Commitments and Contingencies
|6 Months Ended|
Jun. 30, 2017
|Commitments and Contingencies Disclosure [Abstract]|
|Commitments and Contingencies||
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 2016 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 or participated) to other financial institutions. The distributed amounts were $11.6 billion and $12.1 billion at June 30, 2017 and December 31, 2016. At June 30, 2017, the carrying value of these commitments, excluding commitments accounted for under the fair value option, was $775 million, including deferred revenue of $18 million and a reserve for unfunded lending commitments of $757 million. At December 31, 2016, the comparable amounts were $779 million, $17 million and $762 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 $4.5 billion and $7.0 billion at June 30, 2017 and December 31, 2016 that are accounted for under the fair value option. However, the table below excludes cumulative net fair value of $138 million and $173 million on these commitments, which is 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.
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.
At June 30, 2017 and December 31, 2016, the Corporation had commitments to purchase loans (e.g., residential mortgage and commercial real estate) of $598 million and $767 million, and commitments to purchase commercial loans of $2.7 billion and $636 million, which upon settlement will be included in loans or LHFS.
At June 30, 2017 and December 31, 2016, the Corporation had commitments to purchase commodities, primarily liquefied natural gas of $1.6 billion and $1.9 billion, which upon settlement will be included in trading account assets.
At June 30, 2017 and December 31, 2016, the Corporation had commitments to enter into resale and forward-dated resale and securities borrowing agreements of $74.2 billion and $48.9 billion, and commitments to enter into forward-dated repurchase and securities lending agreements of $41.3 billion and $24.4 billion. These commitments expire primarily within the next 12 months.
The Corporation has entered into agreements to purchase retail automotive loans from certain auto loan originators. These agreements provide for stated purchase amounts and contain cancellation provisions that allow the Corporation to terminate its commitment to purchase at any time, with a minimum notification period. At June 30, 2017 and December 31, 2016, the Corporation’s maximum purchase commitment was $345 million and $475 million. In addition, the Corporation has a commitment to originate or purchase auto loans and leases from a strategic partner up to $1.5 billion for the remainder of 2017, with this commitment expiring on December 31, 2017.
The Corporation is a party to operating leases for certain of its premises and equipment. Commitments under these leases are approximately $1.2 billion, $2.2 billion, $2.0 billion, $1.8 billion and $1.5 billion for the remainder of 2017 and the years through 2021, respectively, and $5.7 billion in the aggregate for all years thereafter.
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. At June 30, 2017 and December 31, 2016, the notional amount of these guarantees, which are recorded as derivatives totaled $14.0 billion and $13.9 billion. At both June 30, 2017 and December 31, 2016, the Corporation’s maximum exposure related to these guarantees totaled $3.2 billion, with estimated maturity dates between 2031 and 2039. The net fair value including the fee receivable associated with these guarantees was $2 million and $4 million at June 30, 2017 and December 31, 2016, and reflects the probability of surrender as well as the multiple structural protection features in the contracts.
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 six months ended June 30, 2017, the sponsored entities processed and settled $204.6 billion and $391.4 billion of transactions and recorded losses of $8 million and $15 million. For the three and six months ended June 30, 2016, the sponsored entities processed and settled $178.4 billion and $337.8 billion of transactions and recorded losses of $8 million and $14 million. A significant portion of this activity was processed by a joint venture in which the Corporation holds a 49 percent ownership, and is recorded in other assets on the Consolidated Balance Sheet and in All Other. At both June 30, 2017 and December 31, 2016, the carrying value of the Corporation's investment in the merchant services joint venture was $2.9 billion.
As of June 30, 2017 and December 31, 2016, the maximum potential exposure for sponsored transactions totaled $323.8 billion and $325.7 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.
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 $6.6 billion and $6.7 billion at June 30, 2017 and December 31, 2016. 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
On June 1, 2017, the Corporation completed the sale of its non-U.S. consumer credit card business. Included in the calculation of the gain on sale, the Corporation recorded an obligation to indemnify the purchaser for substantially all PPI exposure above reserves assumed by the purchaser.
Litigation and Regulatory Matters
The following supplements the disclosure in Note 12 – Commitments and Contingencies to the Consolidated Financial Statements of the Corporation's 2016 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 period ended March 31, 2017 (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, regulatory and governmental actions and proceedings.
In view of the inherent difficulty of predicting the outcome of such 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 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 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. Once the loss contingency is deemed to be both probable and estimable, the Corporation will establish an accrued liability 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 $192 million and $466 million was recognized for the three and six months ended June 30, 2017 compared to $270 million and $658 million for the same periods in 2016.
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 matters on an ongoing basis, in conjunction with any outside counsel handling the matter, in light of potentially relevant factual and legal developments. 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 $1.5 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. 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 liquidity for any particular reporting period.
Bond Insurance Litigation
Ambac v. Countrywide l
On May 16, 2017, the First Department issued its decision on the parties' summary judgment cross-appeals. Among other things, the First Department reversed on the applicability of New York insurance law to Ambac's common-law fraud claim, ruling that Ambac must prove all of the elements of its fraudulent inducement claim, including justifiable reliance and loss causation; reversed as to Ambac's remedy for its breach of contract claims, finding that Ambac's sole remedy is the repurchase protocol of cure, repurchases, or substitution of any materially defective loan; affirmed the trial court's ruling that Ambac's compensatory damages claim was an impermissible request for rescissory damages; reversed the dismissal of Ambac's claim for reimbursement of claims payments, but affirmed the dismissal of Ambac's claim for reimbursements of attorneys' fees; and reversed as to the meaning of specific representations and warranties, ruling that disputed issues of fact precluded summary judgment. On July 25, 2017, the First Department granted Ambac's motion for leave to appeal to the Court of Appeals. Separately, the First Department reversed summary judgment for Ambac on the continuity-of-ownership element of its New York law de facto merger claim and remanded for fact issues, while concluding that no continuity of ownership exists where the asset-seller receives fair value, and that the fair value element requires the asset-seller's shareholders to acquire their shares in the buyer as an element of the asset purchase transaction; reversed and dismissed Ambac's claim that the Corporation impliedly assumed Countrywide's liabilities; affirmed the ruling that fact issues prelude summary judgment on Ambac's alter-ego claim; and ruled that New York law applies to the de facto merger determination.
Ambac v. Countrywide III
On June 30, 2017, the Wisconsin Supreme Court reversed the decision of the Wisconsin Court of Appeals and held that Countrywide did not consent to the jurisdiction of the Wisconsin courts by registering to do business in Wisconsin. It remanded the case to the Court of Appeals for further consideration of whether specific jurisdiction exists for this matter.
U.S. Bank -- Harborview Repurchase Litigation
On June 12, 2017, U.S. Bank filed an Amended Petition in the Minnesota Action informing the court that, while a vote of the certificate-holders supports acceptance of the proposed settlement, an expert engaged by U.S. Bank concluded that the proposed settlement amount fell below what the expert considers to be a reasonable settlement range and recommended that U.S. Bank reject the proposed settlement. As a result, the Amended Petition seeks authorization from the Minnesota court to reject the proposed settlement and to continue the litigation in New York state court.
The entire disclosure for commitments and contingencies.
Reference 1: http://www.xbrl.org/2003/role/presentationRef