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:

our ability to execute on our business strategy;
our ability to successfully compete in the industries in which we operate;
our dependence on the effectiveness of direct response marketing;
our ability to retain and attract qualified senior management;
any improper use of or failure to protect the personally identifiable information of past, current and prospective customers to which we have access;
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;
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;
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;
infringement of our trademarks or service marks;
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;
our ability to maintain our state licenses or obtain new licenses in new markets;
our ability to continue to purchase structured settlement payments and other financial assets;
our business model being susceptible to litigation;
our ability to remain in compliance with the terms of our substantial indebtedness and to refinance our term debt;
our ability to obtain sufficient working capital at attractive rates or obtain sufficient capital to meet the financing requirements of our business;
our ability to renew or modify our warehouse lines of credit;
changes in prevailing interest rates and our ability to mitigate interest rate risk through hedging strategies;
the accuracy of the estimates and assumptions of our financial models;
the public disclosure of the identities and information of structured settlement holders maintained in our proprietary database;
our dependence on the opinions of certain credit rating agencies of the credit quality of our securitizations;
our ability to complete future securitizations, other financings or sales on favorable terms;
the insolvency of a material number of structured settlement issuers;
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;
our ability to grow our loan origination volume, acquire mortgage servicing rights ("MSRs") and recapture loans that are refinanced;
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;
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:
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.
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.
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:
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.
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.
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:
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.
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.
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.
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:
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;
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
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:
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;
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;
the Homeowners Equity Protection Act, which requires, among other things, the cancellation of mortgage insurance once certain equity levels are reached;
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;
the Fair Housing Act, which prohibits discrimination in housing on the basis of race, sex, national origin, and certain other characteristics; and
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:
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;
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;
limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;
restrict us from making strategic acquisitions or causing us to make non-strategic divestitures;
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
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:
our financial condition and performance;
the level of liquidity in the credit markets;
prevailing interest rates;
the strength of the lenders that provide us financing;
limitations on borrowings on repurchase facilities, participation agreements and warehouse lines of credit;
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
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:
a delay in the completion of a planned securitization or other financing;
negative market perception of us;

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a change in rating agency criteria with regards our asset class;
delays from rating agencies in providing ratings on our securitizations; and
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
 
$