XML 25 R10.htm IDEA: XBRL DOCUMENT

Fair Value Measurement

9 Months Ended

Sep. 30, 2022

The following table presents assets and liabilities measured at fair value and categorized as Level 3 in the fair value hierarchy:


	December 31,		September 30,
	2021		2022
Assets
Loans	$	252,477	$	700,455
Notes receivable and residual certificates	8,288		3,459
Loan servicing assets	18,388		37,037
Total assets	$	279,153	$	740,951
Liabilities
Loan servicing liabilities	$	8,780	$	4,810
Trailing fee liabilities	4,315		5,201
Total liabilities	$	13,095	$	10,011

Financial instruments are categorized in the fair value hierarchy based on the significance of unobservable factors in the overall fair value measurement. Since the Company’s loans, notes receivable and residual certificates, loan servicing assets and liabilities, and trailing fee liabilities do not trade in an active market with readily observable prices, the Company uses significant unobservable inputs to measure the fair value of these assets and liabilities.

There were no transfers between Level 1, Level 2 or Level 3 of the fair value hierarchy during the periods presented.

Loans

Loans included in the Company’s condensed consolidated balance sheets are classified as either held-for-sale or held-for-investment based on the Company’s intent and ability to sell the loans prior to maturity. From time to time the Company transfers loans between classifications based on changes in the Company’s intent. As of December 31, 2021, $142.7 million and $109.8 million of loans held on the Company’s condensed consolidated balance sheets were classified as held-for-sale and held-for-investment, respectively. As of September 30, 2022, $647.2 million and $53.3 million of loans held on the Company’s condensed consolidated balance sheets were classified as held-for-sale and held-for-investment, respectively.

Valuation Methodology

Loans held-for-sale and held-for-investment are measured at estimated fair value using a discounted cash flow model. The fair valuation methodology considers projected prepayments and historical defaults, losses and recoveries to project future losses and net cash flows on loans. Net cash flows are discounted using an estimate of market rates of return. The fair value of these loans also includes accrued interest.

Significant Inputs and Assumptions

The following table presents quantitative information about the significant unobservable inputs used for the Company’s Level 3 fair value measurements for loans held-for-investment and held-for-sale:


	December 31, 2021						September 30, 2022
	Minimum		Maximum		Weighted-Average (2)		Minimum		Maximum		Weighted-Average (2)
Discount rate	3.42	%	16.49	%	7.29	%	5.90	%	20.88	%	10.80	%
Credit risk rate (1)	0.08	%	55.79	%	17.98	%	0.01	%	93.09	%	17.40	%
Prepayment rate (1)	8.70	%	88.12	%	40.35	%	0.14	%	93.43	%	39.47	%

(1)Expressed as a percentage of the original principal balance of the loans

(2)Unobservable inputs were weighted by relative fair value

Discount rates–The discount rates are rates of return used to discount future expected cash flows to arrive at a present value, which represents the fair value. The discount rates used for the projected net cash flows are the Company’s estimates of the rates of return that market participants would require when investing in these financial instruments with cash flows dependent on credit quality of the related loan. A risk premium component is implicitly included in the discount rates to reflect the amount of compensation market participants require due to the uncertainty inherent in the instruments’ cash flows resulting from risks such as credit and liquidity.

Credit risk rates–The credit risk rates are an estimate of the net cumulative principal payments that will not be repaid over the entire life of a financial instrument. The credit risk rates are expressed as a percentage of the original principal amount of the instrument. The estimated net cumulative loss represents the sum of the net losses estimated to occur each month of the life of the instrument, net of the average recovery expected to be received.

Prepayment rates–Prepayment rates are an estimate of the cumulative principal prepayments that will occur over the entire life of a loan as a percentage of the original principal amount of the loan. The assumption regarding cumulative prepayments impact the projected balances and expected terms of the loans.

The above inputs are similarly used in estimating fair value of related financial instruments. Refer to the Assets and Liabilities related to Securitization Transactions section below for more information.

Significant Recurring Level 3 Fair Value Input Sensitivity

The following table presents the sensitivity of the loans held-for-sale and held-for-investment to adverse changes in key assumptions used in the valuation model as of December 31, 2021 and September 30, 2022, respectively.


	December 31,		September 30,
	2021		2022
Fair value of loans	$	252,477	$	700,455
Discount rates
100 basis point increase	(3,392)		(8,482)
200 basis point increase	(6,709)		(16,793)
Expected credit loss rates on underlying loans
10% adverse change	(3,959)		(8,691)
20% adverse change	(7,927)		(17,386)
Expected prepayment rates
10% adverse change	(239)		(1,638)
20% adverse change	(512)		(3,277)

Rollforward of Level 3 Fair Values

The following tables include a rollforward of the loans classified within Level 3 of the fair value hierarchy:


	Loans Held-for- Sale		Loans Held-for-Investment		Total
Fair value at June 30, 2021	$	26,741	$	55,570	$	82,311

Purchases of loans	41,994		50,190		92,184
Sale of loans	(34,429)		—		(34,429)
Purchase of loans for immediate resale	2,458,757		—		2,458,757
Immediate resale	(2,458,757)		—		(2,458,757)
Repayments received	(1,831)		(6,125)		(7,956)
Changes in fair value recorded in earnings	(1,313)		(1,576)		(2,889)
Other changes	46		358		404

Fair value at September 30, 2021	$	31,208	$	98,417	$	129,625


	Loans Held-for- Sale		Loans Held-for-Investment		Total
Fair value at December 31, 2020	$	60,232	$	18,228	$	78,460
Reclassification of loans	(26)		26		—
Purchases of loans	80,305		92,738		173,043
Sale of loans	(101,330)		—		(101,330)
Purchase of loans for immediate resale	5,872,988		—		5,872,988
Immediate resale	(5,872,988)		—		(5,872,988)
Repayments received	(6,867)		(12,253)		(19,120)
Changes in fair value recorded in earnings	(961)		(960)		(1,921)
Other changes	(145)		638		493

Fair value at September 30, 2021	$	31,208	$	98,417	$	129,625


	Loans Held-for- Sale		Loans Held-for-Investment		Total
Fair value at June 30, 2022	$	605,319	$	18,444	$	623,763

Purchases of loans	333,779		41,402		375,181
Sale of loans	(232,302)		—		(232,302)
Purchase of loans for immediate resale	722,080		—		722,080
Immediate resale	(722,080)		—		(722,080)
Repayments received	(43,748)		(2,699)		(46,447)
Changes in fair value recorded in earnings	(16,499)		(4,560)		(21,059)
Other changes	629		690		1,319

Fair value at September 30, 2022	$	647,178	$	53,277	$	700,455


	Loans Held-for- Sale		Loans Held-for-Investment		Total
Fair value at December 31, 2021	$	142,685	$	109,792	$	252,477

Reclassification of loans from HFS to HFI	103,679		(103,679)		—
Purchases of loans	1,459,544		55,278		1,514,822
Sale of loans	(866,984)		—		(866,984)
Purchase of loans for immediate resale	5,519,116		—		5,519,116
Immediate resale	(5,519,116)		—		(5,519,116)
Repayments received	(128,023)		(3,737)		(131,760)
Changes in fair value recorded in earnings	(68,329)		(5,047)		(73,376)
Other changes	4,606		670		5,276
Fair value at September 30, 2022	$	647,178	$	53,277	$	700,455

The following table presents the aggregate fair value and aggregate principal outstanding of all loans and loans that were 90 days or more past due included in the condensed consolidated balance sheets:


	Loans				Loans > 90 Days Past Due
	December 31,		September 30,		December 31,		September 30,
	2021		2022		2021		2022
Outstanding principal balance	$	277,228	$	785,856	$	1,979	$	8,801
Net fair value and accrued interest adjustments	(24,751)		(85,401)		(1,692)		(7,056)
Fair value(1)	$	252,477	$	700,455	$	287	$	1,745

_________

(1) Includes $50.1 million and $394.1 million of auto loans as of December 31, 2021 and September 30, 2022, respectively, of which an immaterial amount is 90 days or more past due for each period presented.

The Company places loans on non-accrual status at 120 days past due. Any accrued interest recorded in relation to these loans is reversed in the respective period. The Company charges-off loans no later than 120 days past due.

Assets related to Securitization Transactions

As of December 31, 2021 and September 30, 2022, the Company held notes receivable and residual certificates with an aggregate fair value of $8.3 million and $3.5 million, respectively, within other assets on the Company’s condensed consolidated balance sheets. The balances consist of securitization notes and residual certificates corresponding to the 5% economic risk retention the Company is required to maintain as the retaining sponsor of the unconsolidated securitizations.

Valuation Methodology

The discounted cash flow methodology, which is used to estimate the fair value of notes receivable and residual certificates, uses the same projected net cash flows as their related loans. This model uses inputs that are inherently judgmental and reflect the Company’s best estimates of the assumptions a market participant would use to calculate fair value.

Significant Inputs and Assumptions

The following table presents quantitative information about the significant unobservable inputs used for the Company’s Level 3 fair value measurements of assets related to securitization transactions:


	December 31, 2021						September 30, 2022
	Minimum		Maximum		Weighted-Average (2)		Minimum		Maximum		Weighted-Average (2)
Notes receivable and residual certificates
Discount rate	4.96	%	15.72	%	6.78	%	5.79	%	20.35	%	11.21	%
Credit risk rate (1)	0.04	%	50.69	%	18.47	%	0.81	%	50.69	%	18.73	%
Prepayment rate (1)	15.60	%	36.08	%	27.82	%	15.60	%	35.03	%	28.03	%

_________

(1)Expressed as a percentage of the original principal balance of the loans underlying the financial instruments

(2)Unobservable inputs were weighted by relative fair value

Significant Recurring Level 3 Fair Value Input Sensitivity

The securities issued in the securitization transactions are senior or subordinated based on the waterfall criteria of loan payments to each security class, with the residual interest (the “residual certificates”) issued being the first to absorb credit losses in accordance with the waterfall criteria. Accordingly, the residual certificates are the most sensitive to adverse changes in credit risk rates. Depending on the specific securitization, a hypothetical increase in the credit risk rate of 10% to 20% would result in significant decreases in the fair value of the residual certificates. On average, a hypothetical increase in the credit risk rate under a discounted cash flow methodology of 20% would result in a 8% decrease in the fair value of the residual certificates as of September 30, 2022. The remaining classes of securities, with the exception of those in 2018-2, are all overcollateralized such that changes in credit risk rates are not expected to have significant impacts on their fair values.

The fair value of the securities is also sensitive to adverse changes in discount rates, which represent estimates of the rates of return that institutional investors would require when investing in financial instruments with similar risk and return characteristics. On average, a hypothetical 100 basis point increase in discount rates results in a decrease in fair value of the securities (including securitization notes and residual certificates) of 0.69% and 0.57% as of December 31, 2021 and September 30, 2022, respectively. On average, a hypothetical 200 basis point increase in discount rates results in a decrease in fair value of securitization notes and residual certificates of 1.37% and 1.13% as of December 31, 2021 and September 30, 2022, respectively.

The fair value of securitization notes and residual certificates are not sensitive to adverse changes in expected prepayment rates as such changes would not result in a significant impact on the fair value as of December 31, 2021 and September 30, 2022.

Rollforward of Level 3 Fair Values

The following tables include a rollforward of the notes receivable and residual certificates related to securitization transactions classified by the Company within Level 3 of the fair value hierarchy:


	Notes Receivable and Residual Certificates
Fair value at June 30, 2021	$	12,995

Repayments and settlements	(2,766)
Changes in fair value recorded in earnings	260

Fair value at September 30, 2021	$	10,489


	Notes Receivable and Residual Certificates
Fair value at December 31, 2020	$	19,074

Repayments and settlements	(9,115)
Changes in fair value recorded in earnings	530

Fair value at September 30, 2021	$	10,489


	Notes Receivable and Residual Certificates
Fair value at June 30, 2022	$	4,698

Repayments and settlements	(1,596)
Changes in fair value recorded in earnings	357

Fair value at September 30, 2022	$	3,459


	Notes Receivable and Residual Certificates
Fair value at December 31, 2021	$	8,288

Repayments and settlements	(5,508)
Changes in fair value recorded in earnings	679

Fair value at September 30, 2022	$	3,459

Loan Servicing Assets and Liabilities

Valuation Methodology

Loan servicing assets and liabilities are measured at estimated fair value using a discounted cash flow model. The cash flows in the valuation model represent the difference between the contractual servicing fees charged to institutional investors and an estimated market servicing fee. Since contractual servicing fees are

generally based on the monthly unpaid principal balance of the underlying loans, the expected cash flows in the model incorporate estimates of net losses and prepayments.

Significant Inputs and Assumptions

The following table presents quantitative information about the significant unobservable inputs used for the Company’s Level 3 fair value measurements for loan servicing assets and liabilities:


	December 31, 2021						September 30, 2022
	Minimum		Maximum		Weighted-Average (2)		Minimum		Maximum		Weighted-Average (2)
Discount rate	13.00	%	20.00	%	17.69	%	13.00	%	20.00	%	17.32	%
Credit risk rate (1)	0.03	%	52.78	%	18.36	%	0.03	%	91.58	%	16.76	%
Market-servicing rate (3)(4)(5)	0.62	%	3.73	%	0.62	%	0.62	%	3.73	%	0.62	%
Prepayment rate (1)	5.99	%	91.43	%	36.39	%	0.28	%	91.99	%	40.73	%

_________

(1)Expressed as a percentage of the original principal balance of the loans underlying the servicing arrangement

(2)Unobservable inputs were weighted by relative fair value

(3)Excludes ancillary fees that would be passed on to a third-party servicer

(4)Expressed as a percentage of the outstanding principal balance of the loan

(5)Includes personal loans and auto loans

Discount rates–The discount rates are the Company’s estimate of the rates of return that market participants in servicing rights would require when investing in similar servicing rights. Discount rates for servicing rights on existing loans are adjusted to reflect the time value of money and a risk premium intended to reflect the amount of compensation market participants would require due to the uncertainty associated with these instruments’ cash flows.

Credit risk rates–The credit risk rates are the Company’s estimate of the net cumulative principal payments that will not be repaid over the entire life of a loan expressed as a percentage of the original principal amount of the loan. The assumption regarding net cumulative losses impact the projected balances and expected terms of the loans, which are used to project future servicing revenues.

Market-servicing rates–Market-servicing rate is an estimated measure of adequate compensation for a market participant, if one was required. The rate is expressed as a fixed percentage of outstanding principal balance per annum. The estimate considers the profit that would be demanded in the marketplace to service the portfolio of outstanding loans subject to the Company’s servicing agreements.

Prepayment rates–Prepayment rates are the Company’s estimate of the cumulative principal prepayments that will occur over the entire life of a loan as a percentage of the original principal amount of the loan. The assumption regarding cumulative prepayments impact the projected balances and expected terms of the loans, which are used to project future servicing revenues.

Significant Recurring Level 3 Fair Value Input Sensitivity

The following table presents the fair value sensitivity of loan servicing assets and liabilities to adverse changes in key assumptions. The fair value of loan servicing assets and liabilities is not sensitive to adverse changes in discount rates and prepayment rates as such changes would not result in a significant impact on the fair value as of December 31, 2021 and September 30, 2022, respectively.


	December 31,		September 30,
	2021		2022
Fair value of loan servicing assets	$	18,388	$	37,037
Expected market-servicing rates
10% market-servicing rates increase	(5,539)		(10,505)
20% market-servicing rates increase	(11,002)		(20,976)


	December 31,		September 30,
	2021		2022
Fair value of loan servicing liabilities	$	8,780	$	4,810
Expected market-servicing rates
10% market-servicing rates increase	5,357		2,836
20% market-servicing rates increase	10,788		5,712

Rollforward of Level 3 Fair Values

The following tables present a rollforward of the loan servicing assets and liabilities classified by the Company within Level 3 of the fair value hierarchy:


	Loan Servicing Assets		Loan Servicing Liabilities
Fair value at June 30, 2021	$	15,450	$	11,883
Sale of loans	4,904		2,783
Changes in fair value recorded in earnings	(7,974)		(7,478)
Fair value at September 30, 2021	$	12,380	$	7,188


	Loan Servicing Assets		Loan Servicing Liabilities
Fair value at December 31, 2020	$	6,831	$	8,254
Sale of loans	14,833		10,610
Changes in fair value recorded in earnings	(9,284)		(11,676)
Fair value at September 30, 2021	$	12,380	$	7,188


	Loan Servicing Assets		Loan Servicing Liabilities
Fair value at June 30, 2022	$	35,171	$	6,366
Sale of loans	6,048		9
Changes in fair value recorded in earnings	(4,182)		(1,565)
Fair value at September 30, 2022	$	37,037	$	4,810


	Loan Servicing Assets		Loan Servicing Liabilities
Fair value at December 31, 2021	$	18,388	$	8,780
Sale of loans	26,066		2,296
Changes in fair value recorded in earnings	(7,417)		(6,266)
Fair value at September 30, 2022	$	37,037	$	4,810

Trailing Fee Liabilities

The Company pays certain bank partners monthly trailing fees based on the amount and timing of principal and interest payments made by borrowers of the underlying loans. Significant inputs used for estimating the fair value of trailing fee liabilities included discount rates of 3.42% to 16.49% and credit risk rates of 0.08% to 55.79% as of December 31, 2021 and discount rates of 5.90% to 20.88% and credit risk rates of 0.01% to 93.09% as of September 30, 2022.

The fair value sensitivity of trailing fee liabilities to adverse changes in key assumptions would not result in a material impact on the Company’s financial position.

Rollforward of Level 3 Fair Values

The following tables include a rollforward of trailing fee liabilities classified by the Company within Level 3 of the fair value hierarchy:


	Trailing Fee Liabilities
Fair value at June 30, 2021	$	2,513
Issuances	1,148
Repayments and settlements	(350)
Changes in fair value recorded in earnings	23
Fair value at September 30, 2021	$	3,334


	Trailing Fee Liabilities
Fair value at December 31, 2020	$	1,276
Issuances	2,753
Repayments and settlements	(766)
Changes in fair value recorded in earnings	71
Fair value at September 30, 2021	$	3,334


	Trailing Fee Liabilities
Fair value at June 30, 2022	$	5,446
Issuances	618
Repayments and settlements	(816)
Changes in fair value recorded in earnings	(47)

Fair value at September 30, 2022	$	5,201


	Trailing Fee Liabilities
Fair value at December 31, 2021	$	4,315
Issuances	3,404
Repayments and settlements	(2,211)
Changes in fair value recorded in earnings	(307)

Fair value at September 30, 2022	$	5,201

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

+ References + Details