Citibank 2011 Annual Report Download - page 164

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portfolios, where internal credit-risk ratings are assigned (primarily
Institutional Clients Group and Global Consumer Banking) or modified
Consumer loans, where concessions were granted due to the borrowers’
financial difficulties.
The above-mentioned representatives covering these respective business
areas present recommended reserve balances for their funded and unfunded
lending portfolios along with supporting quantitative and qualitative data.
The quantitative data include:
฀ Estimated probable losses for non-performing, non-homogeneous
exposures within a business line’s classifiably managed portfolio
and impaired smaller-balance homogeneous loans whose terms
have been modified due to the borrowers’ financial difficulties, and
it was determined that a concession was granted to the borrower.
Consideration may be given to the following, as appropriate, when
determining this estimate: (i) the present value of expected future cash
flows discounted at the loan’s original effective rate; (ii) the borrower’s
overall financial condition, resources and payment record; and (iii) the
prospects for support from financially responsible guarantors or the
realizable value of any collateral. In the determination of the allowance
for loan losses for TDRs, management considers a combination of
historical re-default rates, the current economic environment and the
nature of the modification program when forecasting expected cash flows.
When impairment is measured based on the present value of expected
future cash flows, the entire change in present value is recorded in the
Provision for loan losses.
฀ Statistically calculated losses inherent in the classifiably managed
portfolio for performing and de minimis non-performing exposures.
The calculation is based upon: (i) Citigroup’s internal system of credit-
risk ratings, which are analogous to the risk ratings of the major rating
agencies; and (ii) historical default and loss data, including rating agency
information regarding default rates from 1983 to 2010 and internal data
dating to the early 1970s on severity of losses in the event of default.
฀ Additional adjustments include: (i) statistically calculated estimates to
cover the historical fluctuation of the default rates over the credit cycle,
the historical variability of loss severity among defaulted loans, and
the degree to which there are large obligor concentrations in the global
portfolio; and (ii) adjustments made for specific known items, such as
current environmental factors and credit trends.
In addition, representatives from each of the risk management and
finance staffs that cover business areas with delinquency-managed portfolios
containing smaller-balance homogeneous loans present their recommended
reserve balances based upon leading credit indicators, including loan
delinquencies and changes in portfolio size as well as economic trends,
including housing prices, unemployment and GDP. This methodology is
applied separately for each individual product within each geographic region
in which these portfolios exist.
This evaluation process is subject to numerous estimates and judgments.
The frequency of default, risk ratings, loss recovery rates, the size and
diversity of individual large credits, and the ability of borrowers with foreign
currency obligations to obtain the foreign currency necessary for orderly debt
servicing, among other things, are all taken into account during this review.
Changes in these estimates could have a direct impact on the credit costs in
any period and could result in a change in the allowance. Changes to the
Allowance for loan losses are recorded in the Provision for loan losses.
Allowance for Unfunded Lending Commitments
A similar approach to the allowance for loan losses is used for calculating
a reserve for the expected losses related to unfunded loan commitments
and standby letters of credit. This reserve is classified on the balance
sheet in Other liabilities. Changes to the allowance for unfunded
lending commitments are recorded in the Provision for unfunded
lending commitments.
Mortgage Servicing Rights
Mortgage servicing rights (MSRs) are recognized as intangible assets when
purchased or when the Company sells or securitizes loans acquired through
purchase or origination and retains the right to service the loans. Mortgage
servicing rights are accounted for at fair value, with changes in value
recorded in Other Revenue in the Company’s Consolidated Statement of
Income.
Additional information on the Company’s MSRs can be found in Note 22
to the Consolidated Financial Statements.
Consumer Mortgage—Representations and Warranties
The majority of Citi’s exposure to representation and warranty claims relates
to its U.S. Consumer mortgage business within CitiMortgage.
When selling a loan, Citi makes various representations and warranties
relating to, among other things, the following:
฀ Citi’s ownership of the loan;
฀ the validity of the lien securing the loan;
฀ the absence of delinquent taxes or liens against the property securing
the loan;
฀ the effectiveness of title insurance on the property securing the loan;
฀ the process used in selecting the loans for inclusion in a transaction;
฀ the loan’s compliance with any applicable loan criteria established by the
buyer; and
฀ the loan’s compliance with applicable local, state and federal laws.
The specific representations and warranties made by Citi depend on the
nature of the transaction and the requirements of the buyer. Market
conditions and credit rating agency requirements may also affect
representations and warranties and the other provisions to which Citi may
agree in loan sales.