JP Morgan Chase 2015 Annual Report Download - page 254

Notes to consolidated financial statements
244 JPMorgan Chase & Co./2015 Annual Report
Loan classification changes
Loans in the held-for-investment portfolio that management
decides to sell are transferred to the held-for-sale portfolio
at the lower of cost or fair value on the date of transfer.
Credit-related losses are charged against the allowance for
loan losses; non-credit related losses such as those due to
changes in interest rates or foreign currency exchange rates
are recognized in noninterest revenue.
In the event that management decides to retain a loan in
the held-for-sale portfolio, the loan is transferred to the
held-for-investment portfolio at the lower of cost or fair
value on the date of transfer. These loans are subsequently
assessed for impairment based on the Firm’s allowance
methodology. For a further discussion of the methodologies
used in establishing the Firm’s allowance for loan losses,
see Note 15.
Loan modifications
The Firm seeks to modify certain loans in conjunction with
its loss-mitigation activities. Through the modification,
JPMorgan Chase grants one or more concessions to a
borrower who is experiencing financial difficulty in order to
minimize the Firm’s economic loss, avoid foreclosure or
repossession of the collateral, and to ultimately maximize
payments received by the Firm from the borrower. The
concessions granted vary by program and by borrower-
specific characteristics, and may include interest rate
reductions, term extensions, payment deferrals, principal
forgiveness, or the acceptance of equity or other assets in
lieu of payments.
Such modifications are accounted for and reported as TDRs.
A loan that has been modified in a TDR is generally
considered to be impaired until it matures, is repaid, or is
otherwise liquidated, regardless of whether the borrower
performs under the modified terms. In certain limited
cases, the effective interest rate applicable to the modified
loan is at or above the current market rate at the time of
the restructuring. In such circumstances, and assuming that
the loan subsequently performs under its modified terms
and the Firm expects to collect all contractual principal and
interest cash flows, the loan is disclosed as impaired and as
a TDR only during the year of the modification; in
subsequent years, the loan is not disclosed as an impaired
loan or as a TDR so long as repayment of the restructured
loan under its modified terms is reasonably assured.
Loans, except for credit card loans, modified in a TDR are
generally placed on nonaccrual status, although in many
cases such loans were already on nonaccrual status prior to
modification. These loans may be returned to performing
status (the accrual of interest is resumed) if the following
criteria are met: (a) the borrower has performed under the
modified terms for a minimum of six months and/or six
payments, and (b) the Firm has an expectation that
repayment of the modified loan is reasonably assured based
on, for example, the borrower’s debt capacity and level of
future earnings, collateral values, loan-to-value (“LTV”)
ratios, and other current market considerations. In certain
limited and well-defined circumstances in which the loan is
current at the modification date, such loans are not placed
on nonaccrual status at the time of modification.
Because loans modified in TDRs are considered to be
impaired, these loans are measured for impairment using
the Firm’s established asset-specific allowance
methodology, which considers the expected re-default rates
for the modified loans. A loan modified in a TDR generally
remains subject to the asset-specific allowance
methodology throughout its remaining life, regardless of
whether the loan is performing and has been returned to
accrual status and/or the loan has been removed from the
impaired loans disclosures (i.e., loans restructured at
market rates). For further discussion of the methodology
used to estimate the Firm’s asset-specific allowance, see
Note 15.
Foreclosed property
The Firm acquires property from borrowers through loan
restructurings, workouts, and foreclosures. Property
acquired may include real property (e.g., residential real
estate, land, and buildings) and commercial and personal
property (e.g., automobiles, aircraft, railcars, and ships).
The Firm recognizes foreclosed property upon receiving
assets in satisfaction of a loan (e.g., by taking legal title or
physical possession). For loans collateralized by real
property, the Firm generally recognizes the asset received
at foreclosure sale or upon the execution of a deed in lieu of
foreclosure transaction with the borrower. Foreclosed
assets are reported in other assets on the Consolidated
balance sheets and initially recognized at fair value less
costs to sell. Each quarter the fair value of the acquired
property is reviewed and adjusted, if necessary, to the lower
of cost or fair value. Subsequent adjustments to fair value
are charged/credited to noninterest revenue. Operating
expense, such as real estate taxes and maintenance, are
charged to other expense.