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Notes Receivable and Allowances for Loan Losses | 6 Months Ended
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Jan. 31, 2024
Receivables [Abstract] |
Notes Receivable and Allowances for Loan Losses |
4. Notes Receivable and Allowances for Loan Losses
As of January 31, 2024, our notes receivable portfolio consisted of notes receivable held for investment, including term loans to small businesses and refund advance loans to consumers, and notes receivable held for sale, including term loans to small businesses.
Notes Receivable Held for Investment
Notes receivable that we have the intent and ability to hold until maturity are classified as notes receivable held for investment. Term loans to small businesses. We provide financing to small businesses via term loans that we originate directly or through an originating bank partner. During the six months ended January 31, 2024 and 2023, we purchased loans from our originating bank partner with principal balances in the amount of $748 million and $64 million, respectively. As of January 31, 2024, we had commitments to purchase $13 million in loans that were originated on or prior to January 31, 2024. The term loans are not secured and are recorded at amortized cost, net of allowances for loan losses. As of January 31, 2024 and July 31, 2023, the net notes receivable balance for term loans to small businesses was $807 million and $757 million, respectively. The current portion is included in notes receivable held for investment and the long-term portion is included in other assets on our condensed consolidated balance sheets. We maintain an allowance for loan losses to reserve for potentially uncollectible notes receivable. We evaluate the creditworthiness of our term loan portfolio on a pooled basis due to its composition of loans with similar general credit risk and characteristics and apply a loss rate at the time of loan origination. The allowance is subjective and requires management estimates. The loss rate and underlying probability of default methodology are updated periodically to reflect factors such as actual loan performance, changes to assumptions, portfolio growth, our current credit policies, changes to our applicant base, and macroeconomic conditions. Factors taken into consideration in the methodology include historical performance, customer creditworthiness, changes in the size and composition of the loan portfolio, delinquency levels, and actual credit loss experience. We use empirical data and management judgment to estimate losses for new credit tests or products for which we do not have enough history. We make judgments about the known and inherent risks in the loan portfolio, adverse situations that may affect borrowers’ ability to repay, and current and future economic conditions. When we determine that amounts are uncollectible, we write them off against the allowance. As of January 31, 2024 and July 31, 2023, the allowances for loan losses on term loans to small businesses were not material. We consider a loan to be delinquent when the payments are one day past due. We place delinquent loans on nonaccrual status and stop accruing interest revenue. Loans are returned to accrual status if they are brought current or have performed in accordance with the contractual terms for a reasonable period of time and, in our judgment, will continue to make periodic principal and interest payments as per contractual terms. Past due amounts were not material for all periods presented. Interest revenue is earned on loans originated and purchased and held for investment in accordance with the specified period of time and defined interest rate noted in the loan contract. Interest revenue is recorded net of amortized direct origination costs and is included in service revenue in our condensed consolidated statements of operations. Interest revenue was not material for all periods presented. Refund Advance Loans. Refund advance loans are loans available to eligible TurboTax customers based on a customer's anticipated income tax refund, at no cost to the customer. The loans are repaid from the customer's income tax refund, which is generally received within three to four weeks after acceptance of the customer's income tax return by the IRS. We partner with a third-party issuing bank to originate the loans and subsequently purchase full participating interests in those loans. The refund advance loans are not secured and are recorded at amortized cost, net of an allowance for loan losses. As of January 31, 2024 and July 31, 2023, the net notes receivable balance for refund advance loans was $329 million and $5 million, respectively. As of January 31, 2024, we had commitments to purchase $70 million in loans that were originated on or prior to January 31, 2024. We maintain an allowance for loan losses to reserve for potentially uncollectible loans. We estimate the allowance based on the expected funding of refunds by the IRS using historical trends. When we determine that any amounts are uncollectible, we write them off against the allowance. As of January 31, 2024 and July 31, 2023, the allowance for loan losses on refund advance loans was not material.
Notes Receivable Held for Sale
Term loans to small businesses. We have a forward flow arrangement with an institutional investor. Pursuant to this arrangement, we have a commitment to sell to the institutional investor a minimum of $250 million in participation interests in unsecured term loans purchased or made to small businesses over 18 months, subject to certain eligibility criteria. As of January 31, 2024, the remaining commitment to sell loans under this arrangement was $176 million. Term loans to small businesses originated or purchased with the intent to sell are considered notes receivable held for sale. We have the intent and ability to sell substantially all of our rights, title, and interests in these qualified loans to a third-party investor after origination or purchase. A loan that is initially designated as held for sale or held for investment may be reclassified when our intent for that loan changes. Notes receivable held for sale are recorded at the lower of cost or fair value until the loans are sold. To determine fair value, we utilize a cash flow methodology, taking into account estimated timing and expected selling prices. As of January 31, 2024, the balance of loans held for sale was $21 million and is included in notes receivable held for sale on our condensed consolidated balance sheets. Total sales of term loans during the six months ended January 31, 2024 were $74 million.

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