Bank of America 2014 Annual Report Download - page 179

Bank of America 2014 177
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.
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. PCI loans are excluded and reported separately on page
186. For additional information, see Note 1 – Summary of
Significant Accounting Principles.
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 2013 and
2012, the Corporation provided interest rate modifications to
qualified borrowers pursuant to the 2012 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. 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 of $2.4 billion were included
in TDRs at December 31, 2014, of which $1.4 billion were
classified as nonperforming and $1.0 billion were loans fully-
insured by the Federal Housing Administration (FHA). 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,
less costs to sell, 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, 2014 and 2013, 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 $630 million and $533 million at December 31,
2014 and 2013.