Bank of America 2015 Annual Report Download - page 49

Bank of America 2015 47
Estimated Range of Possible Loss
We currently estimate that the range of possible loss for
representations and warranties exposures could be up to $2 billion
over existing accruals at December 31, 2015. We treat claims that
are time-barred as resolved and do not consider such claims in
the estimated range of possible loss. The estimated range of
possible loss reflects principally exposures related to loans in
private-label securitization trusts. It represents a reasonably
possible loss, but does not represent a probable loss, and is based
on currently available information, significant judgment and a
number of assumptions that are subject to change.
For more information on the methodology used to estimate the
representations and warranties liability, the corresponding
estimated range of possible loss and the types of losses not
considered in such estimates, see Item 1A. Risk Factors of our
2015 Annual Report on Form 10-K and Note 7 – Representations
and Warranties Obligations and Corporate Guarantees to the
Consolidated Financial Statements and, for more information
related to the sensitivity of the assumptions used to estimate our
liability for representations and warranties, see Complex
Accounting Estimates – Representations and Warranties Liability
on page 102.
Department of Justice Settlement
On August 20, 2014, we reached a comprehensive settlement with
the DoJ and certain federal and state agencies (DoJ Settlement).
As part of the DoJ Settlement, we paid civil monetary penalties
and compensatory remediation payments in 2014. In 2014 and
2015, we provided creditable consumer relief activities primarily
in the form of mortgage modifications, including first-lien principal
forgiveness and forbearance modifications and second- and junior-
lien extinguishments, low- to moderate-income mortgage
originations, and community reinvestment and neighborhood
stabilization efforts, with initiatives focused on communities
experiencing, or at risk of, blight. Also, we have provided support
for the expansion of available affordable rental housing. Our
actions are well ahead of the DoJ agreement calling for us to
complete delivery of the consumer relief by no later than August
31, 2018. The consumer relief requirements are subject to
oversight by an independent monitor.
Other Mortgage-related Matters
We continue to be subject to additional borrower and non-borrower
litigation and governmental and regulatory scrutiny and
investigations related to our past and current origination, servicing,
transfer of servicing and servicing rights, servicing compliance
obligations, foreclosure activities, and MI and captive reinsurance
practices with mortgage insurers. The ongoing environment of
additional regulation, increased regulatory compliance obligations,
and enhanced regulatory enforcement, combined with ongoing
uncertainty related to the continuing evolution of the regulatory
environment, has resulted in increased operational and
compliance costs and may limit our ability to continue providing
certain products and services. For more information on
management’s estimate of the aggregate range of possible loss
and on regulatory investigations, see Note 12 – Commitments and
Contingencies to the Consolidated Financial Statements.
Managing Risk
Overview
Risk is inherent in all our business activities. Sound risk
management enables us to serve our customers and deliver for
our shareholders. If not managed well, risks can result in financial
loss, regulatory sanctions and penalties, and damage to our
reputation, each of which may adversely impact our ability to
execute our business strategies. The Corporation takes a
comprehensive approach to risk management with a defined Risk
Framework and an articulated Risk Appetite Statement which are
approved annually by the Enterprise Risk Committee (ERC) and
the Corporation’s Board of Directors (the Board).
The seven types of risk faced by the Corporation are strategic,
credit, market, liquidity, compliance, operational and reputational
risks.
Strategic risk is the risk resulting from incorrect assumptions
about external or internal factors, inappropriate business plans,
ineffective business strategy execution, or failure to respond in
a timely manner to changes in the regulatory, macroeconomic
or competitive environments.
Credit risk is the risk of loss arising from the inability or failure
of a borrower or counterparty to meet its obligations.
Market risk is the risk that changes in market conditions may
adversely impact the value of assets or liabilities, or otherwise
negatively impact earnings.
Liquidity risk is the potential inability to meet expected or
unexpected cash flow and collateral needs while continuing to
support our business and customer needs under a range of
economic conditions.
Compliance risk is the risk of legal or regulatory sanctions,
material financial loss or damage to the reputation of the
Corporation arising from the failure of the Corporation to comply
with the requirements of applicable laws, rules, regulations and
related self-regulatory organizations’ standards and codes of
conduct.
Operational risk is the risk of loss resulting from inadequate or
failed internal processes, people and systems, or from external
events.
Reputational risk is the risk that negative perceptions of the
Corporation’s conduct or business practices will adversely affect
its profitability or operations through an inability to establish or
maintain existing customer/client relationships.
The following sections address in more detail the specific
procedures, measures and analyses of the major categories of
risk. This discussion of managing risk focuses on the 2016 Risk
Framework (Risk Framework) that, as part of its annual review
process, was approved by the ERC and the Board in December
2015. The key enhancements from the 2015 Risk Framework
include further increasing the focus on our strong risk culture and
emphasizing our risk identification practices and the involvement
and input of Front Line Units (FLUs) and control functions. It
continues to recognize the same seven key risk types as discussed
above and our risk management approach as outlined below.
A strong risk culture is fundamental to our values and operating
principles. It requires us to focus on risk in all activities and
encourages the necessary mindset and behavior to enable
effective risk management, and promotes sound risk-taking within
our risk appetite. Sustaining a strong risk culture throughout the
organization is critical to the success of the Corporation and is a
clear expectation of our executive management team and the
Board.