Bank of America Corporation Quarterly report pursuant to Section 13 or 15(d)

Quarterly report pursuant to Section 13 or 15(d)

Commitments and Contingencies

Commitments and Contingencies

9 Months Ended

Sep. 30, 2022

Commitments and Contingencies Disclosure [Abstract]

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 2021 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 and $10.7 billion at September 30, 2022 and December 31, 2021. The carrying value of the Corporation’s credit extension commitments at both September 30, 2022 and December 31, 2021, excluding commitments accounted for under the fair value option, were $1.5 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 $3.5 billion and $4.8 billion at September 30, 2022 and December 31, 2021 that are accounted for under the fair value option. However, the table excludes the cumulative net fair value for these commitments of $200 million and $97 million at September 30, 2022 and December 31, 2021, 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.



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, 2022
Notional amount of credit extension commitments
Loan commitments (1)	$	108,780	$	159,380	$	210,765	$	20,174	$	499,099
Home equity lines of credit	1,285		6,643		11,310		22,120		41,358
Standby letters of credit and financial guarantees (2)	23,186		10,561		2,762		449		36,958
Letters of credit	946		70		37		49		1,102
Other commitments (3)	25		65		43		1,161		1,294
Legally binding commitments	134,222		176,719		224,917		43,953		579,811
Credit card lines (4)	426,749		—		—		—		426,749
Total credit extension commitments	$	560,971	$	176,719	$	224,917	$	43,953	$	1,006,560

	December 31, 2021
Notional amount of credit extension commitments
Loan commitments (1)	$	102,464	$	190,687	$	174,978	$	26,635	$	494,764
Home equity lines of credit	890		5,097		10,268		24,276		40,531
Standby letters of credit and financial guarantees (2)	22,359		10,742		2,017		422		35,540
Letters of credit	1,145		124		56		98		1,423
Other commitments (3)	18		59		81		1,233		1,391
Legally binding commitments	126,876		206,709		187,400		52,664		573,649
Credit card lines (4)	406,169		—		—		—		406,169
Total credit extension commitments	$	533,045	$	206,709	$	187,400	$	52,664	$	979,818

(1) At September 30, 2022 and December 31, 2021, $3.2 billion and $4.6 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 $26.4 billion and $10.1 billion at September 30, 2022, and $26.3 billion and $8.7 billion at December 31, 2021. Amounts in the table include consumer SBLCs of $534 million and $512 million at September 30, 2022 and December 31, 2021.

(3) Primarily includes second-loss positions on lease-end residual value guarantees.

(4) Includes business card unused lines of credit.

Other Commitments

At September 30, 2022 and December 31, 2021, the Corporation had commitments to purchase loans (e.g., residential mortgage and commercial real estate) of $655 million and $181 million, which upon settlement will be included in trading account assets, loans or LHFS, and commitments to purchase commercial loans of $395 million and $518 million, which upon settlement will be included in trading account assets.

At September 30, 2022 and December 31, 2021, the Corporation had commitments to purchase commodities, primarily liquefied natural gas, of $253 million and $949 million, which upon settlement will be included in trading account assets.

At September 30, 2022 and December 31, 2021, the Corporation had commitments to enter into resale and forward-dated resale and securities borrowing agreements of $89.5 billion and $92.0 billion, and commitments to enter into forward-dated repurchase and securities lending agreements of $70.1 billion and $32.6 billion. These commitments generally expire within the next 12 months.

At September 30, 2022 and December 31, 2021, the Corporation had a commitment to originate or purchase up to $3.7 billion and $4.0 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 September 30, 2022 and December 31, 2021, the Corporation had unfunded equity investment commitments of $720 million and $395 million.

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, 2022 and December 31, 2021, the notional amount of these guarantees totaled $4.4 billion and $6.3 billion. At September 30, 2022 and December 31, 2021, the Corporation’s maximum exposure related to these guarantees totaled $650 million and $928 million, with estimated maturity dates between 2033 and 2039.

Merchant Services

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 $509 billion, is an estimate of the Corporation’s maximum potential exposure as of September 30, 2022. 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 2021 Annual Report on Form 10-K.

The reserve for representations and warranties obligations and corporate guarantees was $1.0 billion and $1.2 billion at September 30, 2022 and December 31, 2021 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 $38.6 billion and $42.0 billion at September 30, 2022 and December 31, 2021.

Other 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.

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 issued by certain statutory trust companies that are 100 percent owned finance subsidiaries of the Corporation.

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 2021 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 below and the matters disclosed 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-related expense of $507 million and $1.1 billion was recognized for the three and nine months ended September 30, 2022 compared to $66 million and $155 million for the same periods in 2021.

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 $0.7 billion in excess of the accrued liability, if any, as of September 30, 2022.

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.

Ambac Bond Insurance Litigation

Ambac v. Countrywide I

Ambac v. Countrywide II

Ambac v. First Franklin

On October 6, 2022, the Corporation and certain wholly owned subsidiaries entered into an agreement with Ambac Assurance Corporation (together with its subsidiaries, “Ambac”) to resolve the above referenced matters. Under the terms of the agreement, in exchange for the Corporation’s payment of $1.84 billion, Ambac, among other things, caused these matters to be dismissed with prejudice, and released the Corporation and its subsidiaries from all outstanding claims related to Ambac’s issuance of bond insurance policies for certain of the Corporation’s and legacy entities’ securitized pools of residential mortgage loans.

Prepaid Debit Card Investigations

On July 14, 2022, 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 administration of prepaid debit cards to distribute unemployment benefits. The orders found that BANA’s fraud prevention measures and resolution of potentially unauthorized transactions improperly delayed or denied access by certain cardholders to account funds. Without admitting or denying the findings, BANA consented to orders requiring it to improve its processes, review accounts and compensate cardholders, and pay penalties of $125 million and $100 million to the OCC and CFPB, respectively. The Corporation continues to defend civil litigation, including putative class actions, concerning BANA’s administration of these prepaid debit card programs.

Record-keeping Investigations

Certain of the Corporation’s U.S. subsidiaries have been cooperating with investigations by the SEC and U.S. Commodity Futures Trading Commission (CFTC) regarding compliance by financial institutions with record-keeping obligations for broker-dealers, investment advisors, swap dealers and futures commission merchants pertaining to business-related electronic communications sent over unapproved electronic messaging channels. On September 27, 2022, these subsidiaries entered into resolutions with the SEC and CFTC to resolve their respective civil investigations. The SEC and CFTC found that BofA Securities, Inc. and Merrill Lynch, Pierce Fenner & Smith

Incorporated did not maintain copies of certain communications required to be maintained under their respective record-keeping rules, where such communications were sent or received by employees over electronic messaging channels that had not been approved for employee use. The CFTC resolution also includes BANA. The SEC and CFTC also found related supervision failures. Under these resolutions, a $125 million civil monetary penalty was paid to the SEC, and a $100 million civil monetary penalty was paid to the CFTC.