eTrade 2012 Annual Report Download - page 70

guidelines in accordance with the Company’s strategic objectives and existing policies. The Credit Committee
reviews investment and lending activities involving credit risk to ensure consistency with those established
guidelines. These reviews involve an analysis of portfolio balances, delinquencies, losses, recoveries, default
management and collateral liquidation performance, as well as any credit risk mitigation efforts relating to the
portfolios. In addition, the Credit Committee reviews and approves credit related counterparties engaged in
financial transactions with the Company.
Loss Mitigation on the Loan Portfolio
We have a credit risk operations team that focuses on the mitigation of potential losses in the loan portfolio.
Through a variety of strategies, including voluntary line closures, automatically freezing lines on all delinquent
accounts, and freezing lines on loans with materially reduced home equity, we have reduced our exposure to
open home equity lines from a high of over $7 billion in 2007 to $0.3 billion as of December 31, 2012.
We utilize third party loan servicers to obtain bankruptcy data on our borrowers and during the third quarter
of 2012, we identified an increase in bankruptcies reported by one specific servicer. In researching this increase,
we discovered that the servicer had not been reporting historical bankruptcy data on a timely basis. As a result,
we implemented an enhanced procedure around all servicer reporting to corroborate bankruptcy reporting with
independent third party data. Through this additional process, approximately $90 million of loans were identified
in which servicers failed to report the bankruptcy filing to us. As a result, these loans were written down to the
estimated current value of the underlying property less estimated selling costs, or approximately $40 million,
during the third quarter of 2012. These charge-offs resulted in an increase to provision for loan losses of $50
million in the third quarter of 2012.
We have an initiative to assess our servicing relationships and, where appropriate, transfer certain mortgage
loans to servicers that specialize in managing troubled assets. We believe this initiative has improved and will
continue to improve the credit performance of the loans transferred in future periods when compared to the
expected credit performance of these same loans if they had not been transferred. A total of $2.8 billion of our
mortgage loans were held at servicers that specialize in managing troubled assets as of December 31, 2012.
We have a loan modification program that focuses on the mitigation of potential losses in the loan portfolio.
We consider modifications in which we make an economic concession to a borrower experiencing financial
difficulty a TDR. During the year ended December 31, 2012, we modified $339.1 million and $31.7 million of
one- to four-family and home equity loans, respectively, in which the modification was considered a TDR.
During the first quarter of 2012, we completed an evaluation of certain programs and practices that were
designed in accordance with guidance from our former regulator, the OTS. This evaluation was initiated in
connection with our transition from the OTS to the OCC, our new primary banking regulator. As a result of our
evaluation, loan modification policies and procedures were aligned with the guidance from the OCC. During the
fourth quarter of 2011, we suspended certain home equity loan modification programs that required changes.
These suspended programs were discontinued in the first quarter of 2012, which has resulted in a decrease in the
volume of TDRs in 2012.
Trial modifications are classified immediately as TDRs and continue to be reported as delinquent until the
successful completion of the trial period, which is typically 90 days. The loan is then classified as current and
becomes a permanent modification.
We also processed minor modifications on a number of loans through traditional collections actions taken in
the normal course of servicing delinquent accounts. These actions typically result in an insignificant delay in the
timing of payments; therefore, we do not consider such activities to be economic concessions to the borrowers.
As of December 31, 2012 and 2011, we had $33.4 million and $41.7 million of mortgage loans, respectively, in
which the modification was not considered a TDR due to the insignificant delay in the timing of payments.
Approximately 8% of these loans were classified as nonperforming at both December 31, 2012 and 2011.
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