Capital One 2013 Annual Report Download - page 272

CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
In establishing litigation reserves for this category, we consider the current and future monoline insurer losses
inherent within the securitization and apply legal judgment to the anticipated factual and legal record to estimate
the lifetime legal liability for each securitization. We rely on our own past monoline settlement ratios in addition
to considering publicly available industry monoline settlement ratios to establish these reserves. Our reserves
with respect to the U.S. Bank Litigation, the DBSP Litigation, and the Ambac Litigation, in each case as
referenced below, are contained within the Active Insured Securitization reserve category. Further, to the extent
we have litigation reserves with respect to indemnification risks from certain representation and warranty
lawsuits brought by monoline bond insurers against third-party securitizations sponsors, where one of our
subsidiaries provided some or all of the mortgage collateral within the securitization but is not a defendant in the
litigation, such reserves are also contained within this category.
For the $4 billion original principal balance of mortgage loans in the Inactive Insured Securitizations category
and the $48 billion original principal balance of mortgage loans in the Uninsured Securitizations category, we
establish reserves based on an assessment of probable and estimable legal liability, if any, utilizing both our own
experience and publicly available industry settlement information to estimate lifetime liability. In contrast with
the bond insurers in the Insured Securitizations, investors in Uninsured Securitizations often face a number of
legal and logistical hurdles before they can force a securitization trustee to pursue mortgage repurchases,
including the need to coordinate with a certain percentage of investors holding the securities and to indemnify the
trustee for any litigation it undertakes. Accordingly, we only reserve for such exposures when a trustee or
investor with standing brings claims and it is probable we have incurred a loss. Some Uninsured Securitization
investors from this category are currently suing investment banks and securitization sponsors under federal and/
or state securities laws. Although we face some direct and indirect indemnity risks from these litigations, we
generally have not established reserves with respect to these indemnity risks because we do not consider them to
be both probable and reasonably estimable liabilities. In addition, to the extent we have litigation reserves with
respect to indemnification risks from certain representation and warranty lawsuits brought by parties who
purchased loans from our subsidiaries and subsequently re-sold the loans into securitizations, such reserves are
also contained within this category.
For the $22 billion original principal balance of mortgage loans sold to private investors as whole loans, we
establish reserves by relying on our historical and anticipated claims and repurchase rates to estimate lifetime
liability.
The aggregate reserves for all three subsidiaries totaled $1.2 billion as of December 31, 2013, compared with
$899 million as of December 31, 2012. We recorded a total provision for mortgage representation and warranty
losses for our representation and warranty repurchase exposure of $309 million in 2013, which was primarily
driven by increased litigation activity and updated legal assumptions with respect to estimable losses. During the
year, we had settlements of repurchase requests totaling $36 million that were charged against the reserves.
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 rise to the level of being
both probable and reasonably estimable outcomes justifying an incremental accrual under applicable accounting
standards. Our current best estimate of reasonably possible future losses from representation and warranty claims
beyond what was in our reserve as of December 31, 2013 is approximately $2.6 billion, a decline from our
estimate of $2.7 billion as of December 31, 2012. The estimate as of December 31, 2013 covers all reasonably
possible losses relating to representation and warranty claim activity, including those relating to the U.S. Bank
Litigation, the DBSP Litigation, the Ambac Litigation, the FHFA Litigation, the LXS Trust Litigation and the
FHLB of Boston Litigation.
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