Capital One 2010 Annual Report Download - page 194

CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED STATEMENTS
174
Allocation of Representation and Warranty Reserves
December 31, 2010
(Dollars in millions, except for loans sold)
Loans Sold
2005 to 2008(1)
Reserve
Liability
GSEs and Active Insured Securitizations .................................................... $ 24 $ 796
Inactive Insured Securitizations and Others .................................................. 87 20
Total ................................................................................... $ 111 $ 816
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(1) Reflects, in billions, the total original principal balance of mortgage loans originated by our subsidiaries and sold to third party investors
between 2005 and 2008.
The adequacy of the reserves and the ultimate amount of losses incurred by our subsidiaries will depend on, among other things,
actual future mortgage loan performance, the actual level of future repurchase and indemnification requests (including the extent, if
any, to which Inactive Insured Securitizations and other currently inactive investors ultimately assert claims), the actual success rates
of claimants, developments in litigation, actual recoveries on the collateral and macroeconomic conditions (including unemployment
levels and housing prices).
As part of our business planning processes, we have considered various outcomes relating to the potential future representation and
warranty liabilities of our subsidiaries that are possible but do not arise to the level of being both probable and reasonably estimable
outcomes that would justify an incremental reserve accrual under applicable accounting standards. We believe that the upper end of
the reasonably possible future losses from representation and warranty claims beyond the current accrual levels, including reasonably
possible future losses relating to the US Bank Litigation and DBSP Litigation (see below), could be as high as $1.1 billion.
Notwithstanding our attempt to estimate a reasonably possible amount of loss beyond our current accrual levels based on current
information, it is possible that actual future losses will exceed both the current accrual level and the amount of reasonably possible losses
estimated here. There is still significant uncertainty as to numerous factors that contribute to ultimate liability levels, including, but not
limited to, litigation outcomes, future repurchase claims levels, ultimate repurchase success rates, and mortgage loan performance levels.
Litigation
In accordance with the current accounting standards for loss contingencies, we establish reserves for litigation related matters when it
is probable that a loss associated with a claim or proceeding has been incurred and the amount of the loss can be reasonably estimated.
Litigation claims and proceedings of all types are subject to many uncertain factors that generally cannot be predicted with assurance.
Below we provide a description of material legal proceedings and claims.
The Banks are members of Visa U.S.A., Inc. (“Visa”). As members, our subsidiary banks have indemnification obligations to Visa
with respect to final judgments and settlements of certain litigation against Visa. In 2005, a number of entities, each purporting to
represent a class of retail merchants, filed antitrust lawsuits (the “Interchange Lawsuits”) against MasterCard and Visa and several
member banks, including the Company and its subsidiaries, alleging among other things, that the defendants conspired to fix the level
of interchange fees. The complaints seek injunctive relief and civil monetary damages, which could be trebled. Separately, a number
of large merchants have asserted similar claims against Visa and MasterCard only. In October 2005, the class and merchant
Interchange lawsuits were consolidated before the U.S. District Court for the Eastern District of New York for certain purposes,
including discovery. Fact and expert discovery have closed. The parties have briefed and presented oral argument on motions to
dismiss and class certification and are awaiting decisions from the court.
In the first quarter of 2008, Visa completed an IPO of its stock. With IPO proceeds, Visa established an escrow account for the benefit of
member banks to fund certain litigation settlements and claims, including the Interchange Lawsuits. As a result, in the first quarter of
2008, we reduced our Visa-related indemnification liabilities of $91 million recorded in other liabilities with a corresponding reduction of
other non-interest expense. We made an election in accordance with the accounting guidance for fair value option for financial assets and
liabilities on the indemnification guarantee to Visa, and the fair value of the guarantee at December 31, 2010 and December 31, 2009 was
zero. In January, 2011, we entered into a MasterCard Settlement and Judgment Sharing Agreement, along with other defendant banks,
which apportions any costs and liabilities of any judgment or settlement arising from the Interchange Lawsuits.
In 2007, a number of individual plaintiffs, each purporting to represent a class of cardholders, filed antitrust lawsuits in the U.S.
District Court for the Northern District of California against several issuing banks, including the Company (the “In Re Late Fees
Litigation”). These lawsuits allege, among other things, that the defendants conspired to fix the level of late fees and over-limit fees
charged to cardholders, and that these fees are excessive. In May 2007, the cases were consolidated for all purposes, and a
consolidated amended complaint was filed alleging violations of federal statutes and state law. The amended complaint requests civil
monetary damages, which could be trebled, and injunctive relief. In November 2007, the court dismissed the amended complaint.