US Bank 2015 Annual Report Download - page 160

framework it would follow in setting the countercyclical capital
buffer, a macroprudential tool that would raise capital
requirements when there is an elevated risk of above normal
losses in the U.S. financial system. Furthermore, the Basel
Committee on Banking Supervision (the “Basel Committee”)
has published several consultative papers regarding (i) the
standardized approach to credit risk, (ii) a fundamental review
of the trading book, (iii) interest rate risk in the banking book,
and (iv) operational risk. Finally, the Basel Committee has
published its final net stable funding ratio framework. The U.S.
banking regulators are expected to incorporate all of these
measures into domestic regulation. The ultimate impact on
the Company’s capital and liquidity will depend on the final
U.S. rulemakings and implementation process thereafter.
The Company is subject to significant financial and
reputational risks from potential legal liability and
governmental actions The Company faces significant legal
risks in its business, and the volume of claims and amount of
damages and penalties claimed in litigation and governmental
proceedings against it and other financial institutions are
increasing. Customers, clients and other counterparties have
grown more litigious and are making claims for substantial or
indeterminate amounts of damages, while banking regulators
and certain other governmental authorities, such as the U.S.
Department of Justice, have demonstrated an increasing
focus on enforcement, including in connection with alleged
violations of law and customer harm. In addition,
governmental authorities have begun to seek criminal
penalties against companies in the financial services sector for
regulatory violations and have begun to require an admission
of wrongdoing from financial institutions in connection with
settling such matters. Criminal convictions or admissions of
wrongdoing in a settlement with the government can lead to
greater exposure in civil litigation and reputational harm.
As an example of increased risks arising from litigation, the
Company and other large financial institutions have been sued
over the past several years in their capacity as trustee for
residential mortgage–backed securities (“RMBS”) trusts. The
plaintiffs in these actions allege that the significant losses they
incurred as investors in the RMBS trusts were caused by the
trustees’ failure to enforce loan repurchase obligations and to
abide by appropriate standards of care after events of default
allegedly occurred, while also arguing to broaden the trustees’
duties. Although the Company has denied liability and
believes it has meritorious defenses in these cases, any
finding of liability or new or enhanced duties in one or more of
these cases against the Company, or another financial
institution, could result in a significant financial loss or require
a modification to the Company’s business practices, which
could negatively impact the Company’s financial results.
Increased litigation costs, substantial legal liability or
significant governmental action against the Company could
materially impact its financial condition and results of operations
or cause significant reputational harm to the Company, which in
turn could adversely impact its business prospects.
The Company faces increased regulatory and legal risk
arising out of its mortgage lending and servicing
businesses The Company is subject to investigations,
examinations and inquiries by government agencies and bank
regulators concerning mortgage-related practices, including
those related to compliance with selling guidelines relating to
residential home loans sold to GSEs, foreclosure-related
expenses submitted to the Federal Housing Administration or
GSEs for reimbursement, lender-placed insurance, and
notices and filings in bankruptcy cases. The Company is
cooperating fully with these investigations, examinations and
inquiries, any of which could lead to administrative or legal
proceedings or settlements. Remedies in such proceedings or
settlements may include fines, penalties, restitution or
alterations to the Company’s business practices, which could
increase the Company’s operating expenses and decrease its
revenue. Additionally, reputational damage arising from these
or other inquiries and industry-wide publicity could also have
an adverse effect upon the Company’s existing mortgage
business and could reduce future business opportunities.
In addition to governmental or regulatory investigations, the
Company, like other companies with residential mortgage
origination and servicing operations, faces the risk of class
actions and other litigation arising out of these operations.
The Company may be required to repurchase mortgage
loans or indemnify mortgage loan purchasers as a
result of breaches in contractual representations and
warranties When the Company sells mortgage loans that it
has originated to various parties, including GSEs, it is required
to make customary representations and warranties to the
purchaser about the mortgage loans and the manner in which
they were originated. The Company may be required to
repurchase mortgage loans or be subject to indemnification
claims in the event of a breach of contractual representations
or warranties that is not remedied within a certain period.
Contracts for residential mortgage loan sales to the GSEs
include various types of specific remedies and penalties that
could be applied to inadequate responses to repurchase
requests. If economic conditions and the housing market
deteriorate or the GSEs increase their claims of breached
representations and warranties, the Company could have
increased repurchase obligations and increased loss severity
on repurchases, requiring material increases to its repurchase
reserve.
The Company is exposed to risk of environmental
liability when it takes title to properties In the course of
the Company’s business, the Company may foreclose on and
—158 —