SEC on October 28, 2013, and incorporated herein by reference.
10.14#
Form of The J.G. Wentworth Company 2013 Omnibus Incentive Plan Stock Option Agreement (Employees). Filed as Exhibit 10.12 to Amendment No. 2 to The J.G. Wentworth Company's Registration Statement on Form S-1 (File No. 333-191585), filed with the SEC on November 7, 2013, and incorporated herein by reference.
10.15#
Form of The J.G. Wentworth Company 2013 Omnibus Incentive Plan Restricted Stock Agreement (Non-Employee Directors). Filed as Exhibit 10.13 to Amendment No. 2 to The J.G. Wentworth Company's Registration Statement on Form S-1 (File No. 333-191585), filed with the SEC on November 7, 2013, and incorporated herein by reference.
10.16#
Form of Director Indemnification Agreement. Filed as Exhibit 10.14 to The J.G. Wentworth Company's Registration Statement on Form S-1 (File No. 333-191585), filed with the SEC on October 7, 2013, and incorporated herein by reference.
10.17
Consulting Agreement, dated May 5, 2017, between Attolon Consulting, LLC and The J.G. Wentworth Company. Filed as an exhibit to The J.G. Wentworth Company’s Current Report on Form 8-K (File No. 001-36170), filed with the SEC on May 19, 2017, and incorporated herein by reference.
10.18
Lease by and between The GC Net Lease (Wayne) Investors, LLC and Green Apple Management Company, LLC, dated May 18, 2017. Filed as an exhibit to The J.G. Wentworth Company’s Current Report on Form 8-K (File No. 001-36170), filed with the SEC on May 22, 2017, and incorporated herein by reference.
10.19
Restructuring Support Agreement, dated as of November 9, 2017, by and among the Company Parties and the supporting parties thereto. Filed as an exhibit to The J.G. Wentworth Company’s Current Report on Form 8-K (File No. 001-36170), filed with the SEC on November 9, 2017, and incorporated herein by reference.
Chief Executive Officer—Certification pursuant to Rules 13a-14(a).
Chief Financial Officer—Certification pursuant to Rules 13a-14(a).
Chief Executive Officer—Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C Section 1350.
Chief Financial Officer—Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C Section 1350.
101
Interactive Data File.
101.INS
XBRL Instance Document.
101.SCH
XBRL Taxonomy Extension Schema.
101.CAL
XBRL Taxonomy Extension Calculation Linkbase.
101.DEF
XBRL Taxonomy Extension Definition Document.
101.LAB
XBRL Taxonomy Extension Label Linkbase.
101.PRE
XBRL Taxonomy Extension Presentation Linkbase.
 
 
#
Indicates management contract or compensatory plan or arrangement.
†

Schedules have been omitted pursuant to Item 601(b)(2) of Regulation S-K. A copy of any omitted schedule will be furnished supplementally to the Securities and Exchange Commission upon request.
Item 16. Form 10-K Summary
The Company has elected not to include any summary information.

95

SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on April 2, 2018.
 
THE J.G. WENTWORTH COMPANY
 
 
 
By:
/s/ Stewart A. Stockdale
 
Name:
Stewart A. Stockdale
 
Title:
Chief Executive Officer
SIGNATURES 
Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated.
Name
 
Title
 
Date
 
 
 
 
 
/s/ Stewart A. Stockdale
 
Chief Executive Officer, and Director
 
 
Stewart A. Stockdale
 
(Principal Executive Officer)
 
April 2, 2018
 
 
 
 
 
/s/ Aikaterini Cozza
 
Interim Chief Financial Officer
 
 
Aikaterini Cozza
 
(Interim Principal Financial Officer)
 
April 2, 2018
 
 
 
 
 
/s/ Michael Shaw
 
Chief Accounting Officer
 
 
Michael Shaw
 
(Principal Accounting Officer)
 
April 2, 2018
 
 
 
 
 
/s/ David Miller
 
 
 
 
David Miller
 
Chairman of the Board of Directors
 
April 2, 2018
 
 
 
 
 
/s/ Grant Mitchell
 
 
 
 
Grant Mitchell
 
Director
 
April 2, 2018
 
 
 
 
 
/s/ Eugene I. Davis
 
 
 
 
Eugene I. Davis
 
Director
 
April 2, 2018
 
 
 
 
 
/s/ Vikas M. Keswani
 
 
 
 
Vikas M. Keswani
 
Director
 
April 2, 2018
 
 
 
 
 
/s/ Jonathan Miller
 
 
 
 
Jonathan Miller
 
Director
 
April 2, 2018

96