Fair Value of Assets and Liabilities

We have financial assets and liabilities subject to fair value measurement, which include our loan receivables held for sale, finance charge reversal ("FCR") liability, and servicing liabilities associated with transfers of rights to previously charged-off loan receivables ("Charged-Off Receivables").

We apply the market approach, which uses observable prices and other relevant information that is generated by market transactions involving identical or comparable assets or liabilities, to value our loan receivables held for sale and the income approach, which uses valuation techniques to convert future amounts to a single, discounted present value amount, to value our FCR liability and servicing liabilities.

Loan receivables held for sale

Loan receivables held for sale are recorded at the lower of cost or fair value and are, therefore, measured at fair value on a nonrecurring basis. For our loan receivables held for sale, fair value approximates par value, as we have consistently sold loans for the full current balance in historical and current period transactions with federally insured banks that originate loans under the GreenSky program and any other lenders with respect to those loans (referred to henceforth as "Bank Partners").

Loan receivables held for sale are classified within Level 2 of the fair value hierarchy, as the primary component of the price is obtained from observable values of loan receivables with similar terms and characteristics sold to our Bank Partners. We have the ability to access this market, and it is the market into which these loan receivables are typically sold. Refer to Note 4 for additional information on our loan receivables held for sale.

Finance charge reversals

Our Bank Partners offer certain loan products that have a feature whereby the account holder is provided a promotional period to repay the loan principal balance in full without incurring a finance charge. For these loan products, we bill interest each month throughout the promotional period and, under the terms of the contracts with our Bank Partners, we are obligated to return this billed interest to the Bank Partners if an account holder pays off the loan balance in full within the promotional period. Therefore, the monthly process of billing interest on deferred loan products triggers a potential future FCR liability for the Company. The FCR component of our Bank Partner contracts qualifies as an embedded derivative.

The FCR liability is carried at fair value on a recurring basis in the Unaudited Consolidated Balance Sheets and is estimated based on historical experience and management’s expectation of future FCR. The FCR liability is classified within Level 3 of the fair value hierarchy, as the primary component of the fair value is obtained from unobservable inputs based on the Company’s data, reasonably adjusted for assumptions that would be used by market participants.

The FCR liability is not designated as a hedge for accounting purposes and, as such, changes in its fair value are recorded within cost of revenue in the Unaudited Consolidated Statements of Operations.

Charged-off receivables

Periodically, we transfer our rights to certain Charged-Off Receivables in exchange for a cash payment based on the expected recovery rate of such loan receivables, which consist primarily of previously charged-off Bank Partner loans. We have no continuing involvement with these Charged-Off Receivables other than performing reasonable servicing and collection efforts on behalf of the third parties and Bank Partners that purchased the Charged-Off Receivables. The proceeds from transfers of Charged-Off Receivables attributable to Bank Partner loans are recognized on a collected basis as reductions to cost of revenue, which reduces the fair value adjustment to the FCR liability in the period of transfer. The following table presents details of Charged-Off Receivable transfers during the periods indicated. There were no transfers of Charged-Off Receivables during the three or six months ended June 30, 2017.



	Aggregate Unpaid Balance						Proceeds
	Bank Partner loans		Loan receivables held for sale		Total⁽¹⁾		Bank Partner loans		Loan receivables held for sale		Total
Three months ended June 30, 2018	$	37,469	$	124	$	37,593	$	5,021	$	17	$	5,038
Six months ended June 30, 2018	74,895		1,283		76,178		10,000		171		10,171


⁽¹⁾	During the three and six months ended June 30, 2018, $3,461 and $6,680, respectively, of the aggregate unpaid balance on cumulative transferred Charged-Off Receivables were recovered through our servicing efforts on behalf of our Charged-Off Receivables investors.

Financial guarantee

Under the terms of the contracts with our Bank Partners, we provide limited protection in the event of excessive Bank Partner portfolio credit losses and record a financial guarantee liability at fair value based on historical experience and the amount of current customer delinquencies expected to convert into Bank Partner portfolio credit losses. Refer to Note 12 for additional information.

Servicing liabilities

Based on our election to adopt the fair value method, our servicing liabilities are carried at fair value on a recurring basis within other liabilities in the Unaudited Consolidated Balance Sheets and are estimated using a discounted cash flow model. Servicing liabilities are classified within Level 3 of the fair value hierarchy, as the primary component of the fair value is obtained from unobservable inputs based on peer market data, reasonably adjusted for assumptions that would be used by market participants to service our transferred Charged-Off Receivables portfolios, for which market data is not available. Changes in the fair value of our servicing liabilities are recorded within other gains/(losses) in the Unaudited Consolidated Statements of Operations.

The following table summarizes, by level within the fair value hierarchy, the carrying amounts and estimated fair values of our assets and liabilities measured at fair value on a recurring or nonrecurring basis or disclosed, but not carried, at fair value in the Unaudited Consolidated Balance Sheets as of the periods presented. There were no transfers into, out of, or between levels within the fair value hierarchy during any of the periods presented. Refer to Note 4, Note 7 and Note 8 for additional information on these assets and liabilities.



	Level	June 30, 2018				December 31, 2017
	Level	Carrying Value		Fair Value		Carrying Value		Fair Value

Assets:
Loan receivables held for sale, net⁽¹⁾	2	$	43,489	$	44,294	$	73,606	$	74,190
Liabilities:
Finance charge reversal liability⁽²⁾	3	$	107,047	$	107,047	$	94,148	$	94,148
Servicing liabilities⁽²⁾	3	2,272		2,272		2,071		2,071
Term loan⁽³⁾	2	387,979		398,037		338,263		345,820


⁽¹⁾	Measured at fair value on a nonrecurring basis.


⁽²⁾	Measured at fair value on a recurring basis. Servicing liabilities are presented within other liabilities in the Unaudited Consolidated Balance Sheets.

⁽³⁾

Disclosed, but not carried, at fair value. The amounts disclosed for June 30, 2018, relate to the modified term loan and amounts disclosed for December 31, 2017, relate to the original term loan. Refer to Note 7 for additional information. The carrying value of our term loan is net of unamortized debt discount and debt issuance costs. The fair value of our term loan was determined using a discounted cash flow model based on observable market factors (such as changes in credit spreads for comparable benchmark companies) and credit factors specific to us.

The following table presents the (increases)/decreases in fair value and Unaudited Consolidated Statements of Operations locations related to our liabilities that are measured at fair value on a recurring basis during the following periods.



	Unaudited Statements of Operations Location	Three Months Ended June 30,						Six Months Ended June 30,
	Unaudited Statements of Operations Location	2018			2017			2018			2017

FCR liability	Cost of revenue	$	(19,226	)	$	(11,980	)	$	(40,736	)	$	(25,449	)
Servicing liabilities	Other gains/(losses)	(85		)	—			(201		)	—

The cash flow impacts of our liabilities that are measured at fair value on a recurring basis are included within net cash provided by operating activities in the Unaudited Consolidated Statements of Cash Flows.

Finance charge reversals

The following table reconciles the beginning and ending fair value measurements of our FCR liability, which is classified as Level 3 within the fair value hierarchy due to the use of unobservable inputs, during the periods indicated.



	Three Months Ended June 30,						Six Months Ended June 30,
	2018			2017			2018			2017

Beginning balance	$	100,913		$	73,181		$	94,148		$	68,064
Receipts⁽¹⁾	33,742			23,920			61,835			44,339
Settlements⁽²⁾	(46,834		)	(32,762		)	(89,672		)	(61,533		)
Fair value changes recognized in cost of revenue⁽³⁾	19,226			11,980			40,736			25,449
Ending balance	$	107,047		$	76,319		$	107,047		$	76,319

⁽¹⁾

Represents cash received from deferred payment loans during the promotional period (incentive payments) as well as the proceeds received from transferring our rights to Charged-Off Receivables attributable to previously charged-off Bank Partner loans. We consider all monthly incentive payments from Bank Partners during the period to be related to billed finance charges on deferred interest products until monthly incentive payments exceed total billed finance charges on deferred products, which did not occur during any of the periods presented.


⁽²⁾	Represents the reversal of previously billed finance charges associated with deferred payment loan principal balances that paid off within the promotional period.


⁽³⁾	A fair value adjustment is made based on the expected reversal percentage of billed finance charges (expected settlements), which is estimated at each reporting period.

The following table presents the estimated reversal rate for billed interest on deferred loan products, which is the significant unobservable input used to value the Level 3 FCR liability, as of the dates indicated.



Reversal rate	June 30, 2018		December 31, 2017
Reversal rate	June 30, 2018		December 31, 2017

Range	86.0% - 98.3%		85.5% – 98.0%
Weighted average	89.7	%	89.0	%

The following table demonstrates the impact on the fair value of FCR assuming a 100 basis points increase or decrease in the reversal rate assumption, while holding all other inputs constant, as of the dates indicated.



Reversal rate sensitivity	Increase/(Decrease) in Fair Value of FCR Liability
	June 30, 2018			December 31, 2017
	June 30, 2018			December 31, 2017

+ 100 basis points	$	1,932		$	1,586
- 100 basis points	$	(1,833	)	$	(1,524	)

Servicing liabilities

Significant assumptions used in valuing our servicing liabilities were as follows:


•	Cost of servicing: The cost of servicing represents the servicing rate a willing market participant would require to service loans with similar characteristics as the Charged-Off Receivables.


•	Discount rate: The discount rate reflects the time value of money adjusted for a risk premium and is within an observable range based on peer market data.


•	Recovery period: Our recovery period was determined based on a reasonable recovery period for loans of this size and characteristics based on historical experience. We assumed that collection efforts for these loans will cease after five years, and the run-off of the portfolio will follow a straight-line methodology, adjusted for actual cash recoveries over time.

The following table reconciles the beginning and ending fair value measurements of our servicing liabilities associated with transferring our rights to Charged-Off Receivables, which are classified as Level 3 within the fair value hierarchy due to the use of unobservable inputs, during the periods presented. There were no such servicing liabilities during the three and six months ended June 30, 2017.



	Three Months Ended June 30, 2018			Six Months Ended June 30, 2018

Beginning balance	$	2,187		$	2,071
Initial obligation from transfer of Charged-Off Receivables⁽¹⁾	450			911
Fair value changes recognized in other gains/(losses)
Change in inputs or assumptions used in the valuation model	—			—
Other changes in fair value⁽²⁾	(365		)	(710		)
Ending balance	$	2,272		$	2,272


⁽¹⁾	Recognized in other gains/(losses).


⁽²⁾	Represents the reduction of our servicing liability due to the passage of time and collection of loan payments.

The following table presents quantitative information about the significant unobservable inputs used to value the Level 3 servicing liabilities as of the dates presented.



Input	June 30, 2018				December 31, 2017
Input	Range		Weighted Average		Range		Weighted Average

Cost of servicing (basis points)	62.5		62.5		62.5		62.5
Discount rate	18.0	%	18.0	%	18.0	%	18.0	%
Recovery period (years)	4.1 - 4.9		4.4		4.6 – 4.9		4.8

The following table demonstrates the impact on the fair value of servicing liabilities assuming hypothetical changes in certain inputs, while holding all other inputs constant as of the dates presented.



	Increase/(Decrease) in Fair Value of Servicing Liabilities
	June 30, 2018			December 31, 2017

Cost of servicing sensitivity:
Increase of 10 basis points	$	364		$	331
Decrease of 10 basis points	(364		)	(331		)
Discount rate sensitivity:
Increase of 1%	(26		)	(25		)
Decrease of 1%	27			26
Recovery period sensitivity:
Increase of one year	380			316
Decrease of one year	(422		)	(351		)