Capital One 2012 Annual Report Download - page 170

CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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. We may be required to repurchase the mortgage loan, indemnify the
investor or insurer, or reimburse the investor for loan and lease losses incurred on the loan in the event of a
material breach of contractual representations or warranties.
We have established representation and warranty reserves for losses that we consider to be both probable and
reasonably estimable associated with the mortgage loans sold by each subsidiary, including both litigation and
non-litigation liabilities in our consolidated balance sheets. The reserve-setting process relies heavily on
estimates, which are inherently uncertain, and requires the application of judgment. In establishing the
representation and warranty reserves, we consider a variety of factors, depending on the category of purchaser
and rely on historical data. We evaluate these estimates on a quarterly basis.
Losses incurred on loans that we are required to either repurchase or make payments to the investor under the
indemnification provisions are charged against the representation and warranty reserve. The representation and
warranty reserve is included in other liabilities in our consolidated balance sheets. Changes to the representation
and warranty reserve related to GreenPoint Mortgage Funding, Inc. (“GreenPoint”) are reported as discontinued
operations for all periods presented. See “Note 21—Commitments, Contingencies and Guarantees” for additional
information related to our representation and warranty reserve.
Customer Rewards Reserve
We offer products, primarily credit cards, which include programs that allow members to earn rewards, such as
cash, airline tickets or merchandise, based on account activity. Customer rewards costs are generally recorded as
an offset to interchange income when the rewards are earned by the customer and record the corresponding
customer rewards reserve. The customer rewards reserve is computed based on estimated future cost of points
earned that are expected to be redeemed and the average cost per point redeemed. The customer rewards reserve
is reduced as points are redeemed. In estimating the customer rewards reserve, we consider historical rewards
redemption behavior, the terms of the current rewards programs and card purchase activity. The customer
rewards reserve is sensitive to changes in the reward redemption type and redemption rate, which is based on the
expectation that the vast majority of all points earned will eventually be redeemed. The customer rewards
reserve, which is included in other liabilities in our consolidated balance sheets, totaled $2.1 billion and
$1.7 billion as of December 31, 2012 and 2011, respectively.
Revenue Recognition
Interest Income and Fees
We recognize interest income, including finance charges, and fees on loans in interest and non-interest income in
our consolidated statements of income in accordance with the contractual provisions of the credit arrangements.
Loan origination fees and costs and premiums and discounts are generally deferred and amortized over the
average life of the related loans using the effective interest method, except for credit card, which are amortized
over one year on a straight-line basis. Direct loan origination costs consist of both internal and external costs
associated with the origination of a loan. As discussed above under “Loans—Delinquent and Nonperforming
Loans,” interest and fees continue to accrue on past due loans until the date the loan is placed on nonaccrual
status, if applicable. Interest and fees accrued but not collected at the date a loan is placed on nonaccrual status
are reversed against earnings.
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