JP Morgan Chase 2015 Annual Report Download - page 304

Notes to consolidated financial statements
294 JPMorgan Chase & Co./2015 Annual Report
On November 15, 2013, the Firm announced that it had
reached a $4.5 billion agreement with 21 major
institutional investors to make a binding offer to the
trustees of 330 residential mortgage-backed securities
trusts issued by J.P.Morgan, Chase, and Bear Stearns
(“RMBS Trust Settlement”) to resolve all representation and
warranty claims, as well as all servicing claims, on all trusts
issued by J.P. Morgan, Chase, and Bear Stearns between
2005 and 2008. For further information see Note 31.
In addition, from 2005 to 2008, Washington Mutual made
certain loan level representations and warranties in
connection with approximately $165 billion of residential
mortgage loans that were originally sold or deposited into
private-label securitizations by Washington Mutual. Of the
$165 billion, approximately $81 billion has been repaid. In
addition, approximately $50 billion of the principal amount
of such loans has liquidated with an average loss severity of
59%. Accordingly, the remaining outstanding principal
balance of these loans as of December 31, 2015, was
approximately $33 billion, of which $6 billion was 60 days
or more past due. The Firm believes that any repurchase
obligations related to these loans remain with the FDIC
receivership.
For additional information regarding litigation, see Note 31.
Loans sold with recourse
The Firm provides servicing for mortgages and certain
commercial lending products on both a recourse and
nonrecourse basis. In nonrecourse servicing, the principal
credit risk to the Firm is the cost of temporary servicing
advances of funds (i.e., normal servicing advances). In
recourse servicing, the servicer agrees to share credit risk
with the owner of the mortgage loans, such as Fannie Mae
or Freddie Mac or a private investor, insurer or guarantor.
Losses on recourse servicing predominantly occur when
foreclosure sales proceeds of the property underlying a
defaulted loan are less than the sum of the outstanding
principal balance, plus accrued interest on the loan and the
cost of holding and disposing of the underlying property.
The Firm’s securitizations are predominantly nonrecourse,
thereby effectively transferring the risk of future credit
losses to the purchaser of the mortgage-backed securities
issued by the trust. At December 31, 2015 and 2014, the
unpaid principal balance of loans sold with recourse totaled
$4.3 billion and $6.1 billion, respectively. The carrying
value of the related liability that the Firm has recorded,
which is representative of the Firm’s view of the likelihood it
will have to perform under its recourse obligations, was
$82 million and $102 million at December 31, 2015 and
2014, respectively.
Other off-balance sheet arrangements
Indemnification agreements – general
In connection with issuing securities to investors, the Firm
may enter into contractual arrangements with third parties
that require the Firm to make a payment to them in the
event of a change in tax law or an adverse interpretation of
tax law. In certain cases, the contract also may include a
termination clause, which would allow the Firm to settle the
contract at its fair value in lieu of making a payment under
the indemnification clause. The Firm may also enter into
indemnification clauses in connection with the licensing of
software to clients (“software licensees”) or when it sells a
business or assets to a third party (“third-party
purchasers”), pursuant to which it indemnifies software
licensees for claims of liability or damages that may occur
subsequent to the licensing of the software, or third-party
purchasers for losses they may incur due to actions taken
by the Firm prior to the sale of the business or assets. It is
difficult to estimate the Firm’s maximum exposure under
these indemnification arrangements, since this would
require an assessment of future changes in tax law and
future claims that may be made against the Firm that have
not yet occurred. However, based on historical experience,
management expects the risk of loss to be remote.
Card charge-backs
Commerce Solutions, Card’s merchant services
business, is a global leader in payment processing and
merchant acquiring.
Under the rules of Visa USA, Inc., and MasterCard
International, JPMorgan Chase Bank, N.A., is primarily liable
for the amount of each processed card sales transaction
that is the subject of a dispute between a cardmember and
a merchant. If a dispute is resolved in the cardmember’s
favor, Commerce Solutions will (through the cardmember’s
issuing bank) credit or refund the amount to the
cardmember and will charge back the transaction to the
merchant. If Commerce Solutions is unable to collect the
amount from the merchant, Commerce Solutions will bear
the loss for the amount credited or refunded to the
cardmember. Commerce Solutions mitigates this risk by
withholding future settlements, retaining cash reserve
accounts or by obtaining other security. However, in the
unlikely event that: (1) a merchant ceases operations and is
unable to deliver products, services or a refund; (2)
Commerce Solutions does not have sufficient collateral from
the merchant to provide customer refunds; and (3)
Commerce Solutions does not have sufficient financial
resources to provide customer refunds, JPMorgan Chase
Bank, N.A., would recognize the loss.
Commerce Solutions incurred aggregate losses of $12
million, $10 million, and $14 million on $949.3 billion,
$847.9 billion, and $750.1 billion of aggregate volume
processed for the years ended December 31, 2015, 2014
and 2013, respectively. Incurred losses from merchant
charge-backs are charged to other expense, with the offset
recorded in a valuation allowance against accrued interest
and accounts receivable on the Consolidated balance
sheets. The carrying value of the valuation allowance was
$20 million and $4 million at December 31, 2015 and
2014, respectively, which the Firm believes, based on
historical experience and the collateral held by Commerce
Solutions of $136 million and $174 million at
December 31, 2015 and 2014, respectively, is
representative of the payment or performance risk to the
Firm related to charge-backs.