Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices, credit performance of loans and interest rates . Certain unobservable inputs may (in isolation) have either a directionally consistent or opposite impact on the fair value of the financial instrument for a given change in that input. When multiple inputs are used within the valuation techniques for loans, a change in one input in a certain direction may be offset by an opposite change from another input. We recorded a fair value mark-to-market adjustment related to our Fair Value Loans and Fair Value Notes of $69.4 million for the year ended December 31, 2021, an increase of approximately $92.8 million compared to the prior year.
Credit Performance Sensitivity
In a strong economic climate, credit losses may decrease due to low unemployment and rising wages, which will increase the fair value of our Fair Value Loans, which increases Net Revenue. In a weak economic climate, credit losses may increase due to high unemployment and falling wages, which will decrease the fair value of our Fair Value Loans, which decreases Net Revenue.
The following table presents estimates at December 31, 2021. Actual results could differ materially from these estimates:
Remaining Cumulative Charge-Offs Projected percentage change in the fair value of our Fair Value Loans Projected change in net fair value recorded in earnings
($ in thousands)
120% of expected (1.8) % $ (41,779)
110% of expected (0.9) % $ (21,126)
100% of expected — % $ —
90% of expected 1.0 % $ 21,612
80% of expected 1.9 % $ 43,724
Market Rate and Interest Rate Sensitivity
The fair values of our Fair Value Loans are estimated using a discounted cash flow methodology, where the discount rate considers various inputs such as the price that we can sell loans to a third party in a non-public market, market conditions such as interest rates, and credit spreads. The discount rates may change due to expected loan performance. We charge fixed rates on our loans and the average life of our loan portfolio is approximately 0.9 years. The fair value of fixed rate loans will generally change when interest rates change, because interest rates will impact the discount rate the market uses to value our loans. As of December 31, 2021, we had $1.65 billion of fixed-rate asset-backed notes outstanding with an average life of 1.9 years. Our borrowing cost does not vary with interest rates for our asset-backed notes, but the fair value will generally change when interest rates change, because interest rates will impact the discount rate the market uses to value our notes.
As of December 31, 2021, we had $357.0 million of outstanding borrowings under our Personal Loan Warehouse facility. The interest rate of the PLW is 1-month LIBOR plus a spread of 2.17% and the maximum borrowing amount is $600.0 million. As of December 31, 2021, we had $41.0 million of outstanding borrowings under our Credit Card Warehouse facility. The interest rate on the Secured Financing - CCW facility is LIBOR, with a floor of 1.00%, plus 6.00% on the first $18.8 million of principal outstanding and LIBOR, with a floor of 0.00%, plus 3.41% on the remaining outstanding principal balance and the maximum borrowing amount is $150.0 million. As of December 31, 2021, we had $116.0 million outstanding under our Acquisition Financing. The interest rate of the Acquisition Financing is 1-month LIBOR plus a spread of 8.00%. Changes in interest rates in the future will likely affect our borrowing costs of our Secured Financing facilities and Acquisition Financing. While not carried at fair value on the Consolidated Balance Sheets, we do not expect changes in interest rates to impact our Secured Financings or Acquisition Financing facility.
In a strong economic climate, interest rates may rise, which will decrease the fair value of our Fair Value Loans, which reduces Net Revenue. Rising interest rates will also decrease the fair value of our Fair Value Notes, which increases Net Revenue. Conversely, in a weak economic climate, interest rates may fall, which will increase the fair value of our Fair Value Loans, which increases Net Revenue. Decreasing interest rates will also increase the fair value of our Fair Value Notes, which reduces Net Revenue. Because the duration and fair value of our loans and asset-backed notes are different, the respective changes in fair value will not fully offset each other.
The following table presents estimates at December 31, 2021. Actual results could differ materially from these estimates:
Change in Interest Rates Projected percentage change in the fair value of our Fair Value Loans Projected percentage change in the fair value of our Fair Value Notes Projected change in net fair value recorded in earnings
($ in thousands)
-100 Basis Points 0.8 % 1.7 % $ (9,537)
-50 Basis Points 0.4 % 0.8 % $ (4,725)
-25 Basis Points 0.2 % 0.4 % $ (2,349)
Basis Interest Rate — % — % $ —
+25 Basis Points (0.2) % (0.4) % $ 2,344
+50 Basis Points (0.4) % (0.8) % $ 4,661
+100 Basis Points (0.8) % (1.6) % $ 9,237
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Prepayment Sensitivity
In a strong economic climate, borrowers’ incomes may increase which may lead them to prepay their loans more quickly. In a weak economic climate, borrowers' incomes may decrease which may lead them to prepay their loans more slowly. The availability of government stimulus payments to consumers during a weak economy may cause prepayments to increase. Additionally, changes in the eligibility requirements for our Good Customer Program, which allows borrowers with existing loans to take out a new loan and use a portion of the proceeds to pay-off their existing loan, could impact prepayment rates. In the future, we may introduce new products or features that could impact the prepayment behavior of our existing loans. Increased competition may also lead to increased prepayment, if our borrowers take out a loan from another lender to refinance our loan.
The following table presents estimates at December 31, 2021. Actual results could differ materially from these estimates:
Remaining Cumulative Prepayments Projected percentage change in the fair value of our Fair Value Loans Projected change in net fair value recorded in earnings
($ in thousands)
120% of expected (0.1) % $ (1,836)
110% of expected — % $ (906)
100% of expected — % $ —
90% of expected — % $ 876
80% of expected 0.1 % $ 1,712
Foreign Currency Exchange Risk
All of our revenue and substantially all of our operating expenses are denominated in U.S. dollars. Our non-U.S. dollar operating expenses in Mexico and India made up 6.5% of total operating expenses in 2021. All of our interest income is denominated in U.S. dollars and is therefore not subject to foreign currency exchange risk.
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