Capital One 2011 Annual Report Download - page 260

CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED STATEMENTS—(Continued)
NOTE 21—COMMITMENTS, CONTINGENCIES AND GUARANTEES
Letters of Credit
We issue letters of credit (financial standby, performance standby and commercial) to meet the financing needs
of our customers. Standby letters of credit are conditional commitments issued by us to guarantee the
performance of a customer to a third party in a borrowing arrangement. Commercial letters of credit are short-
term commitments issued primarily to facilitate trade finance activities for customers and are generally
collateralized by the goods being shipped to the client. Collateral requirements are similar to those for funded
transactions and are established based on management’s credit assessment of the customer. Management
conducts regular reviews of all outstanding letters of credit and customer acceptances, and the results of these
reviews are considered in assessing the adequacy of our allowance for loan and lease losses.
We had contractual amounts of standby letters of credit and commercial letters of credit of $1.9 billion at
December 31, 2011. As of December 31, 2011, financial guarantees had expiration dates ranging from 2012 to
2021. The fair value of the guarantees outstanding which we included in our consolidated balance sheets in other
liabilities was $4 million as of December 31, 2011.
Contingent Payments Related to Acquisitions and Partnership Agreements
Certain of our acquisition and partnership agreements include contingent payment provisions in which we agree to
provide future payments, up to a maximum amount, based on certain performance criteria. Our contingent payment
arrangements are generally based on the difference between the expected credit performance of specified loan
portfolios as of the date of the applicable agreement and the actual future performance. To the extent that actual
losses associated with these portfolios are less than the expected level, we agree to share a portion of the benefit
with the seller. The maximum contingent payment amount related to our acquisitions totaled $330 million as of
December 31, 2011. The actual payment amount related to $30 million of this balance will be determined as of
September 30, 2012. The actual payment amount related to the remaining $300 million of this balance will be
determined as of December 31, 2013. We recognized an expense related to contingent payment arrangements of $30
million in the second quarter of 2011, $60 million in the third quarter of 2011, and a reduction to expense of $(2)
million in the fourth quarter of 2011. As such, we recognized a cumulative expense of $88 million in 2011 related to
contingent payment arrangements. We had a liability for contingent payments related to these arrangements of $88
million as of December 31, 2011. We did not record a liability related to these arrangements as of December 31,
2010 based on our expectation of credit losses on the portfolios.
Potential Mortgage Representation & Warranty Liabilities
In recent years, we acquired three subsidiaries that originated residential mortgage loans and sold them to various
purchasers, including purchasers who created securitization trusts. These subsidiaries are Capital One Home
Loans, which was acquired in February 2005; GreenPoint Mortgage Funding, Inc. (“GreenPoint”), which was
acquired in December 2006 as part of the North Fork acquisition; and Chevy Chase Bank, which was acquired in
February 2009 and subsequently merged into CONA.
In connection with their sales of mortgage loans, the subsidiaries entered into agreements containing varying
representations and warranties about, among other things, the ownership of the loan, the validity of the lien
securing the loan, the loan’s compliance with any applicable loan criteria established by the purchaser, including
underwriting guidelines and the ongoing existence of mortgage insurance, and the loan’s compliance with
applicable federal, state and local laws. The representations and warranties do not address the credit performance
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