JP Morgan Chase 2015 Annual Report Download - page 253

JPMorgan Chase & Co./2015 Annual Report 243
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 with 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
loss 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.
Loans at fair value
Loans used in a market-making strategy or risk managed on
a fair value basis are measured at fair value, with changes
in fair value recorded in noninterest revenue.
For these loans, the earned current contractual interest
payment is recognized in interest income. Changes in fair
value are recognized in noninterest revenue. Loan
origination fees are recognized upfront in noninterest
revenue. Loan origination costs are recognized in the
associated expense category as incurred.
Because these loans are recognized at fair value, the Firm’s
allowance for loan losses and charge-off policies do not
apply to these loans.
See Note 4 for further information on the Firm’s elections of
fair value accounting under the fair value option. See Note 3
and Note 4 for further information on loans carried at fair
value and classified as trading assets.
PCI loans
PCI loans held-for-investment are initially measured at fair
value. PCI loans have evidence of credit deterioration since
the loan’s origination date and therefore it is probable, at
acquisition, that all contractually required payments will not
be collected. Because PCI loans are initially measured at fair
value, which includes an estimate of future credit losses, no
allowance for loan losses related to PCI loans is recorded at
the acquisition date. See page 255 of this Note for
information on accounting for PCI loans subsequent to their
acquisition.