Quarterly report pursuant to Section 13 or 15(d)

INVESTMENTS IN CONSUMER LOANS

v3.5.0.2
INVESTMENTS IN CONSUMER LOANS
9 Months Ended
Sep. 30, 2016
Investments In Consumer Loans Equity Method Investees [Abstract]  
INVESTMENTS IN CONSUMER LOANS
INVESTMENTS IN CONSUMER LOANS
 
In April 2013, New Residential completed, through newly formed limited liability companies (together, the “Consumer Loan Companies”), a co-investment in a portfolio of consumer loans. The portfolio included personal unsecured loans and personal homeowner loans originated through subsidiaries of HSBC Finance Corporation. The Consumer Loan Companies acquired the portfolio from HSBC Finance Corporation and its affiliates. New Residential acquired 30% membership interests in each of the Consumer Loan Companies. Of the remaining 70% of the membership interests, OneMain acquired 47% and funds managed by Blackstone Tactical Opportunities Advisors L.L.C. acquired 23%. OneMain acted as the managing member of the Consumer Loan Companies. The Consumer Loan Companies initially financed approximately 73% of the original purchase price with asset-backed notes. In September 2013, the Consumer Loan Companies issued and sold additional asset-backed notes that were subordinate to the debt issued in April 2013. The Consumer Loan Companies were formed on March 19, 2013, for the purpose of making this investment, and commenced operations upon the completion of the investment. After a servicing transition period, OneMain became the servicer of the loans and provides all servicing and advancing functions for the portfolio.

On October 3, 2014, the Consumer Loan Companies refinanced the outstanding asset-backed notes with an asset-backed securitization. The proceeds in excess of the refinanced debt were distributed to the respective co-investors, which reduced New Residential’s basis in the consumer loans investment to $0.0 million and resulted in a gain. Subsequent to this refinancing, New Residential discontinued recording its share of the underlying earnings of the Consumer Loan Companies. During the three months ended March 31, 2016, the Consumer Loan Companies distributed $9.9 million to New Residential in excess of its basis, resulting in corresponding gains, including $0.03 million in tax withholding payments on behalf of New Residential. The tax withholding payments were considered a non-cash distribution.

On March 31, 2016, New Residential entered into the SpringCastle Transaction (Note 1). As a result, New Residential owns 53.5% of, and consolidates, the Consumer Loan Companies.

In August 2016, New Residential agreed to purchase up to $140.0 million UPB of newly originated consumer loans from a third party prior to September 30, 2016. New Residential purchased $92.6 million UPB of loans through September 30, 2016, for an aggregate purchase price, including related costs, of $92.1 million. In October 2016, New Residential extended the terms of the agreement through October 2016 and purchased an additional $34.3 million UPB of loans for an aggregate purchase price of $34.2 million. These loans are not held in the Consumer Loan Companies and have been designated as performing consumer loans, held-for-investment.

Upon acquisition, the consumer loans are accounted for based on New Residential’s strategy for the loan, and on whether the loan was credit impaired at the date of acquisition. New Residential determined that it has the intent and ability to hold the consumer loans for the foreseeable future and accounts for consumer loans based on the following categories:

Loans Held-for-Investment:
Performing Loans
PCD Loans

The following table summarizes the investment in consumer loans, held-for-investment held by New Residential:
 
Unpaid Principal Balance(A)

Interest in Consumer Loans

Carrying Value

Weighted Average Coupon(B)

Weighted Average Expected Life (Years)(C)
 
Weighted Average Delinquency(D)
September 30, 2016
 
 
 
 
 
 
 
 
 
 
 
Consumer Loan Companies
 
 
 
 
 
 
 
 
 
 
 
Performing Loans
$
1,345,573

 
53.5
%
 
$
1,391,388

 
18.7
%
 
4.3
 
5.7
%
Purchased Credit Deteriorated Loans(E)
396,462

 
53.5
%
 
339,916

 
16.6
%
 
3.6
 
13.2
%
Other - Performing Loans
91,523

 
100.0
%
 
90,675

 
14.3
%
 
1.5
 
%
Total Consumer Loans, held-for-investment
$
1,833,558

 
 
 
$
1,821,979

 
18.1
%
 
4.0
 
7.0
%
December 31, 2015(F)
 
 
 
 
 
 
 
 
 
 
 
Consumer Loan Companies
 
 
 
 
 
 
 
 
 
 
 
Total Consumer Loans, held-for-investment
$
2,094,904

 
30.0
%
 
$
1,698,130

 
18.2
%
 
4.4
 
7.2
%

(A)
Represents the balances as of September 30, 2016 and November 30, 2015, respectively.
(B)
Substantially all of the cash flows received on the loans held by the Consumer Loan Companies are required to be used to make payments on the notes described above.
(C)
Represents the weighted average expected timing of the receipt of expected cash flows for this investment.
(D)
Represents the percentage of the total unpaid principal balance that is 30+ days delinquent. Delinquency status is the primary credit quality indicator as it provides early warning of borrowers who may be experiencing financial difficulties.
(E)
Includes loans with evidence of credit deterioration since origination where it is probable that New Residential will not collect all contractually required principal and interest payments, which are accounted for as PCD loans.
(F)
Held through an equity method investee, which had a carrying value of zero, at such time.

Performing Loans

The following table provides past due information regarding New Residential’s performing consumer loans, held-for-investment, which is an important indicator of credit quality and the establishment of the allowance for loan losses:
September 30, 2016
Days Past Due
 
Delinquency Status(A)
Current
 
94.7
%
30-59
 
2.2
%
60-89
 
1.2
%
90-119(B)
 
0.7
%
120+(B) (C)
 
1.2
%
 
 
100.0
%

(A)
Represents the percentage of the total unpaid principal balance that corresponds to loans that are in each delinquency status.
(B)
Includes loans more than 90 days past due and still accruing interest.
(C)
Interest is accrued up to the date of charge-off at 180 days past due.

Activities related to the carrying value of performing consumer loans, held-for-investment were as follows:
 
 
Performing Loans
Balance at December 31, 2015
 
$

SpringCastle Transaction
 
1,539,569

Purchases
 
92,069

Additional fundings(A)
 
33,137

Proceeds from repayments
 
(155,388
)
Accretion of loan discount and premium amortization, net
 
5,097

Net charge-offs
 
(30,535
)
Provision for loan losses
 
(1,886
)
Balance at September 30, 2016
 
$
1,482,063


(A)
Represents draws on consumer loans with revolving privileges.

Activities related to the allowance for loan losses on performing consumer loans, held-for-investment were as follows:
 
 
Collectively Evaluated(A)
 
Individually Impaired(B)
 
Total
Balance at March 31, 2016
 
$

 
$

 
$

Provision for loan losses
 
31,382

 
1,039

 
32,421

Net charge-offs(C)
 
(30,535
)
 

 
(30,535
)
Balance at September 30, 2016
 
$
847

 
$
1,039

 
$
1,886


(A)
Represents smaller-balance homogeneous loans that are not individually considered impaired and are evaluated based on an analysis of collective borrower performance, key terms of the loans and historical and anticipated trends in defaults and loss severities, and consideration of the unamortized acquisition discount. Includes a provision for loan losses of $0.9 million for newly originated loans acquired during the three months ended September 30, 2016.
(B)
Represents consumer loan modifications considered to be troubled debt restructurings (“TDRs”) as they provide concessions to borrowers, primarily in the form of interest rate reductions, who are experiencing financial difficulty. As of September 30, 2016, there are $3.6 million in UPB and $2.5 million in carrying value of consumer loans classified as TDRs.
(C)
Consumer loans, other than PCD loans, are charged off when available information confirms that loans are uncollectible, which is generally when they become 180 days past due. Charge-offs are presented net of $5.6 million in recoveries of previously charged-off UPB.

Purchased Credit Deteriorated Loans

New Residential determined at acquisition that the PCD loans would be aggregated into pools based on common risk characteristics including delinquency status and loan terms. Loans aggregated into pools are accounted for as if each pool were a single loan with a single composite interest rate and an aggregate expectation of cash flows, including consideration of involuntary prepayments.

A portion of the consumer loans are considered PCD loans. Activities related to the carrying value of PCD consumer loans, held-for-investment were as follows:
Balance at December 31, 2015
 
$

SpringCastle Transaction
 
395,129

Allowance for Loan Losses(A)
 
(2,115
)
Proceeds from repayments
 
(77,899
)
Accretion of loan discount and other amortization
 
24,801

Balance at September 30, 2016
 
$
339,916



(A)
Represents the present value of cash flows expected at acquisition that are no longer expected to be collected.

The following is the unpaid principal balance and carrying value for consumer loans, for which, as of the acquisition date, it was probable that New Residential would be unable to collect all contractually required payments:
 
Unpaid Principal Balance
 
Carrying Value
September 30, 2016
$
396,462

 
$
339,916

March 31, 2016
450,611

 
395,129



The following is a summary of the changes in accretable yield for these loans:
Balance at December 31, 2015
 
$

SpringCastle Transaction
 
176,387

Accretion
 
(24,801
)
Reclassifications from non-accretable difference(A)
 
24,167

Balance at September 30, 2016
 
$
175,753


(A)
Represents a probable and significant increase in cash flows previously expected to be uncollectible.

Noncontrolling Interests

Others’ interests in the equity of the Consumer Loan Companies is computed as follows at September 30, 2016:
Total Consumer Loan Companies equity
 
$
230,251

Others’ ownership interest
 
46.5
%
Others’ interests in equity of consolidated subsidiary
 
$
107,067


Others’ interests in the Consumer Loan Companies’ net income (loss) is computed as follows:
 
Three Months Ended September 30, 2016
 
Nine Months Ended 
 September 30, 2016
Net Consumer Loan Companies income (loss)
$
28,655

 
$
60,118

Others’ ownership interest as a percent of total
46.5
%
 
46.5
%
Others’ interest in net income (loss) of consolidated subsidiaries
$
13,325

 
$
27,955



Variable Interest Entities

The Consumer Loan Companies consolidate certain entities that issued securitized debt collateralized by the consumer loans (the “Consumer Loan SPVs”). The Consumer Loan SPVs are VIEs of which the Consumer Loan Companies are the primary beneficiaries. The following table presents information on the combined assets and liabilities related to these consolidated VIEs.
 
 
As of
 
 
September 30, 2016
Assets
 
 
Consumer loans, held-for-investment
 
$
1,731,304

Restricted cash
 
13,866

Accrued interest receivable
 
25,468

Total assets(A)
 
$
1,770,638

Liabilities
 
 
Notes and bonds payable
 
$
1,590,387

Accounts payable and accrued expenses
 
1,150

Total liabilities(A)
 
$
1,591,537


(A)
The creditors of the Consumer Loan SPVs do not have recourse to the general credit of New Residential, and the assets of the Consumer Loan SPVs are not directly available to satisfy New Residential’s obligations.