Bank of America 2015 Annual Report Download - page 169

Bank of America 2015 167
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
176. For additional information, see Note 1 – Summary of
Significant Accounting Principles.
Consumer Real Estate
Impaired consumer real estate loans within the Consumer Real
Estate portfolio segment consist entirely of TDRs. Excluding PCI
loans, most modifications of consumer real estate loans meet the
definition of TDRs when a binding offer is extended to a borrower.
Modifications of consumer real estate 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.
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.
Consumer real estate loans that have been discharged in
Chapter 7 bankruptcy with no change in repayment terms and not
reaffirmed by the borrower of $1.8 billion were included in TDRs
at December 31, 2015, of which $785 million were classified as
nonperforming and $765 million were loans fully-insured by the
FHA. For more information on loans discharged in Chapter 7
bankruptcy, see Nonperforming Loans and Leases in this Note.
A consumer real estate 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. Consumer real estate 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, consumer real estate TDRs that are
considered to be dependent solely on the collateral for repayment
(e.g., due to the lack of income verification) 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. Consumer real estate 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
consumer real estate 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, 2015 and 2014, remaining commitments to
lend additional funds to debtors whose terms have been modified
in a consumer real estate TDR were immaterial. Consumer real
estate foreclosed properties totaled $444 million and $630 million
at December 31, 2015 and 2014. The carrying value of consumer
real estate loans, including fully-insured and PCI loans, for which
formal foreclosure proceedings were in process as of
December 31, 2015 was $5.8 billion. During 2015 and 2014, the
Corporation reclassified $2.1 billion and $1.9 billion of consumer
real estate loans to foreclosed properties or, for properties
acquired upon foreclosure of certain government-guaranteed loans
(principally FHA-insured loans), to other assets. The
reclassifications represent non-cash investing activities and,
accordingly, are not reflected on the Consolidated Statement of
Cash Flows.