Finance Receivables, net:

The Company accounts for its investment in finance receivables under the guidance of ASC Topic 310-30, “Loans and Debt Securities Acquired with Deteriorated Credit Quality” (“ASC 310-30”). The Company acquires portfolios of accounts that have experienced deterioration of credit quality between origination and the Company’s acquisition of the accounts. The amount paid for a portfolio reflects the Company’s determination that it is probable the Company will be unable to collect all amounts due according to an account’s contractual terms. At acquisition, the Company reviews the accounts to determine whether there is evidence of deterioration of credit quality since origination, and if it is probable that the Company will be unable to collect all amounts due according to the loan’s contractual terms. If both conditions exist, the Company then determines whether each such account is to be accounted for individually or whether such accounts will be assembled into pools based on common risk characteristics. The Company considers expected prepayments and estimates the amount and timing of undiscounted expected principal, interest and other cash flows (expected at acquisition) for each acquired portfolio based on the Company’s proprietary models, and the Company subsequently aggregates portfolios of accounts into pools. The Company determines the excess of the pool’s scheduled contractual principal and contractual interest payments over all cash flows expected at acquisition as an amount that should not be accreted (nonaccretable difference). The remaining amount, representing the excess of the pool’s cash flows expected to be collected over the amount paid, is accreted into income recognized on finance receivables over the remaining estimated life of the pool (accretable yield). ASC 310-30 requires that the excess of the contractual cash flows over expected cash flows, based on the Company’s estimates derived from its proprietary collection models, not be recognized as an adjustment of revenue or expense or on the balance sheet.

Under ASC 310-30 static pools of accounts may be established. These pools are aggregated based on certain common risk criteria. Each static pool is recorded at cost, which includes certain direct costs of acquisition paid to third parties, and is accounted for as a single unit for the recognition of income, payments applied to principal and loss provision. Once a static pool is established for a calendar quarter, individual receivable accounts are not added to the pool (unless replaced by the seller) or removed from the pool (unless sold or returned to the seller). ASC 310-30, utilizing the interest method, initially freezes the yield, estimated when the accounts are purchased as the basis for subsequent impairment testing. The yield is estimated and periodically recalculated based on the timing and amount of anticipated cash flows using the Company’s proprietary collection models. Income on finance receivables is accrued quarterly based on each static pool’s effective yield. Significant increases in expected future cash flows may be recognized prospectively, through an upward adjustment of the yield, over a pool’s remaining life. Any increase to the yield then becomes the new benchmark for impairment testing. Under ASC 310-30, rather than lowering the estimated yield if the collection estimates are not received or projected to be received, the carrying value of a pool would be written down to maintain the then current yield and is shown as a reduction in revenue in the consolidated income statements with a corresponding valuation allowance offsetting finance receivables, net, on the consolidated balance sheets. Cash flows greater than the interest accrual will reduce the carrying value of the static pool. This reduction in carrying value is defined as payments applied to principal (also referred to as principal amortization). Likewise, cash flows that are less than the interest accrual will accrete the carrying balance. Generally, the Company does not record accretion in the first six to twelve months of the life of the pool; accordingly, the Company utilizes either the cost recovery method or cash method when necessary to prevent accretion as permitted by ASC 310-30. Under the cash method, revenue is recognized as it would be under the interest method up to the amount of cash collections. Under the cost recovery method, no revenue is recognized until the Company has fully collected the cost of the pool. A pool can become fully amortized (zero carrying balance on the balance sheet) while still generating cash collections. In this case, all cash collections are recognized as revenue when received. Additionally, the Company uses the cost recovery method when collections on a particular pool of accounts cannot be reasonably predicted. These cost recovery pools are not aggregated with other pools. Under the cost recovery method, no revenue is recognized until the Company has fully collected the cost of the pool, or until such time that the Company considers the collections to be probable and estimable and begins to recognize income based on the interest method as described above. At September 30, 2012 and 2011, the Company had unamortized purchased principal (purchase price) in pools accounted for under the cost recovery method of $4.5 million and $12.8 million, respectively; at December 31, 2011, the amount was $7.4 million.

The Company establishes valuation allowances, if necessary, for acquired accounts subject to ASC 310-10. Valuation allowances are established only subsequent to acquisition of the accounts. At September 30, 2012 and 2011, the Company had a valuation allowance against its finance receivables of $90.8 million and $83.5 million, respectively; at December 31, 2011, the valuation allowance was $86.6 million.

The Company implements the accounting for income recognized on finance receivables under ASC 310-30 as follows. The Company creates each accounting pool using its projections of estimated cash flows and expected economic life. The Company then computes the effective yield that fully amortizes the pool to the end of its expected economic life based on the current projections of estimated cash flows. As actual cash flow results are recorded, the Company balances those results to the data contained in its proprietary models to ensure accuracy, then reviews each pool watching for trends, actual performance versus projections and curve shape (a graphical depiction of the timing of cash flows), sometimes re-forecasting future cash flows utilizing the Company’s statistical models. The review process is primarily performed by the Company’s finance staff; however, the Company’s operational and statistical staffs are also involved, providing updated statistical input and cash projections to the finance staff. To the extent there is overperformance, the Company will either increase the yield or release the allowance and consider increasing future cash projections, if persuasive evidence indicates that the overperformance is considered to be a significant betterment. If the over performance is considered more of an acceleration of cash flows (a timing difference), the Company will: a) adjust estimated future cash flows downward which effectively extends the amortization period to fall within a reasonable expectation of the pool’s economic life, b) introduce some level of future cash adjustment as noted previously coupled with an increase in yield in order for the amortization period to fall within a reasonable expectation of the pool’s economic life, or c) take no action at all if the amortization period falls within a reasonable expectation of the pool’s expected economic life. To the extent there is underperformance, the Company will record an allowance if the underperformance is significant and will also consider revising estimated future cash flows based on current period information, or take no action if the pool’s amortization period is reasonable and falls within the currently projected economic life.

Changes in finance receivables, net for the three and nine months ended September 30, 2012 and 2011 were as follows (amounts in thousands):


	Three Months Ended			Three Months Ended			Nine Months Ended			Nine Months Ended
	September 30, 2012			September 30, 2011			September 30, 2012			September 30, 2011

Balance at beginning of period	$	966,508		$	879,515		$	926,734		$	831,330
Acquisitions of finance receivables, net of buybacks		100,063			119,256			333,402			314,162
Foreign currency translation adjustment		321			—			365			—

Cash collections		(229,052	)		(182,168	)		(679,473	)		(525,166	)
Income recognized on finance receivables, net		135,754			102,875			392,566			299,152

Cash collections applied to principal		(93,298	)		(79,293	)		(286,907	)		(226,014	)


Balance at end of period	$	973,594		$	919,478		$	973,594		$	919,478

At the time of acquisition, the life of each pool is generally estimated to be between 60 to 96 months based on projected amounts and timing of future cash collections using the proprietary models of the Company. Based upon current projections, cash collections applied to principal on finance receivables as of September 30, 2012 are estimated to be as follows for the twelve months in the periods ending (amounts in thousands):


September 30, 2013	$	352,374
September 30, 2014		273,710
September 30, 2015		204,808
September 30, 2016		105,186
September 30, 2017		37,516

	$	973,594

During the three and nine months ended September 30, 2012, the Company purchased approximately $1.26 billion and $4.24 billion, respectively, in face value of charged-off consumer receivables. During the three and nine months ended September 30, 2011, the Company purchased approximately $5.68 billion and $8.59 billion, respectively, in face value of charged-off consumer receivables. At September 30, 2012, the estimated remaining collections (“ERC”) on the receivables purchased in the three and nine months ended September 30, 2012, were $195.7 million and $594.8 million, respectively. At September 30, 2012, ERC on the receivables purchased in the three and nine months ended September 30, 2011, were $195.3 million and $468.9 million, respectively.

Accretable yield represents the amount of income recognized on finance receivables the Company can expect to generate over the remaining life of its existing portfolios based on estimated future cash flows as of the balance sheet date. Additions represent the original expected accretable yield to be earned by the Company based on its proprietary buying models. Reclassifications from nonaccretable difference to accretable yield primarily result from increases in the Company’s estimates of future cash flows. Reclassifications to nonaccretable difference from accretable yield result from decreases in the Company’s estimates of future cash flows and allowance charges that exceed any increases in the Company’s estimates of future cash flows. Changes in accretable yield for the three and nine months ended September 30, 2012 and 2011 were as follows (amounts in thousands):


	Three Months Ended			Three Months Ended			Nine Months Ended			Nine Months Ended
	September 30, 2012			September 30, 2011			September 30, 2012			September 30, 2011

Balance at beginning of period	$	1,151,653		$	936,490		$	1,026,614		$	892,188
Income recognized on finance receivables, net		(135,754	)		(102,875	)		(392,566	)		(299,152	)
Additions		102,997			155,680			325,165			356,848
Reclassifications from nonaccretable difference		45,182			16,519			205,997			55,930
Foreign currency translation adjustment		(104	)		—			(1,236	)		—

Balance at end of period	$	1,163,974		$	1,005,814		$	1,163,974		$	1,005,814

A valuation allowance is recorded for significant decreases in expected cash flows or change in timing of cash flows which would otherwise require a reduction in the stated yield on a pool of accounts. In any given period, the Company may be required to record valuation allowances due to pools of receivables underperforming expectations. Factors that may contribute to the recording of valuation allowances may include both internal as well as external factors. External factors which may have an impact on the collectability, and subsequently to the overall profitability of purchased pools of defaulted consumer receivables would include: new laws or regulations relating to collections, new interpretations of existing laws or regulations, and the overall condition of the economy. Internal factors which may have an impact on the collectability, and subsequently the overall profitability of purchased pools of defaulted consumer receivables would include necessary revisions to initial and post-acquisition scoring and modeling estimates, non-optimal operational activities (which relate to the collection and movement of accounts on both the collection floor of the Company and external channels), and decreases in productivity related to turnover and tenure of the Company’s collection staff.

The following is a summary of activity within the Company’s valuation allowance account, all of which relates to loans acquired with deteriorated credit quality, for the three and nine months ended September 30, 2012 and 2011 (amounts in thousands):


	Three Months Ended September 30,
	2012									2011
	Core Portfolio ⁽¹⁾			Purchased Bankruptcy Portfolio ⁽²⁾			Total			Core Portfolio ⁽¹⁾			Purchased Bankruptcy Portfolio ⁽²⁾			Total
Valuation allowance - finance receivables:
Beginning balance	$	75,850		$	13,419		$	89,269		$	73,630		$	9,100		$	82,730
Allowance charges		1,850			945			2,795			1,400			1			1,401
Reversal of previous recorded allowance charges		(1,150	)		(82	)		(1,232	)		(500	)		(160	)		(660	)

Net allowance charge		700			863			1,563			900			(159	)		741

Ending balance	$	76,550		$	14,282		$	90,832		$	74,530		$	8,941		$	83,471


Finance receivables, net ⁽³⁾:	$	479,558		$	480,402		$	959,960		$	453,168		$	466,310		$	919,478


	Nine Months Ended September 30,
	2012									2011
	Core Portfolio ⁽¹⁾			Purchased Bankruptcy Portfolio ⁽²⁾			Total			Core Portfolio ⁽¹⁾			Purchased Bankruptcy Portfolio ⁽²⁾			Total
Valuation allowance - finance receivables:
Beginning balance	$	76,580		$	9,991		$	86,571		$	70,030		$	6,377		$	76,407
Allowance charges		4,000			4,620			8,620			6,250			2,951			9,201
Reversal of previous recorded allowance charges		(4,030	)		(329	)		(4,359	)		(1,750	)		(387	)		(2,137	)

Net allowance charge		(30	)		4,291			4,261			4,500			2,564			7,064

Ending balance	$	76,550		$	14,282		$	90,832		$	74,530		$	8,941		$	83,471


Finance receivables, net ⁽³⁾:	$	479,558		$	480,402		$	959,960		$	453,168		$	466,310		$	919,478

(1)	“Core” accounts or portfolios refer to accounts or portfolios that are defaulted consumer receivables and are not in a bankrupt status upon purchase. These accounts are aggregated separately from purchased bankruptcy accounts.

(2)	“Purchased bankruptcy” accounts or portfolios refer to accounts or portfolios that are in bankruptcy status when purchased, and as such, are purchased as a pool of bankrupt accounts.

(3)	At September 30, 2012, the MHH finance receivables balance was $13.6 million against which there was no valuation allowance recorded; therefore it is not included in this roll-forward.