Capital One 2014 Annual Report Download - page 169

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circumstances indicate the carrying amount of the assets may not be recoverable. See “Note 7—Goodwill and
Intangible Assets” for additional detail.
Mortgage Servicing Rights
Mortgage servicing rights (“MSRs”) are initially recorded at fair value when mortgage loans are sold or securitized
in the secondary market and the right to service these loans is retained for a fee. Subsequently, our consumer MSRs
are carried at fair value on our consolidated balance sheets with changes in fair value recognized in non-interest
income. Our commercial MSRs are subsequently measured under the amortization method and are periodically
evaluated for impairment, which is recognized as a reduction in non-interest income. See “Note 7—Goodwill and
Intangible Assets” and “Note 18—Fair Value Measurement” for additional information.
Foreclosed Property and Repossessed Assets
Foreclosed property and repossessed assets obtained through our lending activities typically include commercial
and residential real estate or personal property, such as autos. Upon repossession of property obtained in satisfaction
of a loan, we reclassify the loan to repossessed assets and record the acquired property at net realizable value. Net
realizable value is the estimated fair value of the underlying collateral less estimated selling costs and is based on
appraisals, when available. We routinely monitor and update the net realizable value of acquired property, adjusting
our accounting to be equal to the lower of cost or net realizable value. Any changes in net realizable value and gains
or losses realized from disposition of the property are recorded in non-interest expense. See “Note 18—Fair Value
Measurement” for details.
Restricted Equity Investments
We have investments in Federal Home Loan Bank (“FHLB”) stock and in the Board of Governors of the Federal
Reserve System (the “Federal Reserve”) stock. These investments, which are included in other assets on our
consolidated balance sheets, are not marketable and are carried at cost. We assess these investments for OTTI in
accordance with applicable accounting guidance for evaluating impairment. See “Note 9—Deposits and
Borrowings” for details.
Representation and Warranty Reserve
In connection with their sales of mortgage loans, certain 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. 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. The reserve-setting process relies heavily on estimates, which are inherently uncertain, and
requires the application of judgment. 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 on our consolidated balance sheets. Changes to the representation
CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Capital One Financial Corporation (COF)