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Fair Value Measurement | 3 Months Ended
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Mar. 31, 2021
Fair Value Disclosures [Abstract] |
Fair Value Measurement | Fair Value Measurement The following table presents assets and liabilities measured at fair value and categorized as Level 3 in the fair value hierarchy:
|  | December 31, |  | March 31,
|  | 2020 |  | 2021
Assets |  |  |  |
Loans |  | $ | 78,460 |  |  | $ | 57,189 |
Notes receivable and residual certificates |  | 19,074 |  |  | 16,033 |
Loan servicing assets |  | 6,831 |  |  | 8,734 |
Total assets |  | $ | 104,365 |  |  | $ | 81,956 |
Liabilities |  |  |  |
Loan servicing liabilities |  | $ | 8,254 |  |  | $ | 10,853 |
Trailing fee liabilities |  | 1,276 |  |  | 1,775 |
Total liabilities |  | $ | 9,530 |  |  | $ | 12,628 |
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, other assets, 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 periods presented. Loans Loans included in the Company’s condensed consolidated balance sheets are classified as either held-for-sale or held-for-investment. The Company reclassified loans held by the warehouse entities from held-for-investment to held-for-sale as of January 1, 2020, due to the Company’s intent to sell the loans prior to maturity and increasing evidence of their marketability. Other loans held on the Company’s condensed consolidated balance sheets retained their classification as held-for-investment. These loans include loans which do not satisfy the warehouse requirements and loans held in the consolidated securitizations. The following table presents the fair value of classes of loans held by the Company:
| December 31, |  | March 31,
| 2020 |  | 2021
Loans held-for-sale | $ | 60,232 |  |  | $ | 28,794 |
Loans held-for-investment | 18,228 |  |  | 28,395 |
Total | $ | 78,460 |  |  | $ | 57,189 |
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, which was immaterial as of December 31, 2020 and March 31, 2021. For the three months ended March 31, 2020 and 2021, the Company elected the measurement alternative under Topic 810, Consolidation, and maximizes the use of observable inputs to estimate the fair value of the financial assets and liabilities of consolidated securitization entities. Under the measurement alternative, the Company measures the financial assets, which consist of held-for-investment and held-for-sale loans in the condensed consolidated balance sheets, and financial liabilities, which consist of securitization notes and residual certificates issued to institutional investors, included in payable to securitization note holders and residual certificate holders in the condensed consolidated balance sheets, using the more observable of the fair value of the financial assets and liabilities. The Company determined the fair value of the amounts payable to securitization note holders and residual certificate holders is more observable than that of the loans. The securitization notes and residual certificates are measured at fair value, and the loans are measured based on the sum of the fair value of the securitization notes and residual certificates, with changes in fair value included in the condensed consolidated statements of operations and comprehensive income. 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, 2020 |  | March 31, 2021
| Minimum |  | Maximum |  | Weighted-Average (2) |  | Minimum |  | Maximum |  | Weighted-Average (2)
Discount rate | 6.80 | % |  | 16.99 | % |  | 7.44 | % |  | 3.52 | % |  | 16.60 | % |  | 6.74 | %
Credit risk rate (1) | 0.36 | % |  | 52.31 | % |  | 19.82 | % |  | 0.21 | % |  | 52.31 | % |  | 23.09 | %
Prepayment rate (1) | 11.64 | % |  | 78.36 | % |  | 31.03 | % |  | 12.69 | % |  | 78.53 | % |  | 33.68 | %
(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 and Liabilities 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, 2020 and March 31, 2021, respectively. The estimated fair value of these loans is not sensitive to adverse changes in expected prepayment rates as such changes would not result in a significant impact on the fair value in either periods.
| December 31, |  | March 31,
| 2020 |  | 2021
Fair value of loans | $ | 78,460 |  |  | $ | 57,189 |
Discount rates |  |  |
100 basis point increase | (979) |  |  | (714) |
200 basis point increase | (1,939) |  |  | (1,415) |
Expected credit loss rates on underlying loans |  |  |
10% adverse change | (1,303) |  |  | (1,087) |
20% adverse change | (2,611) |  |  | (2,126) |
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 |  | Loans Held-for- Investment (Securitized) |  | Total
Fair value at December 31, 2019 | $ | — |  |  | $ | 141,555 |  |  | $ | 90,750 |  |  | $ | 232,305 |
Reclassification of loans from HFI to HFS | 125,297 |  |  | (125,297) |  |  | — |  |  | — |
Purchases of loans | 97,924 |  |  | 2,755 |  |  | — |  |  | 100,679 |
Sale of loans | (94,949) |  |  | — |  |  | — |  |  | (94,949) |
Purchase of loans for immediate resale to investors | 848,540 |  |  | — |  |  | — |  |  | 848,540 |
Immediate resale to investors | (848,540) |  |  | — |  |  | — |  |  | (848,540) |
Repayments received | (6,446) |  |  | (1,311) |  |  | (15,273) |  |  | (23,030) |
Changes in fair value recorded in earnings | (5,281) |  |  | (1,019) |  |  | (8,143) |  |  | (14,443) |
Other changes | (34) |  |  | 75 |  |  | (2) |  |  | 39 |
Fair value at March 31, 2020 | $ | 116,511 |  |  | $ | 16,758 |  |  | $ | 67,332 |  |  | $ | 200,601 |
| Loans Held-for- Sale |  | Loans Held-for-Investment |  | Loans Held-for- Investment (Securitized) |  | Total
Fair value at December 31, 2020 | $ | 60,232 |  |  | $ | 18,228 |  |  | $ | — |  |  | $ | 78,460 |
Reclassification of loans from HFI to HFS | (26) |  |  | 26 |  |  | — |  |  | — |
Purchases of loans | 18,240 |  |  | 12,947 |  |  | — |  |  | 31,187 |
Sale of loans | (46,469) |  |  | — |  |  | — |  |  | (46,469) |
Purchase of loans for immediate resale to investors | 1,294,634 |  |  | — |  |  | — |  |  | 1,294,634 |
Immediate resale to investors | (1,294,634) |  |  | — |  |  | — |  |  | (1,294,634) |
Repayments received | (3,310) |  |  | (2,329) |  |  | — |  |  | (5,639) |
Changes in fair value recorded in earnings | 357 |  |  | (558) |  |  | — |  |  | (201) |
Other changes | (230) |  |  | 81 |  |  | — |  |  | (149) |
Fair value at March 31, 2021 | $ | 28,794 |  |  | $ | 28,395 |  |  | $ | — |  |  | $ | 57,189 |
Assets related to Securitization Transactions As of December 31, 2020 and March 31, 2021, the Company held notes receivable and residual certificates with an aggregate fair value of $19.1 million and $16.0 million, respectively. The balances consist of securitization notes and residual certificates corresponding to the 5% economic risk retention the Company is required to maintain as the retaining sponsor of the unconsolidated securitizations. Valuation Methodology The discounted cash flow methodology is used to estimate the fair value of notes receivable and residual certificates, using 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, 2020 |  | March 31, 2021
| Minimum |  | Maximum |  | Weighted-Average (2) |  | Minimum |  | Maximum |  | Weighted-Average (2)
Notes receivable and residual certificates |  |  |  |  |  |  |  |  |  |  |
Discount rate | 3.01 | % |  | 14.00 | % |  | 5.84 | % |  | 3.01 | % |  | 14.00 | % |  | 5.83 | %
Credit risk rate (1) | 0.04 | % |  | 50.69 | % |  | 17.12 | % |  | 0.04 | % |  | 50.69 | % |  | 17.40 | %
Prepayment rate (1) | 15.60 | % |  | 36.88 | % |  | 27.63 | % |  | 15.60 | % |  | 36.88 | % |  | 27.67 | %
(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 of 20% would result in a 17% decrease in the fair value of the residual certificates. The remaining classes of securities, with the exception of those in 2018-2, are all overcollateralized such that changes in credit risk rates are not expected to have significant impacts on their fair values. The fair value of the securities is also 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 results in a decrease in fair value of the securities (including securitization notes and residual certificates) of 1.23% and 1.05% as of December 31, 2020 and March 31, 2021, 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 2.36% and 2.08% as of December 31, 2020 and March 31, 2021, 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, 2020 and March 31, 2021. 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, 2019 | $ | 34,116 |  |  |
Purchases and issuances of securitization notes and residual certificates | 4 |  |  |
Repayments and settlements | (4,028) |  |  |
Changes in fair value recorded in earnings | (3,196) |  |  |
Fair value at March 31, 2020 | $ | 26,896 |  |  |
| Notes Receivable and Residual Certificates |  |
Fair value at December 31, 2020 | $ | 19,074 |  |  |
Repayments and settlements | (3,119) |  |  |
Changes in fair value recorded in earnings | 78 |  |  |
Fair value at March 31, 2021 | $ | 16,033 |  |  |
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 fee. 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, 2020 |  | March 31, 2021
| Minimum |  | Maximum |  | Weighted-Average (2) |  | Minimum |  | Maximum |  | Weighted-Average (2)
Discount rate | 15.00 | % |  | 35.00 | % |  | 22.69 | % |  | 15.00 | % |  | 35.00 | % |  | 22.88 | %
Credit risk rate (1) | 0.03 | % |  | 52.78 | % |  | 17.19 | % |  | 0.03 | % |  | 52.78 | % |  | 17.73 | %
Market-servicing rate (3)(4) | 0.75 | % |  | 0.75 | % |  | 0.75 | % |  | 0.75 | % |  | 0.75 | % |  | 0.75 | %
Prepayment rate (1) | 9.07 | % |  | 89.01 | % |  | 31.62 | % |  | 8.61 | % |  | 88.79 | % |  | 32.43 | %
(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 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 rate s–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 on a per annum basis. 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, 2020 and March 31, 2021, respectively.
| December 31, |  | March 31,
| 2020 |  | 2021
Fair value of loan servicing assets | $ | 6,831 |  |  | $ | 8,734 |
Expected market-servicing rates |  |  |
10% market-servicing rates increase | (19,013) |  |  | (20,061) |
20% market-servicing rates increase | (38,027) |  |  | (40,122) |
Expected prepayment rates |  |  |
10% adverse change | (2,061) |  |  | (4,646) |
20% adverse change | (4,212) |  |  | (2,273) |
| December 31, |  | March 31,
| 2020 |  | 2021
Fair value of loan servicing liabilities | $ | 8,254 |  |  | $ | 10,853 |
Expected market-servicing rates |  |  |
10% market-servicing rates increase | 22,974 |  |  | 24,928 |
20% market-servicing rates increase | 45,948 |  |  | 49,857 |
Expected prepayment rates |  |  |
10% adverse change | 2,491 |  |  | 5,773 |
20% adverse change | 5,089 |  |  | 2,825 |
Rollforward of Level 3 Fair Values The following table presents 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, 2019 | $ | 4,725 |  |  | $ | 5,140 |
Sale of loans | 2,705 |  |  | 1,246 |
Changes in fair value recorded in earnings | (808) |  |  | (480) |
Fair value at March 31, 2020 | $ | 6,622 |  |  | $ | 5,906 |
| Loan Servicing Assets |  | Loan Servicing Liabilities
Fair value at December 31, 2020 | $ | 6,831 |  |  | $ | 8,254 |
Sale of loans | 3,452 |  |  | 3,519 |
Changes in fair value recorded in earnings | (1,549) |  |  | (920) |
Fair value at March 31, 2021 | $ | 8,734 |  |  | $ | 10,853 |
Trailing Fee Liabilities The Company pays certain bank 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 3.52% to 16.60% and credit risk rates of 0.21% to 52.31%. 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, 2019 | $ | 504 |
Issuances | 312 |
Repayments and settlements | (54) |
Fair value at March 31, 2020 | $ | 762 |
| Trailing Fee Liabilities
Fair value at December 31, 2020 | $ | 1,276 |
Issuances | 669 |
Repayments and settlements | (170) |
Fair value at March 31, 2021 | $ | 1,775 |

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- 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. + References Reference 1: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 820 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=117815213&loc=d3e19207-110258 + Details
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