Loans and Interest Receivable, Net

We offer credit products to consumers who choose PayPal Credit as their funding source at checkout and working capital advances to certain small and medium-sized PayPal merchants through our PayPal Working Capital product. We work with independent chartered financial institutions that extend credit to the consumer or merchant using our credit products. For our consumer credit products outside the U.S., we extend credit through our Luxembourg banking subsidiary. For our merchant credit products outside the U.S., we extend working capital advances in the U.K. through our Luxembourg banking subsidiary, and we extend working capital advances in Australia through an Australian subsidiary. We purchase the related receivables extended by an independent chartered financial institution and are responsible for servicing functions related to all our credit products. During the nine months ended September 30, 2017 and 2016, we purchased approximately $7.0 billion and $6.0 billion, respectively, in credit receivables. As part of our arrangements with independent chartered financial institutions in the U.S., we sell back a participation interest in the pool of consumer receivables outstanding under PayPal Credit program for consumers and a participation interest in the pool of merchant receivables outstanding under the PayPal Working Capital program for merchants. We account for the participation interest transfers made with respect to each program as a sale and derecognize the portion of participation interest for which control has been surrendered. The ownership interest in each pool that we retain is included in loans and interest receivable and is accounted for at amortized cost, net of an allowance for loan losses. We maintain the servicing rights of the entire pool of consumer and merchant receivables outstanding and receive a fee approximating fair value for servicing the assets underlying the participation interest sold. Under these arrangements, we do not recognize gains or losses on the sale of the participation interest as the carrying amount of the participation interest sold approximates the fair value at time of transfer. However, we have a separate arrangement with certain investors under which we sold to these investors a participation interest in the pool of certain consumer loans receivable that we purchased, where the consideration received exceeded the carrying amount of the participation interest sold, which resulted in a gain reflected as net revenues in our condensed consolidated financial statements. Loans, advances and interest and fees receivable are reported at their outstanding principal balances, net of any participation interest sold, including unamortized deferred origination costs and estimated collectible interest and fees.

Consumer receivables

As of September 30, 2017 and December 31, 2016, the total outstanding balance in our pool of consumer receivables was $5.9 billion and $5.1 billion, respectively, net of the participation interest sold to the independent chartered financial institution and other investors of $1.0 billion. The independent chartered financial institution and other investors have no recourse against us related to their participation interests for failure of debtors to pay when due. The participation interests held by the chartered financial institution and other investors have the same priority to the interests held by us and are subject to the same credit, prepayment, and interest rate risk associated with this pool of consumer receivables. All risks of loss are shared pro rata based on participation interests held among all participating stakeholders.

We use a consumer's FICO score, where available, among other measures, in evaluating the credit quality of our U.S. PayPal Credit consumer receivables. A FICO score is a type of credit score that lenders use to assess an applicant's credit risk and whether to extend credit. Individual FICO scores are generally obtained each quarter in which the U.S. consumer has an outstanding consumer receivable owned by PayPal Credit. The weighted average U.S. consumer FICO scores related to our loans and interest receivable balance outstanding at September 30, 2017 and December 31, 2016 was 680 and 679, respectively. The Company has revised its weighted average U.S. consumer FICO score as of December 31, 2016 to conform to the current period presentation.

As of September 30, 2017 and December 31, 2016, approximately 50.6% and 52.1%, respectively, of the pool of U.S. consumer receivables and interest receivable balance was due from U.S. consumers with FICO scores greater than or equal to 680, which is generally considered "prime" by the consumer credit industry. As of September 30, 2017 and December 31, 2016, approximately 11.7% and 11.1%, respectively, of the pool of U.S. consumer receivables and interest receivable balance was due from U.S. customers with FICO scores below 599. As of September 30, 2017 and December 31, 2016, approximately 90.1% and 90.0%, respectively, of the portfolio of consumer receivables and interest receivable was current.

The following table presents the principal amount of U.S. consumer loans and interest receivable segmented by a FICO score range:



	September 30, 2017		December 31, 2016
	(In millions)
> 760	$	710	$	665
680 - 759	2,157		1,938
600 - 679	2,137		1,840
< 599	665		553
Total	$	5,669	$	4,996

The table above excludes certain outstanding consumer loans outside of the U.S., for which no FICO scores are available, with an outstanding balance of $215 million and $117 million at September 30, 2017 and December 31, 2016, respectively.

The following tables present the delinquency status of the principal amount of consumer loans and interest receivable. The amounts shown below are based on the number of days past the billing date to the consumer. Current represents balances that are within 30 days of the billing date:



September 30, 2017
(In millions)
Current		30 - 59 Days Past Due		60 - 89 Days Past Due		90 - 180 Days Past Due		Total Past Due		Total
$	5,301	$	243	$	98	$	242	$	583	$	5,884



December 31, 2016
(In millions)
Current		30 - 59 Days Past Due		60 - 89 Days Past Due		90 - 180 Days Past Due		Total Past Due		Total
$	4,601	$	219	$	82	$	211	$	512	$	5,113

We charge off consumer loan receivable balances in the month in which a customer balance becomes 180 days past the payment due date. Bankrupt accounts are charged off 60 days after receipt of notification of bankruptcy. Loans receivable past the payment due date continue to accrue interest until such time they are charged off. We record an allowance for loss against the interest and fees receivable.

The following table summarizes the activity in the allowance for consumer loans and interest receivable, net of participation interest sold for the nine months ended September 30, 2017 and 2016:



	September 30, 2017									September 30, 2016
	Consumer Loans Receivable			Interest Receivable			Total Allowance			Consumer Loans Receivable			Interest Receivable			Total Allowance
	(In millions)
Beginning Balance	$	265		$	40		$	305		$	179		$	32		$	211
Provisions	354			100			454			278			82			360
Charge-offs	(315		)	(94		)	(409		)	(232		)	(77		)	(309		)
Recoveries	28			—			28			20			—			20
Ending Balance	$	332		$	46		$	378		$	245		$	37		$	282

The table above excludes receivables from other consumer credit products of $33 million and $16 million at September 30, 2017 and December 31, 2016, respectively, and allowances of $5 million and $3 million at September 30, 2017 and December 31, 2016, respectively.

The provision for loan losses relating to our consumer loans receivable portfolio is recognized in transaction and loan losses, and the provision for interest receivable is recognized in net revenues from other value added services as a reduction in revenue.

Merchant receivables

We offer credit products to certain existing small and medium-sized merchants through our PayPal Working Capital product. As of September 30, 2017, the total outstanding balance in our pool of working capital advances was $660 million, net of the participation interest sold to the independent chartered financial institution of $26 million. As of December 31, 2016, the total outstanding balance in our pool of working capital advances was $558 million. The independent chartered financial institution has no recourse against us related to its participation interest for failure of debtors to pay when due. The participation interest held by the chartered financial institution has the same priority to the interests held by us and is subject to the same credit risk associated with this pool of merchant receivables. All risks of loss are shared pro rata based on the ownership interest held among the stakeholders.

We closely monitor credit quality for all working capital advances that we extend or purchase through that product to manage and evaluate our related exposure to credit risk. To assess a merchant who wishes to obtain a PayPal Working Capital advance, we use, among other indicators, an internally developed risk model that we refer to as our PayPal Working Capital Risk Model (“PRM”), as a credit quality indicator to help predict the merchant's ability to repay the principal balance and fixed fee related to the working capital advance. Primary drivers of the model include the merchant's annual payment volume and payment processing history with PayPal, prior repayment history with the PayPal Working Capital product, and other measures. Merchants are assigned a PRM credit score within the range of 350 to 750. We generally expect that merchants to which we extend a working capital advance will have PRM scores greater than 525. We generally consider scores above 610 to be very good and to pose less credit risk. For all outstanding working capital advances that we own, we assess the participating merchant’s PRM score on a recurring basis. At September 30, 2017 and December 31, 2016, the weighted average PRM score related to our PayPal Working Capital balances outstanding was 631 and 625, respectively.

The following table presents the principal amount of PayPal Working Capital advances and fees receivable segmented by our internal PRM score range:



	September 30, 2017		December 31, 2016
	(In millions)
> 610	$	459	$	378
526-609	113		108
<525	88		72
Total⁽¹⁾	$	660	$	558

⁽¹⁾ Excludes $173 million of receivables acquired from Swift Financial during September 2017.

Through our PayPal Working Capital product, merchants can borrow a certain percentage of their annual payment volume processed by PayPal and are charged a fixed fee for the advance, which targets an annual percentage rate based on the overall credit assessment of the merchant. The fee is fixed at the time the advance is extended and recognized as deferred revenues included in other current liabilities in our condensed consolidated balance sheet. Advances plus the fixed fee are repaid through a fixed percentage of the merchant's future payment volume that PayPal processes. The fixed fee is amortized to net revenues from other value added services based on the amount repaid over the repayment period. We estimate the repayment period based on PayPal's payment processing history with the merchant. There is no stated interest rate and there is a general requirement that at least 10% of the original amount advanced plus the fixed fee must be repaid every 90 days. We calculate the repayment rate of the merchant's future payment volume so that repayment of the advance and fixed fee is expected to generally occur within 9 to 12 months from the date of the advance. On a monthly basis, we recalculate the repayment period based on the repayment activity on the receivable. As such, actual repayment periods are dependent on actual payment processing volumes. We monitor receivables with repayment periods greater than the original expected repayment period.

The following tables present our estimate of the principal amount of PayPal Working Capital advances and fees receivable past their original expected repayment period.



September 30, 2017
(In millions)
Within Original Expected Repayment Period		30 - 59 Days Greater		60 - 89 Days Greater		90 - 180 Days Greater		180+ Days		Total Past Original Expected Repayment Period		Total
$	555	$	38	$	22	$	33	$	12	$	105	$	660

The table above excludes $173 million of receivables acquired from Swift Financial during September 2017.



December 31, 2016
(In millions)
Within Original Expected Repayment Period		30 - 59 Days Greater		60 - 89 Days Greater		90 - 180 Days Greater		180+ Days		Total Past Original Expected Repayment Period		Total
$	462	$	35	$	19	$	30	$	12	$	96	$	558

The following table summarizes the activity in the allowance for PayPal Working Capital advances and fees receivable, for the nine months ended September 30, 2017 and 2016:



	September 30, 2017									September 30, 2016
	PayPal Working Capital Advances			Fees Receivable			Total Allowance			PayPal Working Capital Advances			Fees Receivable			Total Allowance
	(In millions)
Beginning Balance	$	28		$	3		$	31		$	19		$	3		$	22
Provisions	42			8			50			32			4			36
Charge-offs	(34		)	(6		)	(40		)	(27		)	(4		)	(31		)
Recoveries	5			—			5			3			—			3
Ending Balance	$	41		$	5		$	46		$	27		$	3		$	30

We charge off the receivable when the repayments are 180 days past our expectation of repayments and the merchant has not made a payment in the last 60 days. We also charge off the receivable when the repayments are 360 days past due regardless of whether or not the merchant has made a payment within the last 60 days. The provision for loan losses relating to our PayPal Working Capital advances is recognized in transaction and loan losses, and the provisions for fees receivable is recognized in deferred revenues included in other current liabilities in our condensed consolidated balance sheet as a reduction in deferred revenue.