Fair Value of Financial Instruments Measured at Fair Value

Financial Instruments Recorded at Fair Value

For a description of the fair value hierarchy and the Company’s fair value methodologies, see Part II - Item 8 - Financial Statements and Supplementary Data - Note 2 - Summary of Significant Accounting Policies in the Company’s Annual Report. There were no significant changes in these methodologies during the three months ended March 31, 2015. The Company did not transfer any assets or liabilities in or out of level 3 during the three months ended March 31, 2015 or the year ended December 31, 2014. As our loans and related notes and certificates, and loan servicing rights do not trade in an active market with readily observable prices, we use significant unobservable inputs to measure the fair value of these assets and liabilities. Accordingly, we classify them as level 3 as follows:



	Level 1 Inputs	Level 2 Inputs	Level 3 Inputs		Total Fair Value
March 31, 2015
Assets:
Loans	—	—	$	3,230,661	$	3,230,661
Servicing assets	—	—	3,496		3,496
Total assets	—	—	$	3,234,157	$	3,234,157

Liabilities:
Notes and certificates	—	—	$	3,249,346	$	3,249,346
Servicing liabilities	—	—	4,397		4,397
Total liabilities	—	—	$	3,253,743	$	3,253,743

December 31, 2014
Assets:
Loans	—	—	$	2,798,505	$	2,798,505
Servicing assets	—	—	2,181		2,181
Total assets	—	—	$	2,800,686	$	2,800,686

Liabilities:
Notes and certificates	—	—	$	2,813,618	$	2,813,618
Servicing liabilities	—	—	3,973		3,973
Total liabilities	—	—	$	2,817,591	$	2,817,591

Financial instruments are categorized in the level 3 valuation hierarchy based on the significance of unobservable factors in the overall fair value measurement. These fair value estimates may also include observable, actively quoted components derived from external sources. As a result, the realized and unrealized gains and losses for assets and liabilities within the level 3 category may include changes in fair value that were attributable to both observable and unobservable inputs.

Significant Unobservable Inputs

The following table presents quantitative information about the significant unobservable inputs used for our level 3 fair value measurements at March 31, 2015 and December 31, 2014:



		March 31, 2015
		Range of Inputs
Financial Instrument	Unobservable Input	Minimum		Maximum		Weighted- Average
Loans, notes and certificates	Discount rates	5.1	%	17.2	%	10.0	%
	Net cumulative expected loss rates	0.3	%	22.2	%	10.2	%

Servicing asset/liability	Discount rates	3.5	%	23.4	%	10.4	%
	Net cumulative expected loss rates	0.3	%	22.2	%	10.2	%
	Cumulative prepayment rates	16.4	%	36.0	%	21.5	%
	Market servicing rates (% per annum on unpaid principal balance)	0.5	%	0.7	%	0.5	%


		December 31, 2014
		Range of Inputs
Financial Instrument	Unobservable Input	Minimum		Maximum		Weighted- Average
Loans, notes and certificates	Discount rates	5.2	%	17.4	%	10.1	%
	Net cumulative expected loss rates	0.3	%	22.0	%	10.0	%

Servicing asset/liability	Discount rates	5.3	%	23.7	%	10.7	%
	Net cumulative expected loss rates	0.3	%	22.0	%	10.2	%
	Cumulative prepayment rates	16.5	%	26.7	%	20.0	%
	Market servicing rates (% per annum on unpaid principal balance)	0.5	%	0.7	%	0.5	%

At March 31, 2015, the discounted cash flow methodology used to estimate the note and certificates fair values used the same projected cash flows as the related loans. As demonstrated in the following table, the fair value adjustments for loans were largely offset by the fair value adjustments of the notes and certificates due to the member payment dependent design of the notes and certificates and because the principal balances of the loans were very close to the combined principal balances of the notes and certificates.

The following tables present additional information about level 3 loans, notes and certificates measured at fair value on a recurring basis for the three months ended March 31, 2015 and 2014:



	Loans			Notes and Certificates
Fair value at December 31, 2013	$	1,829,042		$	1,839,990
Purchases of loans	776,801			—
Issuances of notes and certificates	—			510,962
Whole loan sales	(265,582		)	—
Principal payments	(204,950		)	(205,274		)
Recoveries from sale and collection of charged-off loans	(744		)	(734		)
Carrying value before fair value adjustments	2,134,567			2,144,944
Fair value adjustments, included in net loss	(24,749		)	(24,717		)
Fair value at March 31, 2014	$	2,109,818		$	2,120,227


	Loans			Notes and Certificates
Fair value at December 31, 2014	$	2,798,505		$	2,813,618
Purchases of loans	1,474,972			—
Issuances of notes and certificates	—			852,715
Whole loan sales	(622,145		)	—
Principal payments	(369,379		)	(365,711		)
Recoveries from sale and collection of charged-off loans	(3,472		)	(3,461		)
Carrying value before fair value adjustments	3,278,481			3,297,161
Fair value adjustments, included in net loss	(47,820		)	(47,815		)
Fair value at March 31, 2015	$	3,230,661		$	3,249,346

The following table presents additional information about level 3 servicing assets and liabilities measured at fair value on a recurring basis for the three months ended March 31, 2015 and 2014:



	Three Months Ended March 31, 2015						Three Months Ended March 31, 2014
	Servicing Assets			Servicing Liabilities			Servicing Assets			Servicing Liabilities
Fair value at beginning of period	$	2,181		$	3,973		$	534		$	936
Issuances⁽¹⁾	1,508			1,412			442			512
Changes in fair value, included in servicing fees	(491		)	(988		)	(112		)	(227		)
Additions, included in deferred revenue	298			—			—			—
Fair value at end of period	$	3,496		$	4,397		$	864		$	1,221


⁽¹⁾	Represents the offset to the gain or loss on sale of the related loan, recorded in other revenue.

Significant Recurring Level 3 Fair Value Asset and Liability Input Sensitivity

The majority of fair value adjustments included in net loss are attributable to changes in estimated instrument-specific future credit losses. All fair valuation adjustments were related to level 3 instruments for the three months ended March 31, 2015 and 2014. A specific loan that is projected to have higher future default losses than previously estimated has lower expected future cash flows over its remaining life, which reduces its estimated fair value. Conversely, a specific loan that is projected to have lower future default losses than previously estimated has increased expected future cash flows over its remaining life, which increases its fair value.

Changes in the unobservable inputs discussed above may have a significant impact on the fair value of loans, notes and certificates, or servicing assets and liabilities. Certain of these unobservable inputs will (in isolation) have a directionally consistent impact on the fair value of the financial instrument for a given change in that input. Alternatively, the fair value of the financial instrument may move in an opposite direction for a given change in another input. When multiple inputs are used within the valuation techniques for loans, notes and certificates, or servicing assets and liabilities, a change in one input in a certain direction may be offset by an opposite change from another input.

Generally, changes in the net cumulative expected loss rates and discount rates will have an immaterial impact on the fair value of loans, notes, certificates, and servicing assets and liabilities. Additionally, changes in prepayment rates will have an immaterial impact on the fair value of loans and notes and certificates.

Our selection of the most representative prepayment rates and market servicing rates for our loans is inherently judgmental. We reviewed third-party servicing rates for assets in similar credit sectors and determined that market servicing rates on our products of 0.40% to 0.70% of outstanding principal are reasonable. Expected prepayments are based on analyses of actual prepayment experience of loans considering their various types, terms, and credit grades. The table below shows the estimated impact on our estimated fair value of servicing assets and liabilities, calculated using different market servicing and prepayment rate assumptions as of March 31, 2015 and December 31, 2014:



	March 31, 2015						December 31, 2014
	Servicing Assets			Servicing Liabilities			Servicing Assets			Servicing Liabilities
Weighted-average market servicing rate assumptions	0.50		%	0.50		%	0.50		%	0.50		%
Change in fair value from:
Servicing rate increase to 0.60%		($1,299	)	1,537				($915	)		$1,416
Servicing rate decrease to 0.40%	1,365			(1,471		)		$965			($1,366	)
Weighted-average cumulative prepayment rate assumptions	21.5		%	21.5		%	20.0		%	20.0		%
Change in fair value from:
25% increase in cumulative prepayments		($120	)		($277	)		($65	)		($228	)
25% decrease in cumulative prepayments	126			285				$67			$231

Financial Instruments Not Recorded at Fair Value

At March 31, 2015 and December 31, 2014 , the carrying amount of all financial assets and liabilities not recorded at fair value approximated fair value due to the short term nature of these assets and liabilities. Instruments to which this applies include: cash and cash equivalents, restricted cash, accrued interest receivable and payable, accounts payable, and payables to investors.