Notes Receivable and Allowances for Loan Losses

9 Months Ended

Apr. 30, 2024

Notes Receivable and Allowances for Loan Losses


4. Notes Receivable and Allowances for Loan Losses

As of April 30, 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. We classify loans as notes receivable held for investment when we have both the intent and ability to hold until maturity or payoff. We classify loans as notes receivable held for sale when 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. A loan that is initially designated as held for sale or held for investment may be reclassified when our intent for that loan changes. When a loan held for investment is reclassified to held for sale and recorded at the lower of amortized cost or fair value, the related allowance for loan loss for that loan is released, and any adjustment to record the loan at the lower of amortized cost or fair value is recorded.


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 nine months ended April 30, 2024 and 2023, we purchased term loans from our originating bank partner with principal balances in the amount of $1.2 billion and $103 million, respectively. As of April 30, 2024, we had commitments to purchase $22 million in term loans that were originated on or prior to April 30, 2024.

The term loans are not secured and are recorded at amortized cost, net of allowances for loan losses. As of April 30, 2024 and July 31, 2023, the net notes receivable balance for term loans to small businesses was $820 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 April 30, 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 term loans on nonaccrual status and stop accruing interest revenue. Term 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 term 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 April 30, 2024 and July 31, 2023, the net notes receivable balance for refund advance loans was $12 million and $5 million, respectively. 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 April 30, 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 April 30, 2024, the remaining commitment to sell term loans under this arrangement was $57 million.

Notes receivable held for sale are recorded at the lower of amortized cost or fair value determined on an individual loan basis. To determine fair value, we utilize a cash flow methodology, taking into account estimated timing and expected selling prices. As of April 30, 2024, the balance of loans held for sale was $7 million and is included in notes receivable held for sale on our condensed consolidated balance sheets. Total sales of term loans during the nine months ended April 30, 2024 were $193 million. For the three and nine months ended April 30, 2024, gains on sales of loans were not material.