Bank of America Corporation Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

Securitizations and Other Variable Interest Entities

Securitizations and Other Variable Interest Entities

12 Months Ended

Dec. 31, 2017

Organization, Consolidation and Presentation of Financial Statements [Abstract]

Securitizations and Other Variable Interest Entities

The Corporation utilizes VIEs in the ordinary course of business to support its own and its customers’ financing and investing needs. The Corporation routinely securitizes loans and debt securities using VIEs as a source of funding for the Corporation and as a means of transferring the economic risk of the loans or debt securities to third parties. The assets are transferred into a trust or other securitization vehicle such that the assets are legally isolated from the creditors of the Corporation and are not available to satisfy its obligations. These assets can only be used to settle obligations of the trust or other securitization vehicle. The Corporation also administers, structures or invests in other VIEs including CDOs, investment vehicles and other entities. For more information on the Corporation’s use of VIEs, see Note 1 – Summary of Significant Accounting Principles.

The tables in this Note present the assets and liabilities of consolidated and unconsolidated VIEs at December 31, 2017 and 2016 in situations where the Corporation has continuing involvement with transferred assets or if the Corporation otherwise has a variable interest in the VIE. The tables also present the Corporation’s maximum loss exposure at December 31, 2017 and 2016 resulting from its involvement with consolidated VIEs and unconsolidated VIEs in which the Corporation holds a variable interest. The Corporation’s maximum loss exposure is based on the unlikely event that all of the assets in the VIEs become worthless and incorporates not only potential losses associated with assets recorded on the Consolidated Balance Sheet but also potential losses associated with off-balance sheet commitments, such as unfunded liquidity commitments and other contractual arrangements. The Corporation’s maximum loss exposure does not include losses previously recognized through write-downs of assets.

The Corporation invests in ABS issued by third-party VIEs with which it has no other form of involvement and enters into certain commercial lending arrangements that may also incorporate the

use of VIEs, for example to hold collateral. These securities and loans are included in Note 3 – Securities or Note 4 – Outstanding Loans and Leases. In addition, the Corporation uses VIEs such as trust preferred securities trusts in connection with its funding activities. For more information, see Note 11 – Long-term Debt. These VIEs, which are generally not consolidated by the Corporation, as applicable, are not included in the tables herein.

Except as described below, the Corporation did not provide financial support to consolidated or unconsolidated VIEs during 2017, 2016 and 2015 that it was not previously contractually required to provide, nor does it intend to do so.

First-lien Mortgage Securitizations

First-lien Mortgages

As part of its mortgage banking activities, the Corporation securitizes a portion of the first-lien residential mortgage loans it originates or purchases from third parties, generally in the form of RMBS guaranteed by government-sponsored enterprises, FNMA and FHLMC (collectively the GSEs), or the Government National Mortgage Association (GNMA) primarily in the case of FHA-insured and U.S. Department of Veterans Affairs (VA)-guaranteed mortgage loans. Securitization usually occurs in conjunction with or shortly after origination or purchase, and the Corporation may also securitize loans held in its residential mortgage portfolio. In addition, the Corporation may, from time to time, securitize commercial mortgages it originates or purchases from other entities. The Corporation typically services the loans it securitizes. Further, the Corporation may retain beneficial interests in the securitization trusts including senior and subordinate securities and equity tranches issued by the trusts. Except as described below and in Note 7 – Representations and Warranties Obligations and Corporate Guarantees, the Corporation does not provide guarantees or recourse to the securitization trusts other than standard representations and warranties.

The table below summarizes select information related to first-lien mortgage securitizations for 2017, 2016 and 2015.




First-lien Mortgage Securitizations
	Residential Mortgage - Agency						Commercial Mortgage
(Dollars in millions)	2017		2016		2015		2017		2016		2015
Cash proceeds from new securitizations⁽¹⁾	$	14,467	$	24,201	$	27,164	$	5,641	$	3,887	$	7,945
Gains on securitizations ⁽²⁾	158		370		894		91		38		49
Repurchases from securitization trusts ⁽³⁾	2,713		3,611		3,716		—		—		—


⁽¹⁾	The Corporation transfers residential mortgage loans to securitizations sponsored by the GSEs or GNMA in the normal course of business and receives RMBS in exchange which may then be sold into the market to third-party investors for cash proceeds.


⁽²⁾	A majority of the first-lien residential mortgage loans securitized are initially classified as LHFS and accounted for under the fair value option. Gains recognized on these LHFS prior to securitization, which totaled $243 million, $487 million and $750 million net of hedges, during 2017, 2016 and 2015, respectively, are not included in the table above.


⁽³⁾	The Corporation may have the option to repurchase delinquent loans out of securitization trusts, which reduces the amount of servicing advances it is required to make. The Corporation may also repurchase loans from securitization trusts to perform modifications. Repurchased loans include FHA-insured mortgages collateralizing GNMA securities.

In addition to cash proceeds as reported in the table above, the Corporation received securities with an initial fair value of $1.9 billion, $4.2 billion and $22.3 billion in connection with first-lien mortgage securitizations in 2017, 2016 and 2015. The receipt of these securities represents non-cash operating and investing activities and, accordingly, is not reflected in the Consolidated Statement of Cash Flows. Substantially all of these securities were initially classified as Level 2 assets within the fair value hierarchy. During 2017, 2016 and 2015, there were no changes to the initial classification.

The Corporation recognizes consumer MSRs from the sale or securitization of consumer real estate loans. The unpaid principal balance of loans serviced for investors, including residential mortgage and home equity loans, totaled $277.6 billion and $326.2 billion at December 31, 2017 and 2016. Servicing fee and ancillary fee income on serviced loans was $893 million, $1.2 billion and $1.4 billion in 2017, 2016 and 2015. Servicing advances on serviced loans, including loans serviced for others and loans held for investment, were $4.5 billion and $6.2 billion at December 31, 2017 and 2016. For more information on MSRs, see Note 20 – Fair Value Measurements.

During 2016 and 2015, the Corporation deconsolidated agency residential mortgage securitization vehicles with total assets of $3.8 billion and $4.5 billion, and total liabilities of $628 million and $0 following the sale of retained interests to third parties, after which the Corporation no longer had the unilateral ability to liquidate the vehicles. Of the balances deconsolidated in 2016, $706 million of assets and $628 million of liabilities represent non-cash investing and financing activities and, accordingly, are not reflected on the Consolidated Statement of Cash Flows. Gains on sale of $125 million and $287 million in 2016 and 2015 related to these deconsolidations were recorded in other income in the Consolidated Statement of Income. There were no deconsolidations of agency residential mortgage securitizations in 2017.

The table below summarizes select information related to first-lien mortgage securitization trusts in which the Corporation held a variable interest at December 31, 2017 and 2016.




First-lien Mortgage VIEs
	Residential Mortgage
					Non-agency
	Agency				Prime				Subprime				Alt-A				Commercial Mortgage
	December 31
(Dollars in millions)	2017		2016		2017		2016		2017		2016		2017		2016		2017		2016
Unconsolidated VIEs
Maximum loss exposure ⁽¹⁾	$	19,110	$	22,661	$	689	$	757	$	2,643	$	2,750	$	403	$	560	$	585	$	344
On-balance sheet assets
Senior securities:
Trading account assets	$	716	$	1,399	$	6	$	20	$	10	$	112	$	50	$	118	$	108	$	51
Debt securities carried at fair value	15,036		17,620		477		441		2,221		2,235		351		305		—		—
Held-to-maturity securities	3,348		3,630		—		—		—		—		—		—		274		64
Subordinate securities	—		—		5		9		38		25		2		24		69		81
Residual interests	—		—		—		—		—		—		—		—		19		25
All other assets ⁽²⁾	10		12		—		28		—		—		—		113		—		—
Total retained positions	$	19,110	$	22,661	$	488	$	498	$	2,269	$	2,372	$	403	$	560	$	470	$	221
Principal balance outstanding ⁽³⁾	$	232,761	$	265,332	$	10,549	$	16,280	$	10,254	$	19,373	$	28,129	$	35,788	$	26,504	$	23,826

Consolidated VIEs
Maximum loss exposure ⁽¹⁾	$	14,502	$	18,084	$	571	$	—	$	—	$	—	$	—	$	25	$	—	$	—
On-balance sheet assets
Trading account assets	$	232	$	434	$	571	$	—	$	—	$	—	$	—	$	99	$	—	$	—
Loans and leases, net	14,030		17,223		—		—		—		—		—		—		—		—
All other assets	240		427		—		—		—		—		—		—		—		—
Total assets	$	14,502	$	18,084	$	571	$	—	$	—	$	—	$	—	$	99	$	—	$	—
On-balance sheet liabilities
Long-term debt	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	74	$	—	$	—
All other liabilities	3		4		—		—		—		—		—		—		—		—
Total liabilities	$	3	$	4	$	—	$	—	$	—	$	—	$	—	$	74	$	—	$	—

⁽¹⁾

Maximum loss exposure includes obligations under loss-sharing reinsurance and other arrangements for non-agency residential mortgage and commercial mortgage securitizations, but excludes the reserve for representations and warranties obligations and corporate guarantees and also excludes servicing advances and other servicing rights and obligations. For more information, see Note 7 – Representations and Warranties Obligations and Corporate Guarantees and Note 20 – Fair Value Measurements.

⁽²⁾

Not included in the table above are all other assets of $148 million and $189 million, representing the unpaid principal balance of mortgage loans eligible for repurchase from unconsolidated residential mortgage securitization vehicles, principally guaranteed by GNMA, and all other liabilities of $148 million and $189 million, representing the principal amount that would be payable to the securitization vehicles if the Corporation was to exercise the repurchase option, at December 31, 2017 and 2016.


⁽³⁾	Principal balance outstanding includes loans where the Corporation was the transferor to securitization vehicles with which it has continuing involvement, which may include servicing the loans.

Other Asset-backed Securitizations

The table below summarizes select information related to home equity loan, credit card and other asset-backed VIEs in which the Corporation held a variable interest at December 31, 2017 and 2016.




Home Equity Loan, Credit Card and Other Asset-backed VIEs

	Home Equity Loan ⁽¹⁾						Credit Card ^{(2, 3)}						Resecuritization Trusts				Municipal Bond Trusts
	December 31
(Dollars in millions)	2017			2016			2017			2016			2017		2016		2017		2016
Unconsolidated VIEs
Maximum loss exposure	$	1,522		$	2,732		$	—		$	—		$	8,204	$	9,906	$	1,631	$	1,635
On-balance sheet assets
Senior securities ⁽⁴⁾:
Trading account assets	$	—		$	—		$	—		$	—		$	869	$	902	$	33	$	—
Debt securities carried at fair value	36			46			—			—			1,661		2,338		—		—
Held-to-maturity securities	—			—			—			—			5,644		6,569		—		—
Subordinate securities ⁽⁴⁾	—			—			—			—			30		97		—		—
Total retained positions	$	36		$	46		$	—		$	—		$	8,204	$	9,906	$	33	$	—
Total assets of VIEs ⁽⁵⁾	$	2,432		$	4,274		$	—		$	—		$	19,281	$	22,155	$	2,287	$	2,406

Consolidated VIEs
Maximum loss exposure	$	112		$	149		$	24,337		$	25,859		$	628	$	420	$	1,453	$	1,442
On-balance sheet assets
Trading account assets	$	—		$	—		$	—		$	—		$	1,557	$	1,428	$	1,452	$	1,454
Loans and leases	177			244			32,554			35,135			—		—		—		—
Allowance for loan and lease losses	(9		)	(16		)	(988		)	(1,007		)	—		—		—		—
All other assets	6			7			1,385			793			—		—		1		—
Total assets	$	174		$	235		$	32,951		$	34,921		$	1,557	$	1,428	$	1,453	$	1,454
On-balance sheet liabilities
Short-term borrowings	$	—		$	—		$	—		$	—		$	—	$	—	$	312	$	348
Long-term debt	76			108			8,598			9,049			929		1,008		—		12
All other liabilities	—			—			16			13			—		—		—		—
Total liabilities	$	76		$	108		$	8,614		$	9,062		$	929	$	1,008	$	312	$	360

⁽¹⁾

For unconsolidated home equity loan VIEs, the maximum loss exposure includes outstanding trust certificates issued by trusts in rapid amortization, net of recorded reserves. For both consolidated and unconsolidated home equity loan VIEs, the maximum loss exposure excludes the reserve for representations and warranties obligations and corporate guarantees. For more information, see Note 7 – Representations and Warranties Obligations and Corporate Guarantees.


⁽²⁾	At December 31, 2017 and 2016, loans and leases in the consolidated credit card trust included $15.6 billion and $17.6 billion of seller’s interest.


⁽³⁾	At December 31, 2017 and 2016, all other assets in the consolidated credit card trust included restricted cash, certain short-term investments, and unbilled accrued interest and fees.


⁽⁴⁾	The retained senior and subordinate securities were valued using quoted market prices or observable market inputs (Level 2 of the fair value hierarchy).


⁽⁵⁾	Total assets include loans the Corporation transferred with which it has continuing involvement, which may include servicing the loan.

Home Equity Loans

The Corporation retains interests in home equity securitization trusts to which it transferred home equity loans. These retained interests primarily include senior securities. In addition, the Corporation may be obligated to provide subordinate funding to the trusts during a rapid amortization event. This obligation is included in the maximum loss exposure in the table above. The charges that will ultimately be recorded as a result of the rapid amortization events depend on the undrawn portion of the home equity lines of credit (HELOCs), performance of the loans, the amount of subsequent draws and the timing of related cash flows.

During 2015, the Corporation deconsolidated several HELOC trusts with total assets of $488 million and total liabilities of $611 million as its obligation to provide subordinated funding is no longer considered to be a potentially significant variable interest in the trusts following a decline in the amount of credit available to be drawn by borrowers. In connection with deconsolidation, the Corporation recorded a gain of $123 million in other income in the Consolidated Statement of Income. The derecognition of assets and liabilities represents non-cash investing and financing activities and, accordingly, is not reflected on the Consolidated Statement of Cash Flows. There were no deconsolidations of HELOC trusts in 2017 or 2016.

Credit Card Securitizations

The Corporation securitizes originated and purchased credit card loans. The Corporation’s continuing involvement with the securitization trust includes servicing the receivables, retaining an undivided interest (seller’s interest) in the receivables, and holding certain retained interests including subordinate interests in accrued interest and fees on the securitized receivables and cash reserve accounts.

During 2017, 2016 and 2015, new senior debt securities issued to third-party investors from the credit card securitization trust were $3.1 billion, $750 million and $2.3 billion.

At December 31, 2017 and 2016, the Corporation held subordinate securities issued by the credit card securitization trust with a notional principal amount of $7.4 billion and $7.5 billion. These securities serve as a form of credit enhancement to the senior debt securities and have a stated interest rate of zero percent. During 2017, 2016 and 2015, the credit card securitization trust issued $500 million, $121 million and $371 million of these subordinate securities.

Resecuritization Trusts

The Corporation transfers securities, typically MBS, into resecuritization vehicles at the request of customers seeking securities with specific characteristics. Generally, there are no significant ongoing activities performed in a resecuritization trust, and no single investor has the unilateral ability to liquidate the trust.

The Corporation resecuritized $25.1 billion, $23.4 billion and $30.7 billion of securities in 2017, 2016 and 2015. Securities transferred into resecuritization vehicles during 2017, 2016 and 2015 were measured at fair value with changes in fair value recorded in trading account profits prior to the resecuritization and no gain or loss on sale was recorded. During 2017, 2016 and 2015, resecuritization proceeds included securities with an initial fair value of $3.3 billion, $3.3 billion and $9.8 billion, including $6.9 billion which were classified as HTM during 2015. Substantially all of the other securities received as resecuritization proceeds were classified as trading securities and were categorized as Level 2 within the fair value hierarchy.

Municipal Bond Trusts

The Corporation administers municipal bond trusts that hold highly-rated, long-term, fixed-rate municipal bonds. The trusts obtain financing by issuing floating-rate trust certificates that reprice on a weekly or other short-term basis to third-party investors.

The Corporation’s liquidity commitments to unconsolidated municipal bond trusts, including those for which the Corporation was transferor, totaled $1.6 billion at both December 31, 2017 and 2016. The weighted-average remaining life of bonds held in the trusts at December 31, 2017 was 6.0 years. There were no material write-downs or downgrades of assets or issuers during 2017, 2016 and 2015.

Other Variable Interest Entities

The table below summarizes select information related to other VIEs in which the Corporation held a variable interest at December 31, 2017 and 2016.




Other VIEs

	Consolidated			Unconsolidated			Total			Consolidated			Unconsolidated			Total
	December 31
(Dollars in millions)	2017									2016
Maximum loss exposure	$	4,660		$	19,785		$	24,445		$	6,114		$	17,754		$	23,868
On-balance sheet assets
Trading account assets	$	2,709		$	346		$	3,055		$	2,358		$	233		$	2,591
Debt securities carried at fair value	—			160			160			—			122			122
Loans and leases	2,152			3,596			5,748			3,399			3,249			6,648
Allowance for loan and lease losses	(3		)	(32		)	(35		)	(9		)	(24		)	(33		)
Loans held-for-sale	27			940			967			188			464			652
All other assets	62			14,276			14,338			369			13,156			13,525
Total	$	4,947		$	19,286		$	24,233		$	6,305		$	17,200		$	23,505
On-balance sheet liabilities
Long-term debt ⁽¹⁾	$	270		$	—		$	270		$	395		$	—		$	395
All other liabilities	18			3,417			3,435			24			2,959			2,983
Total	$	288		$	3,417		$	3,705		$	419		$	2,959		$	3,378
Total assets of VIEs	$	4,947		$	69,746		$	74,693		$	6,305		$	62,269		$	68,574


⁽¹⁾	Includes $1 million and $229 million of long-term debt at December 31, 2017 and 2016 issued by other consolidated VIEs, which has recourse to the general credit of the Corporation.

Customer Vehicles

Customer vehicles include credit-linked, equity-linked and commodity-linked note vehicles, repackaging vehicles, and asset acquisition vehicles, which are typically created on behalf of customers who wish to obtain market or credit exposure to a specific company, index, commodity or financial instrument.

The Corporation’s maximum loss exposure to consolidated and unconsolidated customer vehicles totaled $2.3 billion and $2.9 billion at December 31, 2017 and 2016, including the notional amount of derivatives to which the Corporation is a counterparty, net of losses previously recorded, and the Corporation’s investment, if any, in securities issued by the vehicles. The Corporation also had liquidity commitments, including written put options and collateral value guarantees, with certain unconsolidated vehicles of $442 million and $323 million at December 31, 2017 and 2016, that are included in the table above.

Collateralized Debt Obligation Vehicles

The Corporation receives fees for structuring CDO vehicles, which hold diversified pools of fixed-income securities, typically corporate debt or ABS, which the CDO vehicles fund by issuing multiple tranches of debt and equity securities. CDOs are generally managed by third-party portfolio managers. The Corporation typically transfers assets to these CDOs, holds securities issued by the CDOs and may be a derivative counterparty to the CDOs. The Corporation’s maximum loss exposure to consolidated and unconsolidated CDOs totaled $358 million and $430 million at December 31, 2017 and 2016.

Investment Vehicles

The Corporation sponsors, invests in or provides financing, which may be in connection with the sale of assets, to a variety of investment vehicles that hold loans, real estate, debt securities or other financial instruments and are designed to provide the desired investment profile to investors or the Corporation. At December 31, 2017 and 2016, the Corporation’s consolidated investment vehicles had total assets of $249 million and $846 million. The Corporation also held investments in unconsolidated vehicles with total assets of $20.3 billion and $17.3 billion at December 31, 2017 and 2016. The Corporation’s maximum loss exposure associated with both consolidated and unconsolidated investment vehicles totaled $5.7 billion and $5.1 billion at December 31, 2017 and 2016 comprised primarily of on-balance sheet assets less non-recourse liabilities.

In prior periods, the Corporation transferred servicing advance receivables to independent third parties in connection with the sale of MSRs. Portions of the receivables were transferred into unconsolidated securitization trusts. The Corporation retained senior interests in such receivables with a maximum loss exposure and funding obligation of $50 million and $150 million, including a funded balance of $39 million and $75 million at December 31, 2017 and 2016, which were classified in other debt securities carried at fair value.

Leveraged Lease Trusts

The Corporation’s net investment in consolidated leveraged lease trusts totaled $2.0 billion and $2.6 billion at December 31, 2017 and 2016. The trusts hold long-lived equipment such as rail cars, power generation and distribution equipment, and commercial aircraft. The Corporation structures the trusts and holds a significant residual interest. The net investment represents the Corporation’s maximum loss exposure to the trusts in the unlikely event that the leveraged lease investments become worthless. Debt issued by the leveraged lease trusts is non-recourse to the Corporation.

Tax Credit Vehicles

The Corporation holds investments in unconsolidated limited partnerships and similar entities that construct, own and operate affordable housing, wind and solar projects. An unrelated third party is typically the general partner or managing member and has control over the significant activities of the vehicle. The Corporation earns a return primarily through the receipt of tax credits allocated to the projects. The maximum loss exposure included in the Other VIEs table was $13.8 billion and $12.6 billion at December 31, 2017 and 2016. The Corporation’s risk of loss is generally mitigated by policies requiring that the project qualify for the expected tax credits prior to making its investment.

The Corporation’s investments in affordable housing partnerships, which are reported in other assets on the Consolidated Balance Sheet, totaled $8.0 billion and $7.4 billion, including unfunded commitments to provide capital contributions of $3.1 billion and $2.7 billion at December 31, 2017 and 2016. The unfunded commitments are expected to be paid over the next 5 years. During 2017, 2016 and 2015, the Corporation recognized tax credits and other tax benefits from investments in affordable housing partnerships of $1.0 billion, $1.1 billion and $928 million and reported pre-tax losses in other noninterest income of $766 million, $789 million and $629 million, respectively. Tax credits are recognized as part of the Corporation’s annual effective tax rate used to determine tax expense in a given quarter. Accordingly, the portion of a year’s expected tax benefits recognized in any given quarter may differ from 25 percent. The Corporation may from time to time be asked to invest additional amounts to support a troubled affordable housing project. Such additional investments have not been and are not expected to be significant.