Commitments and Contingencies
|6 Months Ended
Jun. 30, 2023
|Commitments and Contingencies Disclosure [Abstract]
|Commitments and Contingencies
|Commitments and ContingenciesIn 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 2022 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 $10.4 billion at both June 30, 2023 and December 31, 2022. The carrying value of the Corporation’s credit extension commitments at June 30, 2023 and December 31, 2022, excluding commitments accounted for under the fair value option, was $1.4 billion and $1.6 billion, which predominantly related to the reserve for unfunded lending commitments. 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 following table includes the notional amount of commitments of $2.6 billion and $3.0 billion at June 30, 2023 and December 31, 2022 that are accounted for under the fair value option. However, the table excludes the cumulative net fair value for these commitments of $75 million and $110 million at June 30, 2023 and December 31, 2022, 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.
(1) At June 30, 2023 and December 31, 2022, $3.3 billion and $2.6 billion of these loan commitments were 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 $24.3 billion and $9.5 billion at June 30, 2023, and $25.1 billion and $9.5 billion at December 31, 2022. Amounts in the table include consumer SBLCs of $599 million and $575 million at June 30, 2023 and December 31, 2022.
(3) Primarily includes second-loss positions on lease-end residual value guarantees.
(4) Includes business card unused lines of credit.
At June 30, 2023 and December 31, 2022, the Corporation had commitments to purchase loans (e.g., residential mortgage and commercial real estate) of $719 million and $636 million, which upon settlement will be included in trading account assets, loans or LHFS, and commitments to purchase commercial loans of $350 million and $294 million, which upon settlement will be included in trading account assets.
At June 30, 2023 and December 31, 2022, the Corporation had commitments to enter into resale and forward-dated resale and securities borrowing agreements of $132.0 billion and $92.0 billion, and commitments to enter into forward-dated repurchase and securities lending agreements of $77.5 billion and $57.8 billion. A significant portion of these commitments will expire within the next 12 months.
At June 30, 2023 and December 31, 2022, the Corporation had a commitment to originate or purchase up to $4.1 billion and $3.7 billion on a rolling 12-month basis, of auto loans and leases from a strategic partner. This commitment extends through November 2026 and can be terminated with 12 months prior notice.
At June 30, 2023 and December 31, 2022, the Corporation had unfunded equity investment commitments of $527 million and $571 million.
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 both June 30, 2023 and December 31, 2022, the notional amount of these guarantees totaled $4.3 billion. At June 30, 2023 and December 31, 2022, the Corporation’s maximum exposure related to these guarantees totaled $634 million and $632 million, with estimated maturity dates between 2033 and 2039.
The Corporation in its role as merchant acquirer or as a sponsor of other merchant acquirers may be held liable for any reversed charges that cannot be collected from the merchants due to, among other things, merchant fraud or insolvency. If charges are properly reversed after a purchase and cannot be collected from either the merchants or merchant acquirers, the Corporation may be held liable for these reversed charges. The ability to reverse a charge is primarily governed by the applicable payment network rules and regulations, which include, but are not limited to, the type of charge, type of payment used and time limits. The total amount of transactions subject to reversal under payment network rules and regulations processed for the preceding six-month period, which was approximately $436 billion, is an estimate of the Corporation’s maximum potential exposure as of June 30, 2023. The Corporation’s risk in this area primarily relates to circumstances where a cardholder has purchased goods or services for future delivery. The Corporation mitigates this risk by requiring cash deposits, guarantees, letters of credit or other types of collateral from certain merchants. The Corporation’s reserves for contingent losses and the losses incurred related to the merchant processing activity were not significant.
Representations and Warranties Obligations and Corporate Guarantees
For more information on representations and warranties obligations and corporate guarantees, see Note 12 – Commitments and Contingencies to the Consolidated Financial Statements of the Corporation’s 2022 Annual Report on Form 10-K.
The reserve for representations and warranties obligations and corporate guarantees was $622 million and $612 million at June 30, 2023 and December 31, 2022 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, is based on its experience in previous negotiations, and is subject to judgment, a variety of assumptions, and known or unknown uncertainties. Future representations and warranties losses may occur in excess of the amounts recorded for these exposures; however, the Corporation does not expect such amounts to be material to the Corporation's financial condition and liquidity. 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.
Fixed Income Clearing Corporation Sponsored Member Repo Program
The Corporation acts as a sponsoring member in a repo program whereby the Corporation clears certain eligible resale and repurchase agreements through the Government Securities Division of the Fixed Income Clearing Corporation on behalf of clients that are sponsored members in accordance with the Fixed Income Clearing Corporation’s rules. As part of this program, the Corporation guarantees the payment and performance of its sponsored members to the Fixed Income Clearing Corporation. The Corporation’s guarantee obligation is secured by a security interest in cash or high-quality securities collateral placed by clients with the clearinghouse and therefore, the potential for the Corporation to incur significant losses under this arrangement is remote. The Corporation’s maximum potential exposure, without taking into consideration the related collateral, was $48.7 billion and $59.6 billion at June 30, 2023 and December 31, 2022.
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 consolidated finance subsidiary of the Corporation, and effectively provides for the full and unconditional guarantee of trust securities and capital securities issued by certain statutory trust companies that are 100 percent owned finance subsidiaries of the Corporation.
On May 11, 2023, the Federal Deposit Insurance Corporation (FDIC) issued a proposed rule that would impose a special assessment to recover the loss to the Deposit Insurance Fund (DIF) arising from the protection of uninsured depositors of Silicon Valley Bank and Signature Bank associated with their closures, and the systemic risk determination announced by the FDIC on March 12, 2023. Under the proposed rule, the assessment base for the special assessment would be equal to an insured depository institution’s estimated uninsured deposits reported as of December 31, 2022, adjusted to exclude the first $5 billion in estimated uninsured deposits. The FDIC would collect the special assessment over eight quarterly periods, beginning with the first quarterly assessment period of 2024. In addition, the special assessment would be subject toadjustment as the estimated loss to the DIF is updated. While the timing and amount of any expense recognition are unknown until the proposed rule is finalized, if the final rule is issued as proposed, the estimated impact of the special assessment on the Corporation would be a noninterest expense of approximately $1.9 billion that would be recognized upon finalization of the rule.
Litigation and Regulatory Matters
The following disclosures supplement the disclosure in Note 12 – Commitments and Contingencies to the Consolidated Financial Statements of the Corporation’s 2022 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, timing of the ultimate resolution of these matters, or eventual loss, fines or penalties related to each pending matter.
As a matter develops, the Corporation, in conjunction with any outside counsel handling the matter, evaluates whether such matter presents a loss contingency that is probable and estimable, and, for the matters disclosed below and in the prior commitments and contingencies disclosure, whether a loss in excess of any accrued liability is reasonably possible in future periods. 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 and regulatory investigation-related expense of $276 million and $365 million was recognized for the three and six months ended June 30, 2023 compared to $498 million and $604 million for the same periods in 2022.
For any matter disclosed in this Note and in the prior commitments and contingencies disclosure for which a loss in future periods is reasonably possible and estimable (whether in excess of an accrued liability or where there is no accrued liability) and for representations and warranties exposures, the Corporation’s estimated range of possible loss is $0 to $0.8 billion in excess of the accrued liability, if any, as of June 30, 2023.
The accrued liability and estimated range of possible loss are based upon currently available information and subject to significant judgment, a variety of assumptions and known and unknown uncertainties. The matters underlying the accrued liability and estimated range of possible loss are unpredictable and may change from time to time, and actual losses may vary significantly from the current estimate and accrual. The estimated range of possible loss does not represent the Corporation’s maximum loss exposure.
Information is provided below and in the prior commitments and contingencies disclosure regarding the nature of the litigation and, where specified, associated claimed damages. Based on current knowledge, and taking into account accrued liabilities, 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 condition or liquidity of the Corporation. However, in light of the significant judgment, variety of assumptions and uncertainties involved in those matters, some of which are beyond the Corporation’s control, and the very large or indeterminate damages sought in some of those matters, an adverse outcome in one or more of those matters could be material to the Corporation’s business or results of operations for any particular reporting period, or cause significant reputational harm.
Deposit Insurance Assessment
On April 10, 2023, the magistrate judge issued a report and recommendation (the Report) for resolving the parties’ pending summary judgment motions. The Report recommends granting the FDIC motion for summary judgment on BANA’s statutory liability for the unpaid assessments, subject to BANA’s statute of limitations defenses to assessments for the quarters ended March 31, 2012 through March 31, 2013, on which the Report recommends that relevant issues should be resolved at trial. The Report also recommends denying BANA’s counterclaims challenging the adoption of the relevant assessment regulations and granting BANA’s motion for summary judgment on the FDIC’s claims for unjust enrichment and disgorgement. The Report has been submitted to the district court judge for consideration, and the parties have filed objections to the recommendations in the Report.
Representment Non-Sufficient Fund Fees
On July 11, 2023, it was announced that BANA agreed to settle two separate proceedings with the Office of the Comptroller of the Currency (OCC) and Consumer Financial Protection Bureau (CFPB) related to BANA’s assessing overdraft or insufficient funds fees each time a merchant resubmitted a transaction or check for payment after it had been declined due to insufficient funds (Representment Fees). Without admitting or denying the findings, BANA consented to orders requiring it to pay penalties of $60 million to each of the OCC and CFPB. Under the CFPB Consent Order, among other things, BANA also consented to refund at least $80.4 million to customers who were assessed Representment Fees between September 1, 2018 to February 18, 2022.
Credit Card Sales and Marketing Practices
On July 11, 2023, it was announced that BANA agreed to a settlement with the CFPB related to online advertisements concerning bonuses linked to rewards credit cards and failure to provide those bonuses to certain consumers, and applying for and opening credit cards for consumers without their consent and obtaining credit reports for those consumers. Without admitting or denying the findings, BANA agreed to the entry of a Consent Order requiring payment of a $30 million penalty and certain undertakings concerning consumer redress.
Unemployment Insurance Prepaid Cards
BANA has been named as a defendant in a number of putative class action, mass action, and individual lawsuits in multiple states related to its administration of prepaid debit cards to distribute unemployment and other state benefits. These lawsuits generally assert claims for monetary damages and injunctive relief. Class action and mass action lawsuits related to the California program, the largest program administered by BANA measured by total benefits and number of participants, have been consolidated into a multidistrict litigation (MDL) in the U.S. District Court for the Southern District of California. On May 25, 2023, the court dismissed certain of the claims in the MDL while allowing others to proceed, and plaintiffs subsequently filed an amended complaint. BANA filed a partial motion to dismiss certain of the remaining claims in the amended complaint in the MDL, which is currently pending.