Bank of America 2014 Annual Report Download - page 186

184 Bank of America 2014
Credit card and other consumer loans are deemed to be in
payment default during the quarter in which a borrower misses the
second of two consecutive payments. Payment defaults are one
of the factors considered when projecting future cash flows in the
calculation of the allowance for loan and lease losses for impaired
credit card and other consumer loans. Based on historical
experience, the Corporation estimates that 14 percent of new U.S.
credit card TDRs, 81 percent of new non-U.S. credit card TDRs and
12 percent of new direct/indirect consumer TDRs may be in
payment default within 12 months after modification. Loans that
entered into payment default during 2014, 2013 and 2012 that
had been modified in a TDR during the preceding 12 months were
$56 million, $61 million and $203 million for U.S. credit card,
$200 million, $236 million and $298 million for non-U.S. credit
card, and $5 million, $12 million and $35 million for direct/indirect
consumer, respectively.
Commercial Loans
Impaired commercial loans, which include nonperforming loans
and TDRs (both performing and nonperforming), are primarily
measured based on the present value of payments expected to
be received, discounted at the loan’s original effective interest
rate. Commercial impaired loans may also be measured based on
observable market prices or, for loans that are solely dependent
on the collateral for repayment, the estimated fair value of
collateral, less costs to sell. If the carrying value of a loan exceeds
this amount, a specific allowance is recorded as a component of
the allowance for loan and lease losses.
Modifications of loans to commercial borrowers that are
experiencing financial difficulty are designed to reduce the
Corporation’s loss exposure while providing the borrower with an
opportunity to work through financial difficulties, often to avoid
foreclosure or bankruptcy. Each modification is unique and reflects
the individual circumstances of the borrower. Modifications that
result in a TDR may include extensions of maturity at a
concessionary (below market) rate of interest, payment
forbearances or other actions designed to benefit the customer
while mitigating the Corporation’s risk exposure. Reductions in
interest rates are rare. Instead, the interest rates are typically
increased, although the increased rate may not represent a market
rate of interest. Infrequently, concessions may also include
principal forgiveness in connection with foreclosure, short sale or
other settlement agreements leading to termination or sale of the
loan.
At the time of restructuring, the loans are remeasured to reflect
the impact, if any, on projected cash flows resulting from the
modified terms. If there was no forgiveness of principal and the
interest rate was not decreased, the modification may have little
or no impact on the allowance established for the loan. If a portion
of the loan is deemed to be uncollectible, a charge-off may be
recorded at the time of restructuring. Alternatively, a charge-off
may have already been recorded in a previous period such that no
charge-off is required at the time of modification. For more
information on modifications for the U.S. small business
commercial portfolio, see Credit Card and Other Consumer in this
Note.
At December 31, 2014 and 2013, remaining commitments to
lend additional funds to debtors whose terms have been modified
in a commercial loan TDR were immaterial. Commercial foreclosed
properties totaled $67 million and $90 million at December 31,
2014 and 2013.