Quarterly report pursuant to Section 13 or 15(d)

Commitments and Contingencies

v3.19.3
Commitments and Contingencies
9 Months Ended
Sep. 30, 2019
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 2018 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 following table includes the notional amount of unfunded legally binding lending commitments net of amounts
distributed (i.e., syndicated or participated) to other financial institutions. The distributed amounts were $10.9 billion and $10.7 billion at September 30, 2019 and December 31, 2018. At September 30, 2019, the carrying value of these commitments, excluding commitments accounted for under the fair value option, was $826 million, including deferred revenue of $17 million and a reserve for unfunded lending commitments of $809 million. At December 31, 2018, the comparable amounts were $813 million, $16 million and $797 million, respectively. The carrying value of these commitments is classified in accrued expenses and other liabilities on the Consolidated Balance Sheet.
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.
The table below also includes the notional amount of commitments of $4.8 billion and $3.1 billion at September 30, 2019 and December 31, 2018 that are accounted for under the fair value option. However, the table excludes cumulative net fair value of $116 million and $169 million at September 30, 2019 and December 31, 2018 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 16 – Fair Value Option.
 
 
 
 
 
 
 
 
 
 
Credit Extension Commitments
 
 
 
 
 
 
 
 
 
 
 
 
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
(Dollars in millions)
September 30, 2019
Notional amount of credit extension commitments
 

 
 

 
 

 
 

 
 

Loan commitments (1)
$
90,401

 
$
150,634

 
$
166,467

 
$
20,344

 
$
427,846

Home equity lines of credit
1,379

 
1,854

 
5,459

 
34,601

 
43,293

Standby letters of credit and financial guarantees (2)
20,206

 
10,530

 
3,365

 
1,179

 
35,280

Letters of credit (3)
1,060

 
246

 
60

 
45

 
1,411

Legally binding commitments
113,046

 
163,264

 
175,351

 
56,169

 
507,830

Credit card lines (4)
377,392

 

 

 

 
377,392

Total credit extension commitments
$
490,438

 
$
163,264

 
$
175,351

 
$
56,169

 
$
885,222

 
 
 
 
 
 
 
 
 
 
 
December 31, 2018
Notional amount of credit extension commitments
 

 
 

 
 

 
 

 
 

Loan commitments (1)
$
84,910

 
$
142,271

 
$
155,298

 
$
22,683

 
$
405,162

Home equity lines of credit
2,578

 
2,249

 
3,530

 
34,702

 
43,059

Standby letters of credit and financial guarantees (2)
22,571

 
9,702

 
2,457

 
1,074

 
35,804

Letters of credit (3)
1,168

 
84

 
69

 
57

 
1,378

Legally binding commitments
111,227

 
154,306

 
161,354

 
58,516

 
485,403

Credit card lines (4)
371,658

 

 

 

 
371,658

Total credit extension commitments
$
482,885

 
$
154,306

 
$
161,354

 
$
58,516

 
$
857,061

(1)  
At September 30, 2019 and December 31, 2018, $5.3 billion and $4.3 billion of these loan commitments are held in the form of a security.
(2)  
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 $26.6 billion and $8.3 billion at September 30, 2019, and $28.3 billion and $7.1 billion at December 31, 2018. Amounts in the table include consumer SBLCs of $406 million and $372 million at September 30, 2019 and December 31, 2018.
(3)  
At September 30, 2019 and December 31, 2018, included are letters of credit of $1.1 billion and $422 million related to certain liquidity commitments of VIEs. For additional information, see Note 7 – Securitizations and Other Variable Interest Entities.
(4) 
Includes business card unused lines of credit.
Other Commitments
At September 30, 2019 and December 31, 2018, the Corporation had commitments to purchase loans (e.g., residential mortgage and commercial real estate) of $135 million and $329 million, which upon settlement will be included in loans or LHFS, and commitments to purchase commercial loans of $464 million and $463 million, which upon settlement will be included in trading account assets.
At September 30, 2019 and December 31, 2018, the Corporation had commitments to purchase commodities, primarily liquefied natural gas, of $976 million and $1.3 billion, which upon settlement will be included in trading account assets.
At September 30, 2019 and December 31, 2018, the Corporation had commitments to enter into resale and forward-dated resale and securities borrowing agreements of $119.7 billion and $59.7 billion, and commitments to enter into forward-dated repurchase and securities lending agreements of $64.4 billion and $21.2 billion. These commitments expire primarily within the next 15 months.
At September 30, 2019 and December 31, 2018, the Corporation had a commitment to originate or purchase up to $3.2 billion and $3.0 billion on a rolling 12-month basis, of auto loans and leases from a strategic partner. This commitment extends through November 2022 and can be terminated with 12 months prior notice.
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. At September 30, 2019 and December 31, 2018, the notional amount of these guarantees totaled $7.2 billion and $9.8 billion. At September 30, 2019 and December 31, 2018, the Corporation’s maximum exposure related to these guarantees totaled $1.1 billion and $1.5 billion, with estimated maturity dates between 2033 and 2039.
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. If a merchant processor fails to meet its obligation regarding disputed transactions, then the Corporation could be held liable. For the three and nine months ended September 30, 2019, the sponsored entities processed $229.4 billion and $670.6 billion of transactions and recorded losses of $6 million and $17 million. For the same periods in 2018, the sponsored entities processed $220.0 billion and $646.9 billion of transactions and recorded losses of $6 million and $23 million.
At September 30, 2019 and December 31, 2018, the maximum potential exposure for sponsored transactions totaled $375.7 billion and $348.1 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.
A significant portion of the Corporation's merchant processing activity is performed by a joint venture, formed in 2009, in which the Corporation holds a 49 percent ownership interest. The carrying value of the Corporation’s investment was $652 million and $2.8 billion at September 30, 2019 and December 31, 2018. The joint venture is accounted for as an equity method investment and reported in All Other. On July 29, 2019, the Corporation gave notice to the joint venture partner of the termination of the joint venture upon the conclusion of its current term in June 2020. As a result, the Corporation incurred a non-cash, pretax impairment charge in the three months ended September 30, 2019 of $2.1 billion, included in other general operating expense.
Representations and Warranties Obligations and Corporate Guarantees
For more information on representations and warranties obligations and corporate guarantees, and the related reserve and estimated range of possible loss, see Note 12 – Commitments and
Contingencies to the Consolidated Financial Statements of the Corporation’s 2018 Annual Report on Form 10-K.
The reserve for representations and warranties obligations and corporate guarantees was $1.8 billion and $2.0 billion at September 30, 2019 and December 31, 2018 and is included in accrued expenses and other liabilities on the Consolidated Balance Sheet and the related provision is included in other income in the Consolidated Statement of Income. The representations and warranties reserve represents the Corporation’s best estimate of probable incurred losses. It is reasonably possible that future representations and warranties losses may occur in excess of the amounts recorded for these exposures. See Litigation and Regulatory Matters below for the Corporation’s combined range of possible loss in excess of the reserve for representations and warranties and the accrued liability for litigation.
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 $8.1 billion and $5.9 billion at September 30, 2019 and December 31, 2018. The Corporation has made no material payments under these guarantees. For more information on maximum potential future payments under VIE-related liquidity commitments, see Note 7 – Securitizations and Other Variable Interest Entities.
During the three months ended September 30, 2019, the Corporation recognized a loss of $135 million in other income under its indemnity obligation in connection with the sale of its non-U.S. consumer credit card business (payment protection insurance). For additional information, see Note 12 – Commitments and Contingencies to the Consolidated Financial Statements of the Corporation’s 2018 Annual Report on Form 10-K.
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.
Guarantees of Certain Long-term Debt
The Corporation, as the parent company, fully and unconditionally guarantees the securities issued by BofA Finance LLC, a 100 percent owned finance subsidiary of the Corporation, and effectively provides for the full and unconditional guarantee of trust securities issued by certain statutory trust companies that are 100 percent owned finance subsidiaries of the Corporation.
Litigation and Regulatory Matters
The following disclosure supplements the disclosure in Note 12 – Commitments and Contingencies to the Consolidated Financial Statements of the Corporation’s 2018 Annual Report on Form 10-K (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 the eventual outcome of the pending matters, the timing of the ultimate resolution of these
matters, or any eventual loss, fines or penalties related to each pending matter.
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. Excluding expenses of internal and external legal service providers, litigation-related expense of $352 million and $539 million was recognized for the three and nine months ended September 30, 2019 compared to $90 million and $292 million for the same periods in 2018.
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. With respect to such matters, 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 disclosed matters where an estimate of the range of possible loss is possible, as well as for representations and warranties exposures, management currently estimates the aggregate range of reasonably possible loss for these exposures is $0 to $1.8 billion in excess of the accrued liability, if any. 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 the litigation 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 below, 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.
Investigations of Precious Metals Trading
In connection with the U.S. Commodity Futures Trading Commission's (CFTC) and U.S. Department of Justice's (DoJ) investigations of precious metals market trading practices, on June 25, 2019, Merrill Lynch Commodities, Inc. (MLCI), an indirect wholly-owned subsidiary of the Corporation, entered into a civil settlement with the CFTC and a non-prosecution agreement with the DoJ. Those resolutions resulted in settlement payments totaling $36.5 million and require MLCI and the Corporation to undertake certain remedial measures and other obligations.
Mortgage Appraisal Litigation
The District Court has scheduled the cases for trial beginning January 14, 2020.
Mortgage Repurchase Litigation
U.S. Bank - SURF/OWNIT Repurchase Litigation
On July 19, 2019, a settlement regarding one of the seven securitization trusts (the Trusts) became final. For the remaining six Trusts, the defendants and certain certificate-holders agreed to settle the respective litigations in amounts not material to the Corporation, subject to acceptance by U.S. Bank.