Citibank 2014 Annual Report Download - page 164

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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 on: (i) Citi’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 2013 and internal data dating to the
early 1970s on severity of losses in the event of default. Adjustments may
be made to this data. Such 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 on leading credit indicators, including
loan delinquencies and changes in portfolio size as well as economic trends,
including current and future housing prices, unemployment, length of time
in foreclosure, costs to sell 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.
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.
Citigroup Residential Mortgages—Representations and
Warranties
In connection with Citi’s sales of residential mortgage loans to the U.S.
government-sponsored entities (GSEs) and private investors, as well as
through private-label securitizations, Citi typically makes representations
and warranties that the loans sold meet certain requirements, such as the
loan’s compliance with any applicable loan criteria established by the buyer
and the validity of the lien securing the loan. The specific representations
and warranties made by Citi in any particular transaction depend on,
among other things, the nature of the transaction and the requirements of
the investor.
These sales expose Citi to potential claims for alleged breaches of its
representations and warranties. In the event of a breach of its representations
and warranties, Citi could be required either to repurchase the mortgage
loans with the identified defects (generally at unpaid principal balance plus
accrued interest) or to indemnify (make-whole) the investors for their losses
on these loans.
Citi has recorded a repurchase reserve for its potential repurchase
or make-whole liability regarding residential mortgage representation
and warranty claims. Since the first quarter of 2013, Citi has considered
private-label residential mortgage securitization representation and
warranty claims as part of its litigation accrual analysis and not as part of its
repurchase reserve. See Note 28 to the Consolidated Financial Statements for
additional information on Citi’s potential private-label residential mortgage
securitization exposure. Accordingly, Citi’s repurchase reserve has been
recorded for purposes of its potential representation and warranty repurchase
liability resulting from its whole loan sales to the GSEs and, to a lesser extent
private investors, which are made through Citi’s Consumer business in
CitiMortgage.
In the case of a repurchase, Citi will bear any subsequent credit loss on
the mortgage loan and the loan is typically considered a credit-impaired
loan and accounted for under AICPA Statement of Position (SOP) 03-3,
“Accounting of Certain Loans and Debt Securities Acquired in a Transfer”
(now incorporated into ASC 310-30, Receivables-Loans and Debt Securities
Acquired with Deteriorated Credit Quality) (SOP 03-3).