Capital One 2014 Annual Report Download - page 277

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 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 reserve for all three subsidiaries totaled $731 million as of December 31, 2014, compared to $1.2
billion as of December 31, 2013. We recorded a net benefit for mortgage representation and warranty losses of $33
million in the year ended December 31, 2014. During the year ended December 31, 2014, we had settlements totaling
$408 million that were charged against the reserves. The decrease in the representation and warranty reserve was
primarily driven by claims paid and legal developments including settlements.
As part of our business planning processes, we have considered various outcomes relating to the 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, 2014 is approximately $2.1 billion, a decline from our estimate of $2.6 billion at
December 31, 2013. The estimate as of December 31, 2014 covers all reasonably possible losses relating to
representation and warranty claim activity, including those relating to the U.S. Bank Litigation, the FHFA Litigation,
and the LXS Trust Litigation.
In estimating reasonably possible future losses in excess of our current reserves, we assume a portion of the inactive
securitizations become active and for all Insured Securitizations, we assume loss rates on the high end of those
observed in monoline settlements or court rulings. For our remaining GSE exposures, Uninsured Securitizations
and whole loan exposures, our reasonably possible risk estimates assume lifetime loss rates and claims rates at the
highest levels of our past experience and also consider the limited instances of observed settlements. We do not
assume claim rates or loss rates for these risk categories will be as high as those assumed for the Active Insured
Securitizations, however, based on industry precedent. Should the number of claims or the loss rates on these claims
increase significantly, our estimate of reasonably possible risk would increase materially. We also assume that we
will resolve any loan repurchase requests relating to loans originated more than six years ago at a discount as
compared to those originated within six years of a repurchase claim because of the pending legal arguments in
various matters concerning the applicable statute of limitations.
Notwithstanding our ongoing attempts to estimate a reasonably possible amount of future losses beyond our
current accrual levels based on current information, it is possible that actual future losses will exceed both the
current accrual level and our current estimate of the amount of reasonably possible losses. Our reserve and
reasonably possible estimates involve considerable judgment and reflect that there is still significant uncertainty
regarding numerous factors that may impact the ultimate loss levels, including, but not limited to: litigation
outcomes; court rulings; governmental enforcement decisions; future repurchase and indemnification claim levels;
securitization trustees pursuing mortgage repurchase litigation unilaterally or in coordination with investors;
investors successfully pursuing repurchase litigation independently and without the involvement of the trustee as
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CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Capital One Financial Corporation (COF)