Capital One 2015 Annual Report Download - page 38

19 Capital One Financial Corporation (COF)
We May Experience Increased Losses And Inadequate Reserves Associated With Mortgage Repurchases And Indemnification
Obligations.
Certain of our subsidiaries, including GreenPoint Mortgage Funding, Inc. (“GreenPoint”), Capital One Home Loans, LLC and
Capital One, N.A., as successor to Chevy Chase Bank (“CCB”), may be required to repurchase mortgage loans that have been
sold to investors in the event there are breaches of certain representations and warranties contained within the sales agreements.
We may be required to repurchase mortgage loans that we sell to investors in the event that there was improper underwriting or
fraud or in the event that the loans become delinquent shortly after they are originated. These subsidiaries also may be required
to indemnify certain purchasers and others against losses they incur in the event of breaches of representations and warranties and
in various other circumstances, including securities fraud or other public disclosure-related claims, and the amount of such losses
could exceed the repurchase amount of the related loans. Consequently, we may be exposed to credit risk associated with sold
loans.
We have established reserves in our consolidated financial statements for potential losses that are considered to be both probable
and reasonably estimable related to the mortgage loans sold by our originating subsidiaries. The adequacy of the reserve and the
ultimate amount of losses incurred will depend on, among other things, the actual future mortgage loan performance, the actual
level of future repurchase and indemnification requests, the actual success rate of claimants, developments in litigation and the
regulatory environment related to us and the industry, actual recoveries on the collateral, and macroeconomic conditions (including
unemployment levels and housing prices). Due to uncertainties relating to these factors, there can be no assurance that our reserves
will be adequate or that the total amount of losses incurred will not have a material adverse effect upon our financial condition or
results of operations.
In addition to the subsidiaries discussed above, we originate, sell and service commercial mortgage loans that meet underwriting
guidelines established by GSEs. We are required to meet minimum collateral requirements and share a limited portion of the risk
of loss during the remaining terms of these loans. The GSEs may change their collateral requirements for these loans in the future
and also increase our loss-sharing obligations if the loans do not meet specific underwriting criteria or default within certain time
periods following their sale to the GSEs. We cannot assure you that our liability associated with these loss-sharing agreements
will be sufficient to cover any future losses from these loans. We may also be required to share additional losses with GSEs if loan
defaults increase, which could impact our results of operations and liquidity.
For additional information related to our mortgage loan repurchase and indemnification obligations and related reserves and our
estimate of the reasonably possible future losses from representation and warranty claims beyond the current accrual levels, as
well as our loss-sharing agreements, as of December 31, 2015, see “Note 21—Commitments, Contingencies, Guarantees and
Others.”
Capital and Liquidity Risk
We May Not Be Able To Maintain Adequate Capital Or Liquidity Levels, Which Could Have A Negative Impact On Our Financial
Results And Our Ability To Return Capital To Our Shareholders.
As a result of the Dodd-Frank Act and the U.S. implementation of international accords, financial institutions are becoming subject
to new and increased capital and liquidity requirements. Although U.S. regulators have finalized regulations for some of these
requirements, continued uncertainty remains as to the form additional new requirements will take or how and when they will apply
to us. As a result, it is possible that we could be required to increase our capital and/or liquidity levels above the levels assumed
in our current financial plans. These new requirements could have a negative impact on our ability to lend, grow deposit balances
or make acquisitions and limit our ability to make most capital distributions. Higher capital levels also lower our return on equity.
In addition, as described further below, for regulatory capital purposes we entered parallel run on January 1, 2015, which must
last a minimum of four quarters. We will become subject to the Basel III Advanced Approaches framework for purposes of
determining our regulatory capital requirements once we receive regulatory approval to do so, although the exact timing of when
such approval may be granted is uncertain. Although we have current estimates of risk-weighted asset calculations under that
framework, there remains uncertainty around future regulatory interpretations of certain aspects of those calculations. Therefore,
we cannot assure you that our current estimates will be correct, and we may need to hold significantly more regulatory capital in
the future than we currently estimate to maintain a given capital ratio.
In September 2014, the Federal Banking Agencies issued the Final LCR Rule. See “Part I—Item 1. Business—Supervision and
Regulation” for further details regarding the Final LCR Rule. There remains uncertainty as to the impact of daily compliance with
the LCR on how we manage our business. See “Note 13—Regulatory and Capital Adequacy” and “Part I—Item 1. Business—