Bank of America 2015 Annual Report Download - page 187

Bank of America 2015 185
NOTE 7 Representations and Warranties
Obligations and Corporate Guarantees
Background
The Corporation securitizes first-lien residential mortgage loans
generally in the form of RMBS guaranteed by the GSEs or by GNMA
in the case of FHA-insured, VA-guaranteed and Rural Housing
Service-guaranteed mortgage loans, and sells pools of first-lien
residential mortgage loans in the form of whole loans. In addition,
in prior years, legacy companies and certain subsidiaries sold
pools of first-lien residential mortgage loans and home equity loans
as private-label securitizations (in certain of these securitizations,
monoline insurers or other financial guarantee providers insured
all or some of the securities) or in the form of whole loans. In
connection with these transactions, the Corporation or certain of
its subsidiaries or legacy companies made various
representations and warranties. These representations and
warranties, as set forth in the agreements, related to, among other
things, the ownership of the loan, the validity of the lien securing
the loan, the absence of delinquent taxes or liens against the
property securing the loan, the process used to select the loan
for inclusion in a transaction, the loan’s compliance with any
applicable loan criteria, including underwriting standards, and the
loan’s compliance with applicable federal, state and local laws.
Breaches of these representations and warranties have resulted
in and may continue to result in the requirement to repurchase
mortgage loans or to otherwise make whole or provide other
remedies to the GSEs, U.S. Department of Housing and Urban
Development (HUD) with respect to FHA-insured loans, VA, whole-
loan investors, securitization trusts, monoline insurers or other
financial guarantors as applicable (collectively, repurchases). In
all such cases, subsequent to repurchasing the loan, the
Corporation would be exposed to any credit loss on the
repurchased mortgage loans after accounting for any mortgage
insurance (MI) or mortgage guarantee payments that it may
receive.
The liability for representations and warranties exposures and
the corresponding estimated range of possible loss are based
upon currently available information, significant judgment, and a
number of factors and assumptions, including those discussed in
Liability for Representations and Warranties and Corporate
Guarantees in this Note, that are subject to change. Changes to
any one of these factors could significantly impact the liability for
representations and warranties exposures and the corresponding
estimated range of possible loss and could have a material
adverse impact on the Corporation’s results of operations for any
particular period. Given that these factors vary by counterparty,
the Corporation analyzes representations and warranties
obligations based on the specific counterparty, or type of
counterparty, with whom the sale was made.
Settlement Actions
The Corporation has vigorously contested any request for
repurchase where it has concluded that a valid basis for
repurchase does not exist and will continue to do so in the future.
However, in an effort to resolve legacy mortgage-related issues,
the Corporation has reached bulk settlements, including various
settlements with the GSEs, and including settlement amounts
which have been significant, with counterparties in lieu of a loan-
by-loan review process. These bulk settlements generally did not
cover all transactions with the relevant counterparties or all
potential claims that may arise, including in some instances
securities law, fraud and servicing claims, which may be addressed
separately. The Corporation’s liability in connection with the
transactions and claims not covered by these settlements could
be material to the Corporation’s results of operations or liquidity
for any particular reporting period. The Corporation may reach other
settlements in the future if opportunities arise on terms it believes
to be advantageous. However, there can be no assurance that the
Corporation will reach future settlements or, if it does, that the
terms of past settlements can be relied upon to predict the terms
of future settlements. The following provides a summary of the
settlement with The Bank of New York Mellon (BNY Mellon); the
conditions of the settlement have now been fully satisfied.
Settlement with the Bank of New York Mellon, as Trustee
On April 22, 2015, the New York County Supreme Court entered
final judgment approving the BNY Mellon Settlement. In October
2015, BNY Mellon obtained certain state tax opinions and an IRS
private letter ruling confirming that the settlement will not impact
the real estate mortgage investment conduit tax status of the
trusts. The final conditions of the settlement have been satisfied
and, accordingly, the Corporation made the settlement payment
to BNY Mellon of $8.5 billion in February 2016. Pursuant to the
settlement agreement, allocation and distribution of the $8.5
billion settlement payment is the responsibility of the RMBS
trustee, BNY Mellon. On February 5, 2016, BNY Mellon filed an
Article 77 proceeding in the New York County Supreme Court
asking the court for instruction with respect to certain issues
concerning the distribution of each trust’s allocable share of the
settlement payment and asking that the settlement payment be
ordered to be held in escrow pending the outcome of this Article
77 proceeding. The Corporation is not a party to this proceeding.
Unresolved Repurchase Claims
Unresolved representations and warranties repurchase claims
represent the notional amount of repurchase claims made by
counterparties, typically the outstanding principal balance or the
unpaid principal balance at the time of default. In the case of first-
lien mortgages, the claim amount is often significantly greater than
the expected loss amount due to the benefit of collateral and, in
some cases, MI or mortgage guarantee payments. Claims received
from a counterparty remain outstanding until the underlying loan
is repurchased, the claim is rescinded by the counterparty, the
Corporation determines that the applicable statute of limitations
has expired, or representations and warranties claims with respect
to the applicable trust are settled, and fully and finally released.
When a claim is denied and the Corporation does not receive a
response from the counterparty, the claim remains in the
unresolved repurchase claims balance until resolution in one of
the ways described above. Certain of the claims that have been
received are duplicate claims which represent more than one claim
outstanding related to a particular loan, typically as the result of
bulk claims submitted without individual file reviews.