18. Fair Value Measurements

The fair value of a financial instrument is the amount that would be received if an asset were to be sold or the amount that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date. The degree of judgment used in measuring the fair value of financial instruments generally correlates with the level of pricing observability. Financial instruments with quoted prices in active markets generally have more pricing observability and less judgment is used in measuring fair value. Conversely, financial instruments traded in other-than-active markets or that do not have quoted prices have less observability and are measured at fair value using valuation models or other pricing techniques that require more judgment. An other-than-active market is one in which there are few transactions, the prices are not current, price quotations vary substantially either over time or among market makers, or little information is released publicly for the asset or liability being valued. Pricing observability is affected by a number of factors, including the type of financial instrument, whether the financial instrument is listed on an exchange or traded over-the-counter or is new to the market and not yet established, the characteristics specific to the transaction, and general market conditions.

Management is responsible for the determination of the value of the financial assets and financial liabilities and the supporting methodologies and assumptions. Third-party valuation service providers are employed to gather, analyze, and interpret market information and derive fair values based upon relevant methodologies and assumptions for individual instruments. When the valuation service providers are unable to obtain sufficient market observable information upon which to estimate the fair value for a particular security, fair value is determined either by requesting brokers who are knowledgeable about these securities to provide a quote, which is generally non-binding, or by employing widely accepted internal valuation models.

Valuation service providers typically obtain data about market transactions and other key valuation model inputs from multiple sources and, through the use of widely accepted internal valuation models, provide a single fair value measurement for individual securities for which a fair value has been requested. The inputs used by the valuation service providers include, but are not limited to, market prices from recently completed transactions and transactions of comparable securities, interest rate yield curves, credit spreads, currency rates, and other market-observable information as of the measurement date as well as the specific attributes of the security being valued, including its term, interest rate, credit rating, industry sector, and other issue or issuer-specific information. When market transactions or other market observable data is limited, the extent to which judgment is applied in determining fair value is greatly increased. We assess the reasonableness of individual security values received from valuation service providers through various analytical techniques. We conduct price reviews for all assets. Assets that fall outside a price change tolerance are sent to our third-party valuation provider for further review. In addition, we may validate the reasonableness of fair values by comparing information obtained from the valuation service providers to other third-party valuation sources for selected securities.

FAIR VALUE HIERARCHY

We measure and classify assets and liabilities in the consolidated balance sheets in a hierarchy for disclosure purposes consisting of three “Levels” based on the observability of inputs available in the market place used to measure the fair values. In general, we determine the fair value measurements classified as Level 1 based on inputs utilizing quoted prices in active markets for identical assets or liabilities that we have the ability to access. We generally obtain market price data from exchange or dealer markets. We do not adjust the quoted price for such instruments.

We determine the fair value measurements classified as Level 2 based on inputs utilizing other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals.

Level 3 inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability.

In certain cases, the inputs we use to measure the fair value of an asset may fall into different levels of the fair value hierarchy. In such cases, we determine the level in the fair value hierarchy within which the fair value measurement in its entirety falls based on the lowest level input that is significant to the fair value measurement in its entirety. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.

The following table summarizes the fair values and carrying values of our financial instruments and indicates the fair value hierarchy based on the level of inputs we utilized to determine such fair values:

	Fair Value Measurements Using						Total		Total
							Fair		Carrying
(dollars in thousands)	Level 1		Level 2		Level 3		Value		Value

March 31, 2013

Assets
Cash and cash equivalents	$	1,608,702	$	-	$	-	$	1,608,702	$	1,608,702
Investment securities	284		609,599		29,807		639,690		639,690
Net finance receivables, less allowance for finance receivable losses	-		-		11,331,671		11,331,671		11,217,721
Note receivable from parent	-		537,989		-		537,989		537,989
Restricted cash	178,786		-		-		178,786		178,786
Other assets:
Commercial mortgage loans	-		-		100,125		100,125		109,566
Cross currency interest rate derivatives	-		14,049		-		14,049		14,049
Escrow advance receivable	-		-		18,140		18,140		18,140
Receivable from parent and affiliates	-		16,561		-		16,561		16,561

Liabilities
Long-term debt	$	-	$	13,380,346	$	-	$	13,380,346	$	12,387,034

December 31, 2012

Assets
Cash and cash equivalents	$	1,357,212	$	-	$	-	$	1,357,212	$	1,357,212
Investment securities	255		639,148		29,767		669,170		669,170
Net finance receivables, less allowance for finance receivable losses (a)	-		-		11,608,720		11,608,720		11,516,591
Note receivable from parent	-		537,989		-		537,989		537,989
Restricted cash (b)	113,703		-		-		113,703		113,703
Other assets:
Commercial mortgage loans	-		-		99,933		99,933		110,398
Cross currency interest rate derivatives	-		26,699		-		26,699		26,699
Escrow advance receivable (b)	-		-		18,520		18,520		18,520
Receivable from parent and affiliates (b)	-		16,196		-		16,196		16,196

Liabilities
Long-term debt	$	-	$	12,912,712	$	-	$	12,912,712	$	12,454,316
Payable to affiliate	-		30,750		-		30,750		30,750

(a) At December 31, 2012, the fair value of our net finance receivables, less allowance for finance receivable losses in the table above was previously incorrectly understated by $177.0 million and has been corrected.

(b) At December 31, 2012, restricted cash, escrow advance receivable, and receivable from parent and affiliates as presented in the table above were previously incorrectly excluded and have been added to the table above.

FAIR VALUE MEASUREMENTS – RECURRING BASIS

The following table presents information about our assets and liabilities measured at fair value on a recurring basis and indicates the fair value hierarchy based on the levels of inputs we utilized to determine such fair value:

	Fair Value Measurements Using						Total Carried
(dollars in thousands)	Level 1		Level 2		Level 3		At Fair Value

March 31, 2013

Assets
Cash and cash equivalents in mutual funds	$	1,113,743	$	-	$	-	$	1,113,743
Investment securities:
Bonds:
U.S. government and government sponsored entities	-		38,839		-		38,839
Obligations of states, municipalities, and political subdivisions	-		129,533		-		129,533
Corporate debt	-		251,502		13,877		265,379
RMBS	-		168,490		65		168,555
CMBS	-		15,209		2		15,211
CDO/ABS	-		6,026		13,172		19,198
Total	-		609,599		27,116		636,715
Other long-term investments (a)	-		-		1,340		1,340
Common stocks (b)	284		-		-		284
Total investment securities	284		609,599		28,456		638,339
Restricted cash in mutual funds	150,448		-		-		150,448
Other assets - cross currency interest rate derivatives	-		14,049		-		14,049
Total	$	1,264,475	$	623,648	$	28,456	$	1,916,579

December 31, 2012

Assets
Cash and cash equivalents in mutual funds (c)	$	630,227	$	-	$	-	$	630,227
Investment securities:
Bonds:
U.S. government and government sponsored entities	-		36,442		-		36,442
Obligations of states, municipalities, and political subdivisions	-		140,224		-		140,224
Corporate debt	-		274,272		13,417		287,689
RMBS	-		172,135		74		172,209
CMBS	-		12,899		153		13,052
CDO/ABS	-		3,176		13,392		16,568
Total	-		639,148		27,036		666,184
Other long-term investments (a)	-		-		1,380		1,380
Common stocks (b)	255		-		-		255
Total investment securities	255		639,148		28,416		667,819
Restricted cash in mutual funds (d)	93,781		-		-		93,781
Other assets - cross currency interest rate derivatives	-		26,699		-		26,699

Total	$	724,263	$	665,847	$	28,416	$	1,418,526

(a) Other long-term investments excludes our interest in a limited partnership of $0.6 million at March 31, 2013 and December 31, 2012 that we account for using the equity method.

(b) Common stocks excludes stocks not carried at fair value of $0.7 million at March 31, 2013 and December 31, 2012.

(c) At December 31, 2012, cash and cash equivalents in mutual funds measured at fair value on a recurring basis as presented in the table above, previously incorrectly excluded mutual funds of $565.3 million that were utilized for our daily liquidity needs and for principal and interest payments on our long-term debt. The cash and cash equivalents in mutual funds at December 31, 2012 has been added to the table above.

(d) At December 31, 2012, restricted cash in mutual funds measured at fair value on a recurring basis as presented in the table above were previously incorrectly excluded. Restricted cash in mutual funds at December 31, 2012 have been added to the table above.

We had no transfers between Level 1 and Level 2 during the three months ended March 31, 2013.

The following table presents changes in Level 3 assets and liabilities measured at fair value on a recurring basis for the three months ended March 31, 2013:

			Net gains (losses) included in:
									Purchases,
									sales,
	Balance at					Other			issues,			Transfers		Transfers		Balance
	beginning		Other			comprehensive			settlements			into		out of		at end of
(dollars in thousands)	of period		revenues			income (loss)			(a)			Level 3		Level 3		period

Three Months Ended
March 31, 2013

Investment securities:
Bonds:
Corporate debt	$	13,417	$	(169	)	$	510		$	119		$	-	$	-	$	13,877
RMBS	74		(34		)	25			-			-		-		65
CMBS	153		(8		)	6			(149		)	-		-		2
CDO/ABS	13,392		111			(109		)	(222		)	-		-		13,172
Total	27,036		(100		)	432			(252		)	-		-		27,116
Other long-term investments (b)	1,380		-			(40		)	-			-		-		1,340
Total investment securities	$	28,416	$	(100	)	$	392		$	(252	)	$	-	$	-	$	28,456

(a) “Purchases, sales, issues, and settlements” column only consist of settlements. There were no purchases, sales, or issues of investment securities for the three months ended March 31, 2013.

(b) Other long-term investments excludes our interest in a limited partnership of $0.6 million at March 31, 2013 that we account for using the equity method.

The following table presents changes in Level 3 assets and liabilities measured at fair value on a recurring basis for the three months ended March 31, 2012:

			Net gains (losses) included in:
									Purchases,
									sales,
	Balance at					Other			issues,			Transfers		Transfers		Balance
	beginning		Other			comprehensive			settlements			into		out of		at end of
(dollars in thousands)	of period		revenues			income (loss)			(a)			Level 3		Level 3		period

Three Months Ended
March 31, 2012

Investment securities:
Bonds:
Corporate debt	$	2,800	$	3		$	184		$	(2,987	)	$	-	$	-	$	-
RMBS	1,914		(4		)	(7		)	(55		)	-		-		1,848
CMBS	7,944		(4		)	601			(174		)	-		-		8,367
CDO/ABS	8,916		38			762			(104		)	-		-		9,612
Total	21,574		33			1,540			(3,320		)	-		-		19,827
Other long-term investments (b)	4,127		-			295			(936		)	-		-		3,486
Common stocks	3		(5		)	2			-			-		-		-
Total investment securities	$	25,704	$	28		$	1,837		$	(4,256	)	$	-	$	-	$	23,313

(a) “Purchases, sales, issues, and settlements” column only consist of settlements. There were no purchases, sales, or issues of investment securities for the three months ended March 31, 2012.

(b) Other long-term investments excludes our interest in a limited partnership of $1.4 million at March 31, 2012 that we account for using the equity method.

There were no unrealized gains or losses recognized in earnings on instruments held at March 31, 2013 or 2012.

We used observable and/or unobservable inputs to determine the fair value of positions that we have classified within the Level 3 category. As a result, the unrealized gains and losses for assets and liabilities within the Level 3 category presented in the Level 3 tables above may include changes in fair value that were attributable to both observable (e.g., changes in market interest rates) and unobservable (e.g., changes in unobservable long-dated volatilities) inputs.

The unobservable inputs and quantitative data used in our Level 3 valuations for our investment securities were developed and used in models created by our third-party valuation service providers. We applied the third party exception which allows us to omit certain quantitative disclosures about unobservable inputs for other long-term investments. As a result, the weighted average ranges of the inputs for these investment securities are not applicable in the following table.

Quantitative information about Level 3 inputs for our assets measured at fair value on a recurring basis for which information about the unobservable inputs is reasonably available to us at March 31, 2013 and December 31, 2012 is as follows:

			Range (Weighted Average)
	Valuation Technique(s)	Unobservable Input	March 31, 2013	December 31, 2012
Corporate debt	Discounted cash flows	Yield	2.67% - 7.35% (4.38%)	2.74% - 7.35% (4.45%)
Other long-term investments	Discounted cash flows and indicative valuations	Historical costs Nature of investment Local market conditions Comparables Operating performance Recent financing activity	N/A*	N/A*

* Not applicable.

The fair values of the assets using significant unobservable inputs are sensitive and can be impacted by significant increases or decreases in any of those inputs. Level 3 broker-priced instruments (RMBS, CMBS, and CDO/ABS) are excluded from the table above because the unobservable inputs are not reasonably available to us.

Our RMBS, CMBS, and CDO/ABS securities have unobservable inputs that are reliant on and sensitive to the quality of their underlying collateral. The inputs, although not identical, have similar characteristics and interrelationships. Generally a change in the assumption used for the probability of default is accompanied by a directionally similar change in the assumption used for the loss severity and a directionally opposite change in the assumption used for prepayment speeds. An improvement in the workout criteria related to the restructured debt and/or debt covenants of the underlying collateral may lead to an improvement in the cash flows and have an inverse impact on other inputs, specifically a reduction in the amount of discount applied for marketability and liquidity, making the structured bonds more attractive to market participants.

FAIR VALUE MEASUREMENTS – NON-RECURRING BASIS

We measure the fair value of certain assets on a non-recurring basis when events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable.

Assets measured at fair value on a non-recurring basis on which we recorded impairment charges were as follows:

	Fair Value Measurements Using
(dollars in thousands)	Level 1		Level 2		Level 3		Total

March 31, 2013

Assets
Real estate owned	$	-	$	-	$	82,803	$	82,803
Commercial mortgage loans	-		-		19,018		19,018
Total	$	-	$	-	$	101,821	$	101,821

December 31, 2012

Assets
Real estate owned	$	-	$	-	$	98,379	$	98,379
Commercial mortgage loans*	-		-		19,037		19,037
Total	$	-	$	-	$	117,416	$	117,416

* At December 31, 2012, commercial mortgage loans as presented in the table above were previously incorrectly excluded and have been added to the table above.

Net impairrment charges recorded on assets measured at fair value on a non-recurring basis were as follows:

(dollars in thousands)
Three Months Ended March 31,	2013			2012

Assets
Real estate owned	$	7,880		$	13,324
Commercial mortgage loans*	(128		)	866
Finance receivables held for sale	-			1,371
Total	$	7,752		$	15,561

* For the three months ended March 31, 2012, commercial mortgage loans as presented in the table above were previously incorrectly excluded and have been added to the table above.

In accordance with the authoritative guidance for the accounting for the impairment of long-lived assets, we wrote down certain real estate owned reported in our real estate business segment to their fair value during for the three months ended March 31, 2013 and 2012 and recorded the writedowns in other revenues. The fair values disclosed in the tables above are unadjusted for transaction costs as required by the authoritative guidance for fair value measurements. The amounts recorded on the balance sheet are net of transaction costs as required by the authoritative guidance for accounting for the impairment of long-lived assets.

In accordance with the authoritative guidance for the accounting for the impairment of commercial mortgage loans, we recorded allowance adjustments on certain impaired commercial mortgage loans to record their fair value for the three months ended March 31, 2013 and 2012 and recorded the net impairments in investment revenues.

In accordance with the authoritative guidance for the accounting for the impairment of finance receivables held for sale, we wrote down certain finance receivables held for sale reported in our real estate business segment to their fair value for the three months ended March 31, 2012 and recorded the writedowns in other revenues.

The unobservable inputs and quantitative data used in our Level 3 valuations for our real estate owned, finance receivables held for sale, and commercial mortgage loans were developed and used in models created by our third-party valuation service providers or valuations provided by external parties. We applied the third party exception which allows us to omit certain quantitative disclosures about unobservable inputs. As a result, the weighted average ranges of the inputs are not applicable in the following table.

Quantitative information about Level 3 inputs for our assets measured at fair value on a non-recurring basis at March 31, 2013 and December 31, 2012 is as follows:

			Range (Weighted Average)
	Valuation Technique(s)	Unobservable Input	March 31, 2013	December 31, 2012
Real estate owned	Market approach	Third-party valuation	N/A*	N/A*
Commercial mortgage loans	Market approach	Local market conditions Nature of investment Comparable property sales Operating performance	N/A*	N/A*
Finance receivables held for sale	Market approach	Negotiated prices with prospective purchasers	N/A*	N/A*

* Not applicable.

FAIR VALUE MEASUREMENTS – VALUATION METHODOLOGIES AND ASSUMPTIONS

We used the following methods and assumptions to estimate fair value.

Cash and Cash Equivalents

The carrying amount reported in our condensed consolidated balance sheets approximates fair value.

Investment Securities

We utilized third-party valuation service providers to measure the fair value of our investment securities (which consist primarily of bonds). Whenever available, we obtained quoted prices in active markets for identical assets at the balance sheet date to measure investment securities at fair value. We generally obtained market price data from exchange or dealer markets.

We estimated the fair value of fixed maturity investment securities not traded in active markets by referring to traded securities with similar attributes, using dealer quotations and a matrix pricing methodology, or discounted cash flow analyses. This methodology considers such factors as the issuer’s industry, the security’s rating and tenor, its coupon rate, its position in the capital structure of the issuer, yield curves, credit curves, prepayment rates and other relevant factors. For fixed maturity investment securities that are not traded in active markets or that are subject to transfer restrictions, we adjusted the valuations to reflect illiquidity and/or non-transferability. Such adjustments are generally based on available market evidence. In the absence of such evidence, management’s best estimate is used.

Finance Receivables

The fair value of net finance receivables, less allowance for finance receivable losses, both non-impaired and purchased credit impaired, were determined using discounted cash flow methodologies. The application of these methodologies required us to make certain judgments and estimates based on our perception of market participant views related to the economic and competitive environment, the characteristics of our finance receivables, and other similar factors. The most significant judgments and estimates made relate to prepayment speeds, default rates, loss severity, and discount rates. The degree of judgment and estimation applied was significant in light of the current capital markets and, more broadly, economic environments. Therefore, the fair value of our finance receivables could not be determined with precision and may not be realized in an actual sale. Additionally, there may be inherent weaknesses in the valuation methodologies we employed, and changes in the underlying assumptions used could significantly affect the results of current or future values.

Finance Receivables Held for Sale

We determined the fair value of finance receivables held for sale that were originated as held for investment based on negotiations with prospective purchasers (if any) or by using projected cash flows discounted at the weighted-average interest rates offered by us in the market for similar finance receivables. We based cash flows on contractual payment terms adjusted for estimates of prepayments and credit related losses.

Note Receivable from Parent

The fair value of the note receivable from parent approximated the fair value because the note is payable on a demand basis prior to its due date on May 31, 2022 and the interest rate on this note adjusts with changing market interest rates.

Restricted Cash

The carrying amount reported in our condensed consolidated balance sheets approximates fair value.

Commercial Mortgage Loans

We utilized third-party valuation service providers to estimate the fair value of commercial mortgage loans using projected cash flows discounted at an appropriate rate based upon market conditions.

Real Estate Owned

We initially based our estimate of the fair value on independent third-party valuations at the time we took title to real estate owned. Subsequent changes in fair value are based upon independent third-party valuations obtained periodically to estimate a price that would be received in a then current transaction to sell the asset.

Derivatives

Our derivatives are not traded on an exchange. The valuation model used by our third-party valuation service provider to calculate fair value of our derivative instruments includes a variety of observable inputs, including contractual terms, interest rate curves, foreign exchange rates, yield curves, credit curves, measure of volatility, and correlations of such inputs. Valuation adjustments may be made in the determination of fair value. These adjustments include amounts to reflect counterparty credit quality and liquidity risk, as well as credit and market valuation adjustments. The credit valuation adjustment adjusts the valuation of derivatives to account for nonperformance risk of our counterparty with respect to all net derivative assets positions. The credit valuation adjustment also accounts for our own credit risk in the fair value measurement of all net derivative liabilities’ positions, when appropriate. The market valuation adjustment adjusts the valuation of derivatives to reflect the fact that we are an “end-user” of derivative products. As such, the valuation is adjusted to take into account the bid-offer spread (the liquidity risk), as we are not a dealer of derivative products.

Escrow Advance Receivable

The carrying amount reported in our condensed consolidated balance sheets approximates fair value.

Receivable from Parent and Affiliates

The carrying amount reported in our condensed consolidated balance sheets approximates fair value.

Long-term Debt

Where market-observable prices are not available, we estimated the fair values of long-term debt using projected cash flows discounted at each balance sheet date’s market-observable implicit-credit spread rates for our long-term debt and adjusted for foreign currency translations.

Payable to Affiliate

The fair value of the payable to affiliate approximates the carrying value due to its short-term nature.