Bank of America 2007 Annual Report Download - page 72

ple, we have adjusted our underwriting criteria, as well as enhanced our
line management and collection strategies across the consumer busi-
nesses. In the commercial businesses, we have increased the frequency
of portfolio monitoring and are aggressively managing exposure when we
begin to see signs of deterioration.
Consumer Portfolio Credit Risk Management
Credit risk management for the consumer portfolio begins with initial under-
writing and continues throughout a borrower’s credit cycle. Statistical
techniques in conjunction with experiential judgment are used in all
aspects of portfolio management including underwriting, product pricing,
risk appetite, setting credit limits, operating processes and metrics to
quantify and balance risks and returns. In addition, credit decisions are
statistically based with tolerances set to decrease the percentage of
approvals as the risk profile increases. Statistical models are built using
detailed behavioral information from external sources such as credit
bureaus and/or internal historical experience. These models are a critical
component of our consumer credit risk management process and are used
in the determination of both new and existing credit decisions, portfolio
management strategies including authorizations and line management,
collection practices and strategies, determination of the allowance for
credit losses, and economic capital allocations for credit risk.
For information on our accounting policies regarding delinquencies,
nonperforming status and charge-offs for the consumer portfolio, see Note
1 – Summary of Significant Accounting Principles to the Consolidated
Financial Statements.
Management of Consumer Credit Risk
Concentrations
Consumer credit risk is evaluated and managed with a goal that credit
concentrations do not result in undesirable levels of risk. We review,
measure and manage credit exposure in numerous ways such as by prod-
uct and geography in order to achieve the desired mix. Additionally, to
enhance our overall risk management strategy credit protection is pur-
chased on certain portions of our portfolio.
Our consumer loan portfolio in the states of California, Florida, New
York and Texas represented in aggregate 43 percent and 42 percent of
total managed consumer loans at December 31, 2007 and 2006. Our
consumer loan portfolio in the state of California represented approx-
imately 24 percent and 23 percent of total managed consumer loans at
December 31, 2007 and 2006, primarily driven by the consumer real
estate portfolio. Our consumer loan portfolio in the state of Florida is our
second largest concentration and represented approximately eight percent
of total managed consumer loans at both December 31, 2007 and 2006,
primarily driven by the consumer real estate portfolio. New York and Texas
represented six percent and five percent of total managed consumer loans
at both December 31, 2007 and 2006. No state other than California, and
no single Metropolitan Statistical Area (MSA) within California represented
more than 10 percent of the total managed consumer portfolio. No other
single state represented over five percent of total managed consumer
loans.
We have mitigated a portion of our credit risk in our residential mort-
gage loan portfolio by using synthetic securitizations. These agreements
are cash collateralized and will reimburse us in the event that losses
exceed established loss levels. As of December 31, 2007 and 2006,
approximately $140.0 billion and $130.0 billion of mortgage loans were
protected by these agreements. In addition, we have entered into credit
protection agreements with government-sponsored agencies on approx-
imately $33.0 billion and $5.0 billion as of December 31, 2007 and
2006, providing full protection on conforming residential mortgage loans
that become severely delinquent. Our regulatory risk-weighted assets were
reduced as a result of these transactions because we transferred a por-
tion of our credit risk to unaffiliated parties. At December 31, 2007 and
2006, these transactions had the cumulative effect of reducing our risk-
weighted assets by $49.0 billion and $36.4 billion, and resulted in
increases of 27 bps and 30 bps in our Tier 1 Capital ratio at
December 31, 2007 and 2006.
70 Bank of America 2007