Discover 2011 Annual Report Download - page 124

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112
Impaired Loans and Troubled Debt Restructurings. Generally loans included in a loan modification program are
considered to be individually impaired and are accounted for as troubled debt restructurings. The Company has both internal
and external loan modification programs that provide relief to credit card and personal loan borrowers who are experiencing
financial hardship. The internal loan modification programs include both temporary and permanent programs.
For our credit card customers, the temporary hardship program primarily consists of a reduced minimum payment and an
interest rate reduction, both lasting for a period no longer than 12 months. The permanent workout program involves changing
the structure of the loan to a fixed payment loan with a maturity no longer than 60 months and reducing the interest rate on the
loan. The permanent programs do not normally provide for the forgiveness of unpaid principal, but may allow for the reversal
of certain unpaid interest or fee assessments. The Company also makes loan modifications for customers who request financial
assistance through external sources, such as a consumer credit counseling agency program (referred to here as external
programs). These loans typically receive a reduced interest rate but continue to be subject to the original minimum payment
terms and do not normally include waiver of unpaid principal, interest or fees.
Temporary and permanent modifications on credit card loans, certain grants of student loan forbearance and long-term
modifications to personal loans are considered troubled debt restructurings and are accounted for in accordance with ASC
310-40, Troubled Debt Restructuring by Creditors. Student loan borrowers face unique challenges as they enter the workforce
and their loans enter repayment. To assist borrowers who are experiencing temporary financial difficulties and are willing to
resume making payments, the Company may offer forbearance periods of up to 12 months over the life of the loan. Private
student loans have repayment terms of 10 to 30 years and the actual maturity can extend for several additional years since no
payments are required while the borrower is in school. The forbearance period does not result in a significant delay in payment
relative to the original expected duration. Furthermore, the Company does not anticipate significant shortfalls in the contractual
amount due for borrowers using a first forbearance period as the historical performance of these borrowers is not significantly
different from the overall portfolio. However, when a delinquent borrower is granted a second forbearance period, the
forbearance is considered a troubled debt restructuring.
For our personal loan customers, the temporary programs normally consist of a reduction of the minimum payment for a
period of no longer than 6 months with a final balloon payment required at the end of the loan term. The permanent program
involves changing the terms of the loan in order to pay off the outstanding balance over the new term for a period no longer
than four years. The total term may not exceed nine years. The Company also allows loan modifications for personal loan
customers who request financial assistance through external sources, similar to our credit card customers discussed above.
Payments are modified based on the new terms agreed upon with the credit counseling agency. Personal loans included in
permanent programs are accounted for as troubled debt restructurings.
Loans classified as troubled debt restructurings are recorded at their present value with impairment measured as the
difference between the loan balance and the discounted present value of cash flows expected to be collected. Consistent with
the Company’s measurement of impairment of modified loans on a pooled basis, the discount rate used for credit card loans is
the average current annual percentage rate it applies to non-impaired credit card loans, which approximates what would have
applied to the pool of modified loans prior to impairment. For closed-end consumer loans, the discount rate used is the average
contractual rate prior to modification.
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