JP Morgan Chase 2012 Annual Report Download - page 241

JPMorgan Chase & Co./2012 Annual Report 251
Certain consumer loans will be charged off earlier than the
FFIEC charge-off standards in certain circumstances as
follows:
• A charge-off is recognized when a loan is modified in a
TDR if the loan is determined to be collateral-dependent.
A loan is considered to be collateral-dependent when
repayment of the loan is expected to be provided solely
by the underlying collateral, rather than by cash flows
from the borrower’s operations, income or other
resources.
• Loans to borrowers who have experienced an event (e.g.,
bankruptcy) that suggests a loss is either known or highly
certain are subject to accelerated charge-off standards.
Residential real estate and auto loans are charged off
when the loan becomes 60 days past due, or sooner if the
loan is determined to be collateral-dependent. Credit card
and scored business banking loans are charged off within
60 days of receiving notification of the bankruptcy filing
or other event. Student loans are generally charged off
when the loan becomes 60 days past due after receiving
notification of a bankruptcy.
• Auto loans are written down to net realizable value upon
repossession of the automobile and after a redemption
period (i.e., the period during which a borrower may cure
the loan) has passed.
Other than in certain limited circumstances, the Firm
typically does not recognize charge-offs on government-
guaranteed loans.
Wholesale loans, risk-rated business banking loans and risk-
rated auto loans are charged off when it is highly certain
that a loss has been realized, including situations where a
loan is determined to be both impaired and collateral-
dependent. The determination of whether to recognize a
charge-off includes many factors, including the
prioritization of the Firm’s claim in bankruptcy, expectations
of the workout/restructuring of the loan and valuation of
the borrower’s equity or the loan collateral.
When a loan is charged down to the estimated net realizable
value, the determination of the fair value of the collateral
depends on the type of collateral (e.g., securities, real
estate). In cases where the collateral is in the form of liquid
securities, the fair value is based on quoted market prices
or broker quotes. For illiquid securities or other financial
assets, the fair value of the collateral is estimated using a
discounted cash flow model.
For residential real estate loans, collateral values are based
upon external valuation sources. When it becomes likely
that a borrower is either unable or unwilling to pay, the
Firm obtains a broker’s price opinion of the home based on
an exterior-only valuation (“exterior opinions”), which is
then updated at least every six months thereafter. As soon
as practicable after the Firm receives the property in
satisfaction of a debt (e.g., by taking legal title or physical
possession), generally, either through foreclosure or upon
the execution of a deed in lieu of foreclosure transaction
with the borrower, the Firm obtains an appraisal based on
an inspection that includes the interior of the home
(“interior appraisals”). Exterior opinions and interior
appraisals are discounted based upon the Firm’s experience
with actual liquidation values as compared to the estimated
values provided by exterior opinions and interior appraisals,
considering state- and product-specific factors.
For commercial real estate loans, collateral values are
generally based on appraisals from internal and external
valuation sources. Collateral values are typically updated
every six to twelve months, either by obtaining a new
appraisal or by performing an internal analysis, in
accordance with the Firm’s policies. The Firm also considers
both borrower- and market-specific factors, which may
result in obtaining appraisal updates or broker price
opinions at more frequent intervals.
Loans held-for-sale
Held-for-sale loans are measured at the lower of cost or fair
value, with valuation changes recorded in noninterest
revenue. For consumer loans, the valuation is performed on
a portfolio basis. For wholesale loans, the valuation is
performed on an individual loan basis.
Interest income on loans held-for-sale is accrued and
recognized based on the contractual rate of interest.
Loan origination fees or costs and purchase price discounts
or premiums are deferred in a contra loan account until the
related loan is sold. The deferred fees and discounts or
premiums are an adjustment to the basis of the loan and
therefore are included in the periodic determination of the
lower of cost or fair value adjustments and/or the gain or
losses recognized at the time of sale.
Held-for-sale loans are subject to the nonaccrual policies
described above.
Because held-for-sale loans are recognized at the lower of
cost or fair value, the Firm’s allowance for loan losses and
charge-off policies do not apply to these loans.