The following discussion should be read in conjunction with our consolidated
financial statements and the related notes included therein and our Annual
Report on Form 10-K for the year ended
This Management's Discussion and Analysis of Financial Condition and Results of Operations includes forward-looking statements. We base these forward-looking statements on our current plans, expectations and beliefs about future events. There are risks, including the factors discussed in "Risk Factors" in Part II, Item 1A and elsewhere in this Report, that our actual experience will differ materially from these expectations. For more information, see "Forward-Looking Information" below.
In this Report, except as the context suggests otherwise, "Company," "
OVERVIEW
Currently, within our Credit as a Service ("CaaS") segment, we apply our
technology solutions, in combination with the experiences gained, and
infrastructure built from servicing over
We are principally engaged in providing products and services to lenders in the
Using our infrastructure and technology, we also provide loan servicing, including risk management and customer service outsourcing, for third parties. Also through our CaaS segment, we engage in testing and limited investment in consumer finance technology platforms as we seek to capitalize on our expertise and infrastructure. Additionally, we report within our CaaS segment: 1) servicing income? and 2) gains or losses associated with investments previously made in consumer finance technology platforms. These include investments in companies engaged in mobile technologies, marketplace lending and other financial technologies. These investments are carried at the lower of cost or market valuation. None of these companies are publicly-traded and there are no material pending liquidity events. We will continue to carry these investments on our books at cost minus impairment, if any, plus or minus changes resulting from observable price changes.
The recurring cash flows we receive within our CaaS segment principally include those associated with (1) private label credit and general purpose credit card receivables, (2) servicing compensation and (3) credit card receivables portfolios that are unencumbered or where we own a portion of the underlying structured financing facility.
Our credit and other operations are heavily regulated, which may cause us to
change how we conduct our operations either in response to regulation or in
keeping with our goal of leading the industry in adherence to consumer-friendly
practices. We have made meaningful changes to our practices over the past
several years, and because our account management practices are evolutionary and
dynamic, it is possible that we may make further changes to these practices,
some of which may produce positive, and others of which may produce adverse,
effects on our operating results and financial position. Customers at the lower
end of the credit score range intrinsically have higher loss rates than do
customers at the higher end of the credit score range. As a result, the products
we support are priced to reflect expected loss rates for our various risk
categories. See "Consumer and Debtor Protection Laws and Regulations-CaaS
Segment" in Part I, Item 1 of our Annual Report on Form 10K for the year ended
Subject to possible disruptions caused by COVID-19, supply chain interruptions, or inflation, we believe that our private label credit and general purpose credit card receivables are generating, and will continue to generate, attractive returns on assets, thereby facilitating debt financing under terms and conditions (including advance rates and pricing) that will support attractive returns on equity, and we continue to pursue growth in this area.
Within our Auto Finance segment, our CAR subsidiary operations
principally purchases and/or services loans secured by automobiles from or for,
and also provides floor-plan financing for, a pre-qualified network of
independent automotive dealers and automotive finance companies in the buy-here,
pay-here used car business. We generate revenues on purchased loans through
interest earned on the face value of the installment agreements combined with
the accretion of discounts on loans purchased. We generally earn discount income
over the life of the applicable loan. Additionally, we generate revenues from
servicing loans on behalf of dealers for a portion of actual collections and by
providing back-up servicing for similar quality assets owned by unrelated third
parties. We offer a number of other products to our network of buy-here,
pay-here dealers (including our floor-plan financing offering), but the majority
of our activities are represented by our purchases of auto loans at discounts
and our servicing of auto loans for a fee. As of
Fair Value Election
We adopted ASU 2016-13 beginning
Impact of the COVID-19 Pandemic on
In
As of the date of filing this Quarterly Report on Form 10-Q, the duration and
severity of the effects of the COVID-19 pandemic and resulting government
stimulus programs remain unknown. Likewise, we do not know the duration and
severity of the impact of the COVID-19 pandemic on all members of the Company's
ecosystem - our bank partner, merchants and consumers - as well as our
employees. At the onset of the COVID-19 pandemic,
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Consumer spending behavior has been significantly impacted by the COVID-19 pandemic, initially due to uncertainties about the extent and duration of the pandemic. Additionally, earlier government stimulus programs decreased consumer need for credit products and generally led to an increase in customer payments. While we have seen improvements in this area, to the extent this change in consumer spending behavior continues or is further impacted by economic inflation, receivables purchases could decline relative to the prior year. Furthermore, a number of our merchant partners have recently experienced labor shortages and supply chain disruptions. These trends could decrease or delay consumer spending and our receivables growth.
Borrowers impacted by COVID-19 requesting hardship assistance received temporary relief from payments. While we expect these measures to mitigate credit losses, related economic disruptions could result in increased portfolio credit losses in the future.
As the impact of COVID-19 continues to evolve, the Company remains committed to
serving our bank partner, merchant partners and consumers, while caring for the
safety of our employees and their families. The potential impact that COVID-19,
related economic impacts, and labor shortages and supply chain disruptions could
have on our financial condition and results of operations remains highly
uncertain. For more information, refer to Part II, Item 1A "Risk Factors" and,
in particular, "- COVID-19 has caused severe disruptions in the
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