Investment in Receivable Portfolios, Net

3 Months Ended

Mar. 31, 2021

Investment in Receivable Portfolios, Net

The Company’s purchased portfolios of loans are grossed-up to their face value with an offsetting allowance and noncredit discount allocated to the individual receivables as the unit of account is at the individual loan level. Since each loan is deeply delinquent and deemed uncollectible at the individual loan level, the Company applies its charge-off policy and fully writes-off the amortized costs (i.e., face value net of noncredit discount) of the individual receivables immediately after purchasing the portfolio. The Company then records a negative allowance that represents the present value of all expected future recoveries for pools of receivables that share similar risk characteristics using a discounted cash flow approach, which ultimately equals the amount paid for a portfolio purchase and presented as “Investment in receivable portfolios, net” in the Company’s consolidated statements of financial condition. The discount rate is an effective interest rate (or “purchase EIR”) based on the purchase price of the portfolio and the expected future cash flows at the time of purchase.

Receivable portfolio purchases are aggregated into pools based on similar risk characteristics. Examples of risk characteristics include financial asset type, collateral type, size, interest rate, date of origination, term, and geographic location. The Company’s static pools are typically grouped into credit card, purchased consumer bankruptcy, and mortgage portfolios. The Company further groups these static pools by geographic location. Once a pool is established, the portfolios will remain in the designated pool unless the underlying risk characteristics change. The purchase EIR of a pool will not change over the life of the pool even if expected future cash flows change.

Revenue is recognized for each static pool over the economic life of the pool. Revenue primarily includes two components: (1) accretion of the discount on the negative allowance due to the passage of time, and (2) changes in expected

cash flows, which includes (a) the current period variances between actual cash collected and expected cash recoveries and (b) the present value change of expected future recoveries.

The Company measures expected future recoveries based on historical experience, current conditions, and reasonable and supportable forecasts. Factors that may change the expected future recoveries may include both internal as well as external factors. Internal factors include operational performance, such as capacity and the productivity of our collection staff. External factors that may have an impact on our collections include new laws or regulations, new interpretations of existing laws or regulations, and macroeconomic conditions.

The table below provides the detail on the establishment of negative allowance for expected recoveries of portfolios purchased during the periods presented (in thousands):


	Three Months Ended March 31,
	2021		2020
Purchase price	$	170,178	$	214,113
Allowance for credit losses	374,575		521,194
Amortized cost	544,753		735,307
Noncredit discount	784,112		967,715
Face value	1,328,865		1,703,022
Write-off of amortized cost	(544,753)		(735,307)
Write-off of noncredit discount	(784,112)		(967,715)
Negative allowance	170,178		214,113
Negative allowance for expected recoveries - current period purchases	$	170,178	$	214,113

The following table summarizes the changes in the balance of the investment in receivable portfolios during the periods presented (in thousands):


	Three Months Ended March 31,
	2021		2020
Balance, beginning of period	$	3,291,918	$	3,328,150
Purchases of receivable portfolios	170,178		214,113

Put-backs and Recalls	(3,153)		(5,068)
Disposals and transfers to assets held for sale	(1,665)		(1,531)
Cash collections	(606,461)		(527,279)
Revenue from receivable portfolios	338,018		357,365
Changes in expected current period recoveries	91,401		10,315
Changes in expected future period recoveries	(46,864)		(108,976)
Foreign currency adjustments	(7,694)		(101,071)
Balance, end of period	$	3,225,678	$	3,166,018

Changes in expected current period recoveries represent over and under-performance in the reporting period. Collections during the three months ended March 31, 2021 significantly outperformed the projected cash flows. The Company believes the collection over-performance was a result of its sustained improvements in portfolio collections driven by change in consumer behavior during the COVID-19 pandemic and our liquidation improvement initiatives. The over-performance was also driven by higher collections as compared to the reduced near-term expected recoveries as a result of adjustments made to the projected cash flow forecast during 2020 associated with the COVID-19 pandemic.

While the Company now has additional information with respect to the impact on collections of the COVID-19 pandemic, the future outlook remains uncertain, and will continue to evolve depending on future developments, including the duration and spread of the pandemic and related actions taken by governments. When reassessing the future forecasts of expected lifetime recoveries during three months ended March 31, 2021, management considered historical and current collection performance, as well as the uncertainty in economic forecasts in the geographies in which we operate, and believes that while some of the collection over-performance resulted in increased total expected recoveries for certain pool groups, the majority of the over-performance was a shift forward in timing rather than an increase in total estimated remaining collections. Additionally, the macroeconomic driven consumer distress has improved; although it is still present and will likely impact the Company’s collections performance in the near future. As a result of a combination of the above, the Company has updated its forecast, resulting in a net reduction of total estimated remaining collections which in turn, when discounted to present value, resulted in a provision for credit loss adjustment of approximately $46.9 million during the three months ended March 31, 2021. During the three months ended March 31, 2020, the Company recorded approximately $109.0 million in provision for credit loss adjustment due to significant uncertainty of the COVID-19 pandemic at that time. The circumstances around this pandemic continue to rapidly evolve, and will continue to impact the Company’s business and its estimation of expected recoveries in future periods. The Company will continue to closely monitor the COVID-19 situation and update its assumptions accordingly.