Quarterly report pursuant to Section 13 or 15(d)

Commitments and Contingencies

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Commitments and Contingencies
9 Months Ended
Sep. 30, 2015
Commitments and Contingencies Disclosure [Abstract]  
Commitments and Contingencies
NOTE 10 – Commitments and Contingencies

In the normal course of business, the Corporation enters into a number of off-balance sheet commitments. These commitments expose the Corporation to varying degrees of credit and market risk and are subject to the same credit and market risk limitation reviews as those instruments recorded on the Consolidated Balance Sheet. For more information on commitments and contingencies, see Note 12 – Commitments and Contingencies to the Consolidated Financial Statements of the Corporation's 2014 Annual Report on Form 10-K.

Credit Extension Commitments

The Corporation enters into commitments to extend credit such as loan commitments, standby letters of credit (SBLCs) and commercial letters of credit to meet the financing needs of its customers. The table below includes the notional amount of unfunded legally binding lending commitments net of amounts distributed (e.g., syndicated) to other financial institutions of $13.4 billion and $15.7 billion at September 30, 2015 and December 31, 2014. At September 30, 2015, the carrying value of these commitments, excluding commitments accounted for under the fair value option, was $680 million, including deferred revenue of $19 million and a reserve for unfunded lending commitments of $661 million. At December 31, 2014, the comparable amounts were $546 million, $18 million and $528 million, respectively. The carrying value of these commitments is classified in accrued expenses and other liabilities on the Consolidated Balance Sheet.

The table below also includes the notional amount of commitments of $7.9 billion and $9.9 billion at September 30, 2015 and December 31, 2014 that are accounted for under the fair value option. However, the table below excludes cumulative net fair value adjustments of $594 million and $405 million on these commitments, which are classified in accrued expenses and other liabilities. For more information regarding the Corporation's loan commitments accounted for under the fair value option, see Note 15 – Fair Value Option.

Credit Extension Commitments
 
 
 
September 30, 2015
(Dollars in millions)
Expire in
One Year
or Less
 
Expire After
One Year Through
Three Years
 
Expire After Three Years Through
Five Years
 
Expire After Five Years
 
Total
Notional amount of credit extension commitments
 
 
 
 
 
 
 
 
 
Loan commitments
$
78,452

 
$
115,856

 
$
149,567

 
$
28,860

 
$
372,735

Home equity lines of credit
6,949

 
19,388

 
6,331

 
18,417

 
51,085

Standby letters of credit and financial guarantees (1)
19,026

 
9,887

 
4,144

 
1,063

 
34,120

Letters of credit
1,871

 
163

 
41

 
91

 
2,166

Legally binding commitments
106,298

 
145,294

 
160,083

 
48,431

 
460,106

Credit card lines (2)
375,641

 

 

 

 
375,641

Total credit extension commitments
$
481,939

 
$
145,294

 
$
160,083

 
$
48,431

 
$
835,747

 
 
 
 
 
 
 
 
 
 
 
December 31, 2014
Notional amount of credit extension commitments
 
 
 
 
 
 
 
 
 
Loan commitments
$
79,897

 
$
97,583

 
$
146,743

 
$
18,942

 
$
343,165

Home equity lines of credit
6,292

 
19,679

 
12,319

 
15,417

 
53,707

Standby letters of credit and financial guarantees (1)
19,259

 
9,106

 
4,519

 
1,807

 
34,691

Letters of credit
1,883

 
157

 
35

 
88

 
2,163

Legally binding commitments
107,331

 
126,525

 
163,616

 
36,254

 
433,726

Credit card lines (2)
363,989

 

 

 

 
363,989

Total credit extension commitments
$
471,320

 
$
126,525

 
$
163,616

 
$
36,254

 
$
797,715

(1) 
The notional amounts of SBLCs and financial guarantees classified as investment grade and non-investment grade based on the credit quality of the underlying reference name within the instrument were $25.9 billion and $8.1 billion at September 30, 2015, and $26.1 billion and $8.2 billion at December 31, 2014. Amounts in table include consumer SBLCs of $143 million and $396 million at September 30, 2015 and December 31, 2014.
(2) 
Includes business card unused lines of credit.

Legally binding commitments to extend credit generally have specified rates and maturities. Certain of these commitments have adverse change clauses that help to protect the Corporation against deterioration in the borrower's ability to pay.
Other Commitments

At September 30, 2015 and December 31, 2014, the Corporation had commitments to purchase loans (e.g., residential mortgage and commercial real estate) of $559 million and $1.8 billion, which upon settlement will be included in loans or LHFS.

At September 30, 2015 and December 31, 2014, the Corporation had commitments to purchase commodities, primarily liquefied natural gas of $2.6 billion and $241 million, which upon settlement will be included in trading account assets.

At September 30, 2015 and December 31, 2014, the Corporation had commitments to enter into forward-dated resale and securities borrowing agreements of $121.5 billion and $73.2 billion, and commitments to enter into forward-dated repurchase and securities lending agreements of $96.6 billion and $55.8 billion. These commitments expire within the next 12 months.

The Corporation is a party to operating leases for certain of its premises and equipment. Commitments under these leases are approximately $640 million, $2.4 billion, $2.1 billion, $1.7 billion and $1.4 billion for the remainder of 2015 and the years through 2019, respectively, and $5.5 billion in the aggregate for all years thereafter.

Other Guarantees

Bank-owned Life Insurance Book Value Protection

The Corporation sells products that offer book value protection to insurance carriers who offer group life insurance policies to corporations, primarily banks. The book value protection is provided on portfolios of intermediate investment-grade fixed-income securities and is intended to cover any shortfall in the event that policyholders surrender their policies and market value is below book value. These guarantees are recorded as derivatives and carried at fair value in the trading portfolio. At September 30, 2015 and December 31, 2014, the notional amount of these guarantees totaled $13.7 billion and $13.6 billion. At both September 30, 2015 and December 31, 2014, the Corporation's maximum exposure related to these guarantees totaled $3.1 billion with estimated maturity dates between 2031 and 2039. The net fair value including the fee receivable associated with these guarantees was $14 million and $25 million at September 30, 2015 and December 31, 2014, and reflects the probability of surrender as well as the multiple structural protection features in the contracts.

Merchant Services

In accordance with credit and debit card association rules, the Corporation sponsors merchant processing servicers that process credit and debit card transactions on behalf of various merchants. In connection with these services, a liability may arise in the event of a billing dispute between the merchant and a cardholder that is ultimately resolved in the cardholder's favor. If the merchant defaults on its obligation to reimburse the cardholder, the cardholder, through its issuing bank, generally has until six months after the date of the transaction to present a chargeback to the merchant processor, which is primarily liable for any losses on covered transactions. However, if the merchant processor fails to meet its obligation to reimburse the cardholder for disputed transactions, then the Corporation, as the sponsor, could be held liable for the disputed amount. For the three and nine months ended September 30, 2015, the sponsored entities processed and settled $168.6 billion and $494.2 billion of transactions and recorded losses of $6 million and $16 million. For the three and nine months ended September 30, 2014, the sponsored entities processed and settled $162.7 billion and $476.4 billion of transactions and recorded losses of $3 million and $11 million. A significant portion of this activity was processed by a joint venture in which the Corporation holds a 49 percent ownership. At September 30, 2015 and December 31, 2014, the sponsored merchant processing servicers held as collateral $165 million and $130 million of merchant escrow deposits which may be used to offset amounts due from the individual merchants.

The Corporation believes the maximum potential exposure for chargebacks would not exceed the total amount of merchant transactions processed through Visa and MasterCard for the last six months, which represents the claim period for the cardholder, plus any outstanding delayed-delivery transactions. As of September 30, 2015 and December 31, 2014, the maximum potential exposure for sponsored transactions totaled $274.6 billion and $269.3 billion. However, the Corporation believes that the maximum potential exposure is not representative of the actual potential loss exposure and does not expect to make material payments in connection with these guarantees.

Other Derivative Contracts

The Corporation funds selected assets, including securities issued by CDOs and CLOs, through derivative contracts, typically total return swaps, with third parties and VIEs that are not consolidated by the Corporation. The total notional amount of these derivative contracts was $396 million and $527 million with commercial banks and $980 million and $1.2 billion with VIEs at September 30, 2015 and December 31, 2014. The underlying securities are senior securities and substantially all of the Corporation's exposures are insured. Accordingly, the Corporation's exposure to loss consists principally of counterparty risk to the insurers. In certain circumstances, generally as a result of ratings downgrades, the Corporation may be required to purchase the underlying assets, which would not result in additional gain or loss to the Corporation as such exposure is already reflected in the fair value of the derivative contracts.

Other Guarantees

The Corporation has entered into additional guarantee agreements and commitments, including sold risk participation swaps, liquidity facilities, lease-end obligation agreements, partial credit guarantees on certain leases, real estate joint venture guarantees, divested business commitments and sold put options that require gross settlement. The maximum potential future payment under these agreements was approximately $6.1 billion and $6.2 billion at September 30, 2015 and December 31, 2014. The estimated maturity dates of these obligations extend up to 2040. The Corporation has made no material payments under these guarantees.

In the normal course of business, the Corporation periodically guarantees the obligations of its affiliates in a variety of transactions including ISDA-related transactions and non-ISDA related transactions such as commodities trading, repurchase agreements, prime brokerage agreements and other transactions.

Payment Protection Insurance Claims Matter

In the U.K., the Corporation previously sold payment protection insurance (PPI) through its international card services business to credit card customers and consumer loan customers. PPI covers a consumer's loan or debt repayment if certain events occur such as loss of job or illness. In response to an elevated level of customer complaints across the industry, heightened media coverage and pressure from consumer advocacy groups the U.K. Financial Services Authority, which has subsequently been replaced by the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA), investigated and raised concerns about the way some companies have handled complaints related to the sale of these insurance policies. In October 2015, the FCA issued a statement that it will issue guidance early next year on the treatment of certain PPI claims. In connection with this matter, the Corporation added to its reserve for PPI claims. The reserve was $434 million and $378 million at September 30, 2015 and December 31, 2014. The Corporation recorded expense of $303 million and $319 million for the three and nine months ended September 30, 2015 compared to $298 million and $482 million for the same periods in 2014. It is possible that the Corporation will incur additional expense related to PPI claims; however, the amount of such additional expense cannot be reasonably estimated.

Litigation and Regulatory Matters

The following supplements the disclosure in Note 12 – Commitments and Contingencies to the Consolidated Financial Statements of the Corporation's 2014 Annual Report on Form 10-K and in Note 10 – Commitments and Contingencies to the Consolidated Financial Statements of the Corporation's Quarterly Report on Form 10-Q for the quarterly periods ended June 30, 2015 and March 31, 2015 (the prior commitments and contingencies disclosure).

In the ordinary course of business, the Corporation and its subsidiaries are routinely defendants in or parties to many pending and threatened legal actions and proceedings, including actions brought on behalf of various classes of claimants. These actions and proceedings are generally based on alleged violations of consumer protection, securities, environmental, banking, employment, contract and other laws. In some of these actions and proceedings, claims for substantial monetary damages are asserted against the Corporation and its subsidiaries.

In the ordinary course of business, the Corporation and its subsidiaries are also subject to regulatory and governmental examinations, information gathering requests, inquiries, investigations, and threatened legal actions and proceedings. For example, certain subsidiaries of the Corporation are registered broker-dealers or investment advisors and are subject to regulation by the SEC, the Financial Industry Regulatory Authority, the European Commission, the PRA, the FCA and other international, federal and state securities regulators. In connection with formal and informal inquiries, the Corporation and its subsidiaries receive numerous requests, subpoenas and orders for documents, testimony and information in connection with various aspects of the Corporation's regulated activities.

In view of the inherent difficulty of predicting the outcome of such litigation, regulatory and governmental matters, particularly where the claimants seek very large or indeterminate damages or where the matters present novel legal theories or involve a large number of parties, the Corporation generally cannot predict what the eventual outcome of the pending matters will be, what the timing of the ultimate resolution of these matters will be, or what the eventual loss, fines or penalties related to each pending matter may be.

In accordance with applicable accounting guidance, the Corporation establishes an accrued liability for litigation, regulatory and governmental matters when those matters present loss contingencies that are both probable and estimable. In such cases, there may be an exposure to loss in excess of any amounts accrued. As a litigation, regulatory or governmental matter develops, the Corporation, in conjunction with any outside counsel handling the matter, evaluates on an ongoing basis whether such matter presents a loss contingency that is probable and estimable. When a loss contingency is not both probable and estimable, the Corporation does not establish an accrued liability. If, at the time of evaluation, the loss contingency related to a litigation, regulatory or governmental matter is not both probable and estimable, the matter will continue to be monitored for further developments that would make such loss contingency both probable and estimable. Once the loss contingency related to a litigation, regulatory or governmental matter is deemed to be both probable and estimable, the Corporation will establish an accrued liability with respect to such loss contingency and record a corresponding amount of litigation-related expense. The Corporation continues to monitor the matter for further developments that could affect the amount of the accrued liability that has been previously established. Excluding expenses of internal and external legal service providers, litigation-related expense of $231 million and $776 million was recognized for the three and nine months ended September 30, 2015 compared to $6.0 billion and $16.0 billion for the same periods in 2014.

For a limited number of the matters disclosed in this Note, and in the prior commitments and contingencies disclosure, for which a loss, whether in excess of a related accrued liability or where there is no accrued liability, is reasonably possible in future periods, the Corporation is able to estimate a range of possible loss. In determining whether it is possible to estimate a range of possible loss, the Corporation reviews and evaluates its material litigation, regulatory and governmental matters on an ongoing basis, in conjunction with any outside counsel handling the matter, in light of potentially relevant factual and legal developments. These may include information learned through the discovery process, rulings on dispositive motions, settlement discussions, and other rulings by courts, arbitrators or others. In cases in which the Corporation possesses sufficient appropriate information to estimate a range of possible loss, that estimate is aggregated and disclosed below. There may be other disclosed matters for which a loss is probable or reasonably possible but such an estimate of the range of possible loss may not be possible. For those matters where an estimate of the range of possible loss is possible, management currently estimates the aggregate range of possible loss is $0 to $2.4 billion in excess of the accrued liability (if any) related to those matters. This estimated range of possible loss is based upon currently available information and is subject to significant judgment and a variety of assumptions, and known and unknown uncertainties. The matters underlying the estimated range will change from time to time, and actual results may vary significantly from the current estimate. Those matters for which an estimate is not possible are not included within this estimated range. Therefore, this estimated range of possible loss represents what the Corporation believes to be an estimate of possible loss only for certain matters meeting these criteria. It does not represent the Corporation's maximum loss exposure.

Information is provided below, or in the prior commitments and contingencies disclosure, regarding the nature of all of these contingencies and, where specified, the amount of the claim associated with these loss contingencies. Based on current knowledge, management does not believe that loss contingencies arising from pending matters, including the matters described herein and in the prior commitments and contingencies disclosure, will have a material adverse effect on the consolidated financial position or liquidity of the Corporation. However, in light of the inherent uncertainties involved in these matters, some of which are beyond the Corporation's control, and the very large or indeterminate damages sought in some of these matters, an adverse outcome in one or more of these matters could be material to the Corporation's results of operations or cash flows for any particular reporting period.

Bond Insurance Litigation

Ambac Countrywide Litigation

On October 22, 2015, the New York Supreme Court, New York County, issued rulings in the action Ambac brought on September 29, 2010. The Court granted in part and denied in part Countrywide's motion for summary judgment and Ambac's motion for partial summary judgment against Countrywide. Among other things, the court granted summary judgment dismissing Ambac's claim for rescissory damages and denied summary judgment regarding Ambac's claims for fraud and breach of the insurance agreements. The Court also denied the Corporation's motion for summary judgment and granted in part Ambac's motion for partial summary judgment on Ambac's successor-liability claims with respect to a single element of its de facto merger claim. The Court denied summary judgment on the other elements of Ambac's de facto merger claim and the other successor-liability claims. Ambac filed its notice of appeal on October 27, 2015. The Corporation and Countrywide intend to appeal certain portions of the summary judgment rulings.

Ambac First Franklin Litigation

On September 17, 2015, the court denied Ambac's motion to dismiss defendants' affirmative defense of in pari delicto and granted Ambac's motion to dismiss defendants' affirmative defense of unclean hands.

Montgomery

On July 31, 2015, the U.S. Court of Appeals denied plaintiffs' petition for rehearing en banc. On October 29, 2015, plaintiffs filed a petition for a writ of certiorari before the U.S. Supreme Court.

Mortgage Repurchase Litigation

U.S. Bank Litigation

On September 16, 2015, defendants (i) withdrew the appeal that had been noticed, but not briefed, regarding the court's November 13, 2014 order that had granted U.S. Bank's motion for leave to amend, and (ii) moved, on the ground of failure to perfect, for dismissal of U.S. Bank's appeal from the court's February 13, 2014 order that had dismissed a claim seeking repurchase of all mortgage loans and sought clarification of a prior dismissal order. On September 30, 2015, U.S. Bank advised the court that it did not oppose dismissal of its appeal from the February 13, 2014 order.

Pennsylvania Public School Employees' Retirement System

The parties in Pennsylvania Public School Employees' Retirement System v. Bank of America, et al. agreed to settle the claims for $335 million, an amount that was fully accrued as of June 30, 2015. The agreement is subject to final documentation and court approval.