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Fair Value Measurement

12 Months Ended

Dec. 31, 2022

The following tables presents assets and liabilities measured at fair value:


	December 31, 2021
	Level 1		Level 2		Level 3		Total
Assets
Loans	$	—	$	—	$	252,477	$	252,477
Notes receivable and residual certificates	—		—		8,288		8,288
Loan servicing assets	—		—		18,388		18,388
Total assets	$	—	$	—	$	279,153	$	279,153
Liabilities
Loan servicing liabilities	$	—	$	—	$	8,780	$	8,780
Trailing fee liabilities	—		—		4,315		4,315
Total liabilities	$	—	$	—	$	13,095	$	13,095


	December 31, 2022
	Level 1		Level 2		Level 3		Total
Assets
Loans	$	—	$	—	$	1,010,421	$	1,010,421
Notes receivable and residual certificates	—		—		6,181		6,181
Loan servicing assets	—		—		36,467		36,467
Total assets	$	—	$	—	$	1,053,069	$	1,053,069
Liabilities
Loan servicing liabilities	$	—	$	—	$	3,968	$	3,968
Trailing fee liabilities	—		—		4,852		4,852
Total liabilities	$	—	$	—	$	8,820	$	8,820

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 years presented.

Loans

Loans included in the Company’s 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. Loan held-for-investment are generally held for research and development purposes, primarily in support of new products and expansion into new categories of borrowers. 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 consolidated balance sheets were classified as held-for-sale and held-for-investment,

respectively. As of December 31, 2022, $882.8 million and $127.6 million of loans held on the Company’s 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						December 31, 2022
	Minimum		Maximum		Weighted-Average (2)		Minimum		Maximum		Weighted-Average (2)
Discount rate	3.42	%	16.49	%	7.29	%	6.36	%	22.28	%	11.87	%
Credit risk rate (1)	0.08	%	55.79	%	17.98	%	0.01	%	93.09	%	16.93	%
Prepayment rate (1)	8.70	%	88.12	%	40.35	%	0.08	%	93.43	%	40.49	%

(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 related to Securitization Transactions section below for more information.

Significant Recurring Level 3 Fair Value Input Sensitivity

The below 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 2022, respectively.


	December 31,
	2021		2022
Fair value of loans	$	252,477	$	1,010,421
Discount rates
100 basis point increase	(3,392)		(11,979)
200 basis point increase	(6,709)		(23,720)
Expected credit loss rates on underlying loans
10% adverse change	(3,959)		(11,927)
20% adverse change	(7,927)		(23,852)
Expected prepayment rates
10% adverse change	(239)		(2,284)
20% adverse change	(512)		(4,530)

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 December 31, 2020	$	60,232	$	18,228	$	78,460

Purchases of loans(1)	219,128		159,398		378,526
Sale of loans(1)	(123,370)		(40,602)		(163,972)
Purchase of loans for immediate resale(1)	8,713,476		—		8,713,476
Immediate resale of loans(1)	(8,713,476)		—		(8,713,476)
Repayments received(1)	(10,578)		(22,612)		(33,190)
Changes in fair value recorded in earnings	(3,284)		(5,770)		(9,054)
Changes in accrued interest and other charges	557		1,150		1,707

Fair value at December 31, 2021	$	142,685	$	109,792	$	252,477
Reclassification of loans(1)	103,677		(103,677)		—
Purchases of loans(1)	1,807,787		149,344		1,957,131
Sale of loans(1)	(914,369)		—		(914,369)
Purchase of loans for immediate resale(1)	5,992,148		—		5,992,148
Immediate resale of loans(1)	(5,992,148)		—		(5,992,148)
Repayments received(1)	(180,135)		(15,194)		(195,329)
Changes in fair value recorded in earnings	(85,567)		(14,215)		(99,782)
Changes in accrued interest and other charges	8,732		1,561		10,293
Fair value at December 31, 2022	$	882,810	$	127,611	$	1,010,421

_________

(1) Represents the unpaid principal balance.

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 consolidated balance sheets:


	Loans				Loans > 90 Days Past Due
	December 31,		December 31,		December 31,		December 31,
	2021		2022		2021		2022
Outstanding principal balance	$	277,228	$	1,047,714	$	1,979	$	9,006
Net fair value and accrued interest adjustments	(24,751)		(37,293)		(1,692)		(7,006)
Fair value(1)	$	252,477	$	1,010,421	$	287	$	2,000

_________

(1) Includes $50.1 million and $397.7 million of auto loans as of December 31, 2021 and 2022, respectively, of which an immaterial amount is 90 days or more past due for each year 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 2022, the Company held notes receivable and residual certificates with an aggregate fair value of $8.3 million and $6.2 million, respectively within other assets on the Company’s consolidated balance sheets. The balances consist of securitization notes and residual certificates retained from securitization transactions.

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						December 31, 2022
	Minimum		Maximum		Weighted-Average (2)		Minimum		Maximum		Weighted-Average (2)
Notes receivable and residual certificates
Discount rate	4.96	%	15.72	%	6.78	%	8.42	%	22.27	%	12.79	%
Credit risk rate (1)	0.04	%	50.69	%	18.47	%	0.59	%	50.69	%	18.43	%
Prepayment rate (1)	15.60	%	36.08	%	27.82	%	10.90	%	88.73	%	42.66	%

_________

(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 27% decrease in the fair value of the residual certificates.

The fair value of the securities are 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 under a discounted cash flow methodology results in a decrease in fair value of the securities (including securitization notes and residual certificates) of 0.69% and 1.10% as of December 31, 2021 and 2022, respectively. On average, a hypothetical 200 basis point increase in discount rates results in a decrease in fair value of the securities (including securitization notes and residual certificates) of 1.37% and 2.18% as of December 31, 2021 and 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 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 December 31, 2020	$	19,074

Repayments and settlements	(11,458)
Changes in fair value recorded in earnings	672

Fair value at December 31, 2021	$	8,288
Residual certificates retained under unconsolidated securitization transaction	4,680
Repayments and settlements	(6,736)
Changes in fair value recorded in earnings	(51)
Fair value at December 31, 2022	$	6,181

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 rate. 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						December 31, 2022
	Minimum		Maximum		Weighted-Average (2)		Minimum		Maximum		Weighted-Average (2)
Discount rate	13.00	%	20.00	%	17.69	%	13.00	%	20.00	%	17.20	%
Credit risk rate (1)	0.03	%	52.78	%	18.36	%	0.03	%	91.76	%	16.22	%
Market-servicing rate (3)(4)(5)	0.62	%	3.73	%	0.62	%	0.62	%	3.72	%	0.62	%
Prepayment rate (1)	5.99	%	91.43	%	36.39	%	0.53	%	91.99	%	41.19	%

_________

(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 table below 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 as such changes would not result in a significant impact on the fair value as of December 31, 2021 and 2022, respectively.


	December 31,		December 31,
	2021		2022
Fair value of loan servicing assets	$	18,388	$	36,467
Expected market-servicing rates
10% market-servicing rates increase	(5,539)		(9,989)
20% market-servicing rates increase	(11,002)		(19,950)


	December 31,		December 31,
	2021		2022
Fair value of loan servicing liabilities	$	8,780	$	3,968
Expected market-servicing rates
10% market-servicing rates increase	5,357		2,303
20% market-servicing rates increase	10,788		4,640

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 December 31, 2020	$	6,831	$	8,254
Sale of loans	21,240		14,324
Changes in fair value recorded in earnings	(9,683)		(13,798)
Fair value at December 31, 2021	$	18,388	$	8,780
Sale of loans	31,041		2,302
Changes in fair value recorded in earnings	(12,962)		(7,114)
Fair value at December 31, 2022	$	36,467	$	3,968

Trailing Fee Liabilities

The Company pays certain lending 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 6.36% to 22.28% and credit risk rates of 0.01% to 93.09% as of December 31, 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 December 31, 2020	$	1,276
Issuances	4,275
Repayments and settlements	(1,240)
Changes in fair value recorded in earnings	4


Fair value at December 31, 2021	$	4,315
Issuances	3,898
Repayments and settlements	(3,001)
Changes in fair value recorded in earnings	(360)

Fair value at December 31, 2022	$	4,852

- 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.

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