Discover 2015 Annual Report Download - page 151

-135-
representations and warranties may extend through the contractual life of the mortgage loan, even though the
Company closed the mortgage origination business. Subsequent to the sale, if underwriting deficiencies, borrower fraud
or documentation defects are discovered in individual mortgage loans, the Company may be obligated to repurchase
the respective mortgage loan or indemnify the investors for any losses from borrower defaults if such deficiency or
defect cannot be cured within the specified period following discovery. The Company has established a repurchase
reserve based on expected losses. At December 31, 2015, this amount was not material and was included in accrued
expenses and other liabilities on the consolidated statements of financial condition. The related provision was included
in other income on the consolidated statements of income.
Guarantees
The Company has obligations under certain guarantee arrangements, including contracts and indemnification
agreements, which contingently require the Company to make payments to the guaranteed party based on changes in
an underlying asset, liability or equity security of a guaranteed party, rate or index. Also included as guarantees are
contracts that contingently require the Company to make payments to a guaranteed party based on another entity’s
failure to perform under an agreement. The Company’s use of guarantees is disclosed below by type of guarantee.
Counterparty Settlement Guarantees
Diners Club and DFS Services LLC (on behalf of PULSE) have various counterparty exposures, which are listed
below.
•Merchant Guarantee. Diners Club has entered into contractual relationships with certain international
merchants, which generally include travel-related businesses, for the benefit of all Diners Club licensees. The
licensees hold the primary liability to settle the transactions of their customers with these merchants. However,
Diners Club retains a counterparty exposure if a licensee fails to meet its financial payment obligation to one
of these merchants.
•ATM Guarantee. PULSE entered into contractual relationships with certain international ATM acquirers in
which DFS Services LLC retains counterparty exposure if an issuer fails to fulfill its settlement obligation.
The maximum potential amount of future payments related to such contingent obligations is dependent upon the
transaction volume processed between the time a counterparty defaults on its settlement and the time at which the
Company disables the settlement of any further transactions for the defaulting party, which could be one month
depending on the type of guarantee/counterparty. However, there is no limitation on the maximum amount the
Company may be liable to pay. The actual amount of the potential exposure cannot be quantified as the Company
cannot determine whether particular counterparties will fail to meet their settlement obligations.
While the Company has some contractual remedies to offset these counterparty settlement exposures (such as
letters of credit or pledged deposits), in the event that all licensees and/or issuers were to become unable to settle their
transactions, the Company estimates its maximum potential counterparty exposures to these settlement guarantees,
based on historical transaction volume, would be as follows (dollars in millions):
December 31,
2015
Diners Club
Merchant guarantee ........................................................................................................................................................... $ 108
PULSE
ATM guarantee .................................................................................................................................................................. $ 1
With regard to the counterparty settlement guarantees discussed above, the Company believes that the estimated
amounts of maximum potential future payments are not representative of the Company’s actual potential loss exposure
given Diners Club’s and PULSE’s insignificant historical losses from these counterparty exposures. As of December 31,
2015, the Company had not recorded any contingent liability in the consolidated financial statements for these
counterparty exposures, and management believes that the probability of any payments under these arrangements is
low.