Bank of America 2015 Annual Report Download - page 146

144 Bank of America 2015
creditors of these trusts typically have no recourse to the
Corporation except in accordance with the Corporation’s
obligations under standard representations and warranties.
When the Corporation is the servicer of whole loans held in a
securitization trust, including non-agency residential mortgages,
home equity loans, credit cards, automobile loans and student
loans, the Corporation has the power to direct the most significant
activities of the trust. The Corporation generally does not have the
power to direct the most significant activities of a residential
mortgage agency trust except in certain circumstances in which
the Corporation holds substantially all of the issued securities and
has the unilateral right to liquidate the trust. The power to direct
the most significant activities of a commercial mortgage
securitization trust is typically held by the special servicer or by
the party holding specific subordinate securities which embody
certain controlling rights. The Corporation consolidates a whole-
loan securitization trust if it has the power to direct the most
significant activities and also holds securities issued by the trust
or has other contractual arrangements, other than standard
representations and warranties, that could potentially be
significant to the trust.
The Corporation may also transfer trading account securities
and AFS securities into municipal bond or resecuritization trusts.
The Corporation consolidates a municipal bond or resecuritization
trust if it has control over the ongoing activities of the trust such
as the remarketing of the trust’s liabilities or, if there are no ongoing
activities, sole discretion over the design of the trust, including
the identification of securities to be transferred in and the structure
of securities to be issued, and also retains securities or has
liquidity or other commitments that could potentially be significant
to the trust. The Corporation does not consolidate a municipal
bond or resecuritization trust if one or a limited number of third-
party investors share responsibility for the design of the trust or
have control over the significant activities of the trust through
liquidation or other substantive rights.
Other VIEs used by the Corporation include collateralized debt
obligations (CDOs), investment vehicles created on behalf of
customers and other investment vehicles. The Corporation does
not routinely serve as collateral manager for CDOs and, therefore,
does not typically have the power to direct the activities that most
significantly impact the economic performance of a CDO. However,
following an event of default, if the Corporation is a majority holder
of senior securities issued by a CDO and acquires the power to
manage the assets of the CDO, the Corporation consolidates the
CDO.
The Corporation consolidates a customer or other investment
vehicle if it has control over the initial design of the vehicle or
manages the assets in the vehicle and also absorbs potentially
significant gains or losses through an investment in the vehicle,
derivative contracts or other arrangements. The Corporation does
not consolidate an investment vehicle if a single investor controlled
the initial design of the vehicle or manages the assets in the
vehicles or if the Corporation does not have a variable interest
that could potentially be significant to the vehicle.
Retained interests in securitized assets are initially recorded
at fair value. In addition, the Corporation may invest in debt
securities issued by unconsolidated VIEs. Fair values of these debt
securities, which are classified as trading account assets, debt
securities carried at fair value or held-to-maturity securities, are
based primarily on quoted market prices in active or inactive
markets. Generally, quoted market prices for retained residual
interests are not available; therefore, the Corporation estimates
fair values based on the present value of the associated expected
future cash flows. This may require management to estimate credit
losses, prepayment speeds, forward interest yield curves, discount
rates and other factors that impact the value of retained interests.
Retained residual interests in unconsolidated securitization trusts
are classified in trading account assets or other assets with
changes in fair value recorded in earnings. The Corporation may
also enter into derivatives with unconsolidated VIEs, which are
carried at fair value with changes in fair value recorded in earnings.
Fair Value
The Corporation measures the fair values of its assets and
liabilities, where applicable, in accordance with accounting
guidance that requires an entity to base fair value on exit price. A
three-level hierarchy, provided in the applicable accounting
guidance, for inputs is utilized in measuring fair value which
maximizes the use of observable inputs and minimizes the use of
unobservable inputs by requiring that observable inputs be used
to determine the exit price when available. Under applicable
accounting guidance, the Corporation categorizes its financial
instruments, based on the priority of inputs to the valuation
technique, into this three-level hierarchy, as described below.
Trading account assets and liabilities, derivative assets and
liabilities, AFS debt and equity securities, other debt securities
carried at fair value, consumer MSRs and certain other assets are
carried at fair value in accordance with applicable accounting
guidance. The Corporation has also elected to account for certain
assets and liabilities under the fair value option, including certain
commercial and consumer loans and loan commitments, LHFS,
short-term borrowings, securities financing agreements, long-term
deposits and long-term debt. The following describes the three-
level hierarchy.
Level 1 Unadjusted quoted prices in active markets for identical
assets or liabilities. Level 1 assets and liabilities include
debt and equity securities and derivative contracts that
are traded in an active exchange market, as well as
certain U.S. Treasury securities that are highly liquid and
are actively traded in OTC markets.
Level 2 Observable inputs other than Level 1 prices, such as
quoted prices for similar assets or liabilities, quoted
prices in markets that are not active, or other inputs that
are observable or can be corroborated by observable
market data for substantially the full term of the assets
or liabilities. Level 2 assets and liabilities include debt
securities with quoted prices that are traded less
frequently than exchange-traded instruments and
derivative contracts where fair value is determined using
a pricing model with inputs that are observable in the
market or can be derived principally from or corroborated
by observable market data. This category generally
includes U.S. government and agency mortgage-backed
and asset-backed securities (ABS), corporate debt
securities, derivative contracts, certain loans and LHFS.
Level 3 Unobservable inputs that are supported by little or no
market activity and that are significant to the overall fair
value of the assets or liabilities. Level 3 assets and
liabilities include financial instruments for which the
determination of fair value requires significant
management judgment or estimation. The fair value for
such assets and liabilities is generally determined using