Bank of America 2013 Annual Report Download - page 188

186 Bank of America 2013
Impaired Loans and Troubled Debt Restructurings
A loan is considered impaired when, based on current information,
it is probable that the Corporation will be unable to collect all
amounts due from the borrower in accordance with the contractual
terms of the loan. Impaired loans include nonperforming
commercial loans and all consumer and commercial TDRs. For
additional information, see Note 1 – Summary of Significant
Accounting Principles. Impaired loans exclude nonperforming
consumer loans and nonperforming commercial leases unless
they are classified as TDRs. Loans accounted for under the fair
value option are also excluded. Purchased credit-impaired (PCI)
loans are excluded and reported separately on page 194.
Home Loans
Impaired home loans within the Home Loans portfolio segment
consist entirely of TDRs. Excluding PCI loans, most modifications
of home loans meet the definition of TDRs when a binding offer
is extended to a borrower. Modifications of home loans are done
in accordance with the government’s Making Home Affordable
Program (modifications under government programs) or the
Corporation’s proprietary programs (modifications under
proprietary programs). These modifications are considered to be
TDRs if concessions have been granted to borrowers experiencing
financial difficulties. Concessions may include reductions in
interest rates, capitalization of past due amounts, principal and/
or interest forbearance, payment extensions, principal and/or
interest forgiveness, or combinations thereof. During 2012, the
Corporation implemented a borrower assistance program that
provides forgiveness of principal balances in connection with the
settlement agreement among the Corporation and certain of its
affiliates and subsidiaries, together with the U.S. Department of
Justice (DOJ), the U.S. Department of Housing and Urban
Development (HUD) and other federal agencies, and 49 state
Attorneys General concerning the terms of a global settlement
resolving investigations into certain origination, servicing and
foreclosure practices (National Mortgage Settlement). In addition,
the Corporation also provides interest rate modifications to
qualified borrowers pursuant to the National Mortgage Settlement
and these interest rate modifications are not considered to be
TDRs.
Prior to permanently modifying a loan, the Corporation may
enter into trial modifications with certain borrowers under both
government and proprietary programs, including the borrower
assistance program pursuant to the National Mortgage
Settlement. Trial modifications generally represent a three- to four-
month period during which the borrower makes monthly payments
under the anticipated modified payment terms. Upon successful
completion of the trial period, the Corporation and the borrower
enter into a permanent modification. Binding trial modifications
are classified as TDRs when the trial offer is made and continue
to be classified as TDRs regardless of whether the borrower enters
into a permanent modification.
Home loans that have been discharged in Chapter 7 bankruptcy
with no change in repayment terms at the time of discharge of
$3.6 billion were included in TDRs at December 31, 2013, of which
$1.8 billion were classified as nonperforming and $1.8 billion were
loans fully-insured by the Federal Housing Administration (FHA).
Of the $3.6 billion of home loan TDRs, approximately 27 percent,
30 percent and 43 percent were discharged in Chapter 7
bankruptcy in 2013, 2012 and in years prior to 2012, respectively.
For more information on loans discharged in Chapter 7 bankruptcy,
see Nonperforming Loans and Leases in this Note.
A home loan, excluding PCI loans which are reported separately,
is not classified as impaired unless it is a TDR. Once such a loan
has been designated as a TDR, it is then individually assessed for
impairment. Home loan TDRs are measured primarily based on
the net present value of the estimated cash flows discounted at
the loan’s original effective interest rate, as discussed in the
following paragraph. If the carrying value of a TDR exceeds this
amount, a specific allowance is recorded as a component of the
allowance for loan and lease losses. Alternatively, home loan TDRs
that are considered to be dependent solely on the collateral for
repayment (e.g., due to the lack of income verification or as a
result of being discharged in Chapter 7 bankruptcy) are measured
based on the estimated fair value of the collateral and a charge-
off is recorded if the carrying value exceeds the fair value of the
collateral. Home loans that reached 180 days past due prior to
modification had been charged off to their net realizable value
before they were modified as TDRs in accordance with established
policy. Therefore, modifications of home loans that are 180 or
more days past due as TDRs do not have an impact on the
allowance for loan and lease losses nor are additional charge-offs
required at the time of modification. Subsequent declines in the
fair value of the collateral after a loan has reached 180 days past
due are recorded as charge-offs. Fully-insured loans are protected
against principal loss, and therefore, the Corporation does not
record an allowance for loan and lease losses on the outstanding
principal balance, even after they have been modified in a TDR.
The net present value of the estimated cash flows used to
measure impairment is based on model-driven estimates of
projected payments, prepayments, defaults and loss-given-default
(LGD). Using statistical modeling methodologies, the Corporation
estimates the probability that a loan will default prior to maturity
based on the attributes of each loan. The factors that are most
relevant to the probability of default are the refreshed LTV, or in
the case of a subordinated lien, refreshed CLTV, borrower credit
score, months since origination (i.e., vintage) and geography. Each
of these factors is further broken down by present collection status
(whether the loan is current, delinquent, in default or in
bankruptcy). Severity (or LGD) is estimated based on the refreshed
LTV for first mortgages or CLTV for subordinated liens. The
estimates are based on the Corporation’s historical experience as
adjusted to reflect an assessment of environmental factors that
may not be reflected in the historical data, such as changes in
real estate values, local and national economies, underwriting
standards and the regulatory environment. The probability of
default models also incorporate recent experience with
modification programs including redefaults subsequent to
modification, a loan’s default history prior to modification and the
change in borrower payments post-modification.
At December 31, 2013 and 2012, remaining commitments to
lend additional funds to debtors whose terms have been modified
in a home loan TDR were immaterial. Home loan foreclosed
properties totaled $533 million and $650 million at December 31,
2013 and 2012.