US Bank 2013 Annual Report Download - page 139

Commitments from Securities Lending The Company
participates in securities lending activities by acting as the
customer’s agent involving the loan of securities. The
Company indemnifies customers for the difference between
the fair value of the securities lent and the fair value of the
collateral received. Cash collateralizes these transactions.
The maximum potential future payments guaranteed by the
Company under these arrangements were approximately
$5.3 billion at December 31, 2013, and represented the fair
value of the securities lent to third parties. At December 31,
2013, the Company held $5.4 billion of cash as collateral for
these arrangements.
Asset Sales The Company has provided guarantees to
certain third parties in connection with the sale or syndication
of certain assets, primarily loan portfolios and tax-
advantaged investments. These guarantees are generally in
the form of asset buy-back or make-whole provisions that are
triggered upon a credit event or a change in the tax-
qualifying status of the related projects, as applicable, and
remain in effect until the loans are collected or final tax
credits are realized, respectively. The maximum potential
future payments guaranteed by the Company under these
arrangements were approximately $3.7 billion at
December 31, 2013, and represented the proceeds received
from the buyer or the guaranteed portion in these
transactions where the buy-back or make-whole provisions
have not yet expired. At December 31, 2013, the Company
had reserved $102 million for potential losses related to the
sale or syndication of tax-advantaged investments.
The maximum potential future payments do not include
loan sales where the Company provides standard
representation and warranties to the buyer against losses
related to loan underwriting documentation defects that may
have existed at the time of sale that generally are identified
after the occurrence of a triggering event such as
delinquency. For these types of loan sales, the maximum
potential future payments is generally the unpaid principal
balance of loans sold measured at the end of the current
reporting period. Actual losses will be significantly less than
the maximum exposure, as only a fraction of loans sold will
have a representation and warranty breach, and any losses
on repurchase would generally be mitigated by any
collateral held against the loans.
The Company regularly sells loans to GSEs as part of its
mortgage banking activities. The Company provides
customary representation and warranties to the GSEs in
conjunction with these sales. These representations and
warranties generally require the Company to repurchase
assets if it is subsequently determined that a loan did not meet
specified criteria, such as a documentation deficiency or
rescission of mortgage insurance. If the Company is unable to
cure or refute a repurchase request, the Company is generally
obligated to repurchase the loan or otherwise reimburse the
counterparty for losses. At December 31, 2013, the Company
had reserved $83 million for potential losses from
representation and warranty obligations, compared with $240
million at December 31, 2012. The $157 million decrease
reflected the settlement of substantially all representation and
warranty obligations on loans sold to the Federal Home Loan
Mortgage Corporation (“Freddie Mac”) between 2000 and
2008. The Company’s reserve reflects management’s best
estimate of losses for representation and warranty obligations.
The Company’s repurchase reserve is modeled at the loan
level, taking into consideration the individual credit quality and
borrower activity that has transpired since origination. The
model applies credit quality and economic risk factors to
derive a probability of default and potential repurchase that
are based on the Company’s historical loss experience, and
estimates loss severity based on expected collateral value.
The Company also considers qualitative factors that may
result in anticipated losses differing from historical loss trends.
The following table is a rollforward of the Company’s
representation and warranty reserve:
Year Ended December 31
(Dollars in Millions) 2013 2012 2011
Balance at beginning of period .... $ 240 $ 160 $ 180
Net realized losses .............. (115) (120) (137)
Change in reserve ............... (42) 200 117
Balance at end of period ........... $ 83 $ 240 $ 160
As of December 31, 2013 and 2012, the Company had
$89 million and $131 million, respectively, of unresolved
representation and warranty claims from the GSEs. The
Company does not have a significant amount of unresolved
claims from investors other than the GSEs.
Merchant Processing The Company, through its
subsidiaries, provides merchant processing services. Under
the rules of credit card associations, a merchant processor
retains a contingent liability for credit card transactions
processed. This contingent liability arises in the event of a
billing dispute between the merchant and a cardholder that
is ultimately resolved in the cardholder’s favor. In this
situation, the transaction is “charged-back” to the merchant
and the disputed amount is credited or otherwise refunded
to the cardholder. If the Company is unable to collect this
amount from the merchant, it bears the loss for the amount of
the refund paid to the cardholder.
A cardholder, through its issuing bank, generally has
until the latter of up to four months after the date the
transaction is processed or the receipt of the product or
service to present a charge-back to the Company as the
merchant processor. The absolute maximum potential
liability is estimated to be the total volume of credit card
transactions that meet the associations’ requirements to be
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