SEC Company Response from BANK OF AMERICA (BAC) — Aug 19, 2011
BANK OF AMERICA CORP /DE/ (BAC, BAC-PB, BAC-PE, BAC-PK, BAC-PL, BAC-PM, BAC-PN, BAC-PO, BAC-PP, BAC-PQ, BAC-PS, BML-PG, BML-PL) (CIK 0000070858)
Date: Aug. 19, 2011 · CIK: 0000070858 · Accession: 0001193125-11-227634
AI Filing Summary & Sentiment
Reasoning
File numbers found in text: 001-6523
Referenced dates: August 2, 2011, June 6, 2011
Letter
United States Securities and Exchange Commission Division of Corporation Finance File No. 001-6523 Form 10-Q for the quarterly period ended March 31, 2011 Filed May 5, 2011 Form 8-K filed July 19, 2011
Dear Ms. Hayes:
We have received and reviewed your letter dated August 2, 2011. The following are our responses to each of your comments and requests. For ease of reference, we have repeated the Staff’s comments. Our responses are intended to address the comments and questions raised by the Staff. We would be pleased to continue to work with the Staff in resolving any matter requiring further attention.
Form 10-K for the Fiscal Year Ended December 31, 2010
Item 1A. Risk Factors
Adverse changes to our credit ratings from the major credit ratings agencies could have a material adverse effect on our liquidity, cash flows, competitive position…page 8
1. We note your response to prior comment one of our letter dated June 6, 2011. Your risk factor discussion should include the details necessary for an investor to understand the risk and potential consequences rather than cross reference various discussions in your filing. Please expand future risk factor disclosure to quantify likely losses and additional collateral requirements given a one notch and two notch downgrade.
Response:
In response to the Staff’s comment, we included the following qualitative disclosure concerning the risks and potential consequences associated with a potential adverse change in the Corporation’s credit ratings in the Risk Factors section of our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2011, filed on August 4, 2011 (the Second Quarter 2011 Form 10-Q):
Liquidity Risk
Adverse changes to our credit ratings from the major credit ratings agencies could have a material adverse effect on our liquidity, cash flows, competitive position, financial condition and results of operations by significantly limiting our access to the funding or capital markets, increasing our borrowing costs, or triggering additional collateral or funding requirements.
Our borrowing costs and ability to obtain funding are directly impacted by our credit ratings. In addition, credit ratings may be important to customers or counterparties when we compete in certain markets and when we seek to engage in certain transactions, including OTC derivatives. Credit ratings and outlooks are opinions on our creditworthiness and that of our obligations or securities, including long-term debt, short-term borrowings, preferred stock and other securities, including asset-backed and mortgage-backed securities. Our credit ratings are subject to ongoing review by the rating agencies and thus may change from time to time based on a number of factors, including our own financial strength and operations, as well as factors not under our control, such as rating agency specific criteria or frameworks for our industry or certain security types, which are subject to revision from time to time, and conditions affecting the financial services industry generally. There can be no assurance that we will maintain our current credit ratings.
On June 2, 2011, Moody’s placed our ratings on review for possible downgrade from negative outlook due to its view that the current level of U.S. government support incorporated into our ratings may no longer be appropriate. The ratings agencies have indicated that, as a systemically important financial institution, our credit ratings currently reflect their expectation that, if necessary, we would receive significant support from the U.S. government. All three ratings agencies have indicated they will reevaluate, and could reduce the uplift they include in our ratings for government support, for reasons arising from financial services regulatory reform proposals or legislation.
Currently, our long-term senior debt ratings and outlooks expressed by the ratings agencies are as follows: A2 (review for possible downgrade) by Moody’s; A (negative) by S&P; and A+ (Rating Watch Negative) by Fitch. A reduction in certain of our credit ratings would likely have a material adverse effect on our liquidity, access to credit markets, the related cost of funds, our businesses and on certain trading revenues, particularly in those businesses where counterparty creditworthiness is critical. If our short-term credit ratings, or those of our bank or broker-dealer subsidiaries, were downgraded by one or more levels, the potential loss of short-term funding sources such as commercial paper or repo financing, and the effect on our incremental cost of funds would be material. While certain potential impacts of a downgrade are contractual and quantifiable, the full scope of consequences to a credit rating downgrade is inherently uncertain, as it depends upon numerous dynamic, complex and inter-related factors and assumptions, including whether any downgrade of our long-term credit ratings precipitates downgrades to our short-term credit ratings, and assumptions about the behavior of various customers, investors and counterparties, whose responses to a downgrade are unknown and not reasonably knowable in advance.
For additional information about our credit ratings and their potential effects to our liquidity, see Liquidity Risk – Credit Ratings in the MD&A on page 74 and Note 4 – Derivatives to the Consolidated Financial Statements.
The Corporation also provided quantitative disclosure regarding additional collateral and termination payments required under certain over-the-counter (OTC) derivative contracts and other trading agreements as a result of a one- and two-level downgrade of the long-term credit rating of the Corporation and its subsidiaries by all ratings agencies in Note 4 – Derivatives to the Corporation’s Consolidated Financial Statements in the Second Quarter 2011 Form 10-Q, along with a cross reference in the Risk Factor disclosure.
For the reasons identified in the existing Risk Factor disclosure and discussed further below, we do not believe that providing additional quantitative disclosure regarding other potential consequences of an adverse change in the Corporation’s credit ratings, if any, is feasible. The full scope of consequences to a credit ratings downgrade is inherently uncertain, as it depends upon numerous dynamic, complex and inter-related factors and assumptions, including assumptions about the behavior of various customers, investors and counterparties whose responses to a downgrade are unknown and not reasonably determinable in advance.
Consistent with the requirements of Securities Exchange Act Rule 12b-21, the Corporation has disclosed such information as it is known or reasonably able to obtain regarding these matters, and the Corporation provided a statement in the Risk Factors section of the Second Quarter 2011 Form 10-Q set forth above that additional information with respect to the responses of various customers, investors and counterparties is unknown and not reasonably knowable in advance. Finally, the Corporation has chosen to include the quantitative disclosure regarding additional collateral and termination payments required under certain OTC derivative contracts and other trading agreements as a result of a one- and two-level downgrade of the long-term credit rating of the Corporation and its subsidiaries by all ratings agencies in the footnotes to the Consolidated Financial Statements rather than in the Risk Factor disclosure because, in the Corporation’s view, to provide this disclosure in the Risk Factors section would vest in these numbers undue prominence relative to other risks applicable to the Corporation that are disclosed in the Risk Factor section, and would risk creating an unbalanced presentation in light of the other consequences that cannot yet be quantified or described accurately in such a Risk Factor at this time. The Corporation will continue to provide in its periodic reports such disclosure regarding the consequences associated with an adverse change in its long-term credit ratings as is known by the Corporation or the Corporation is reasonably able to determine given the available information.
Mortgage and Housing Market-Related Risk, page 9
2. In response to comment three of our letter dated June 6, 2011 you have stated that you cannot calculate the maximum funding obligation attributable to rapid amortization because a home equity borrower has the ability to pay down and redraw balances but that undrawn available credit was $639 million at December 31, 2010. It would appear that $639 million could be drawn and repaid multiple times and the amounts repaid would be distributed to the holders of the trust certificates. Please provide further explanation as to your belief that risk factor disclosure is not warranted or provide draft disclosure to be included in future filings.
Response:
As disclosed in the Second Quarter 2011 Form 10-Q, the Corporation evaluates each of the securitizations that have entered into rapid amortization for potential losses due to non-recoverable advances by estimating the amount and timing of future losses on the underlying loans, the excess spread available to cover such losses and potential cash flow shortfalls during rapid amortization. This evaluation also includes the number of loans still in revolving status, the amount of available credit and when those loans will lose revolving status. At June 30, 2011, the reserve for losses on expected future draw obligations on the home equity loan securitizations in rapid amortization for which the Corporation has a subordinated funding obligation was $107 million compared to $131 million at December 31, 2010.
The charges that will ultimately be recorded as a result of rapid amortization events in large part depend on the undrawn available credit on the home equity lines. The undrawn available credit on the home equity loans declined 12% to $564 million at June 30, 2011 compared to $639 million at December 31, 2010. This amount continues to decline based on, among other things, the Corporation’s home equity line management initiatives which seek to reduce or eliminate the amount of available credit based on increases in customer risk profiles. The charges that will be recorded as a result of rapid amortization events also depend on the performance of the home equity loans, the amount of subsequent draws and the timing of related cash flows.
The Corporation believes its predictive models, utilizing its historical experience while considering current developments, including customer behavior and projections of future defaults, subsequent draws and the timing of related cash flows, as well as certain other assumptions regarding economic conditions, home prices and other matters, allow it to reasonably estimate the reserve for losses on expected future draw obligations on the home equity loan securitizations in rapid amortization. For the past four quarters, the Corporation has observed that losses on draw obligations averaged approximately $4.7 million per month, with the most recent two quarters averaging $5 million to $6 million per month. The Corporation expects these losses to decline over time. In addition, the Corporation has forecasted aggregate losses of $107 million on expected future draw obligations on the home equity loan securitizations in rapid amortization through 2017, which is when it expects to no longer have any further subordinate funding obligation on these loans.
As a result, the Corporation continues to believe possible losses due to the rapid amortization of home equity securitization trusts do not represent a significant risk to its business, operations or financial condition, and accordingly that this matter does not warrant Risk Factor disclosure.
3. We note your response to comment four of our letter dated June 6, 2011. However, we disagree with your belief that the agreements were made in the ordinary course of business. Therefore, we believe they should be filed pursuant to Item 601(b) (10) of Regulation S-K.
Response:
The Corporation continues to believe that neither the December 31, 2010 agreement with Fannie Mae (FNMA Agreement) nor the December 31, 2010 agreement with Freddie Mac (FHLMC Agreement) is a material contract required to be filed as an exhibit under Item 601(b)(10) of Regulation S-K. The Corporation respectfully disagrees with the Staff’s assertion that the FNMA Agreement and the FHLMC Agreement were entered into other than in the ordinary course of the Corporation’s business.
Over the past decade, we and legacy Countrywide sold over $2 trillion of loans to Fannie Mae and Freddie Mac (the GSEs). Those sales were made in the ordinary course of business. In connection with those sales, we or our subsidiaries or legacy companies made various contractual representations and warranties. The GSEs have routinely alleged that in certain cases the Corporation has breached those representations and warranties. As a result of those alleged breaches, the GSEs have made requests to repurchase mortgage loans or to otherwise make whole or provide other remedies to the GSEs (collectively, repurchases). At June 30, 2011, there were outstanding repurchase claims of $5.1 billion from the GSEs.
We have an established history of working with the GSEs on repurchase claims, including through bulk settlement. In 2008, 2009 and 2010, we received $2.9 billion, $6.4 billion and $13.6 billion, respectively, in repurchase claims from the GSEs and resolved $1.6 billion, $4.5 billion and $9.1 billion, respectively, of repurchase claims (excluding claims settled through the FNMA Agreement and the FHLMC Agreement). Additionally, we currently employ 900 associates in the Consumer
Real Estate Services segment that focus on resolving residential mortgage repurchase claims. The resolution of repurchase claims stemming from alleged breaches of those representations and warranties is a continuous and ordinary course process in the Corporation’s business, although repurchase claims remain at historically elevated levels.
We have contested, and will continue to contest, any request for repurchase when we conclude that a valid basis for repurchase does not exist. Nevertheless, we have also reached, and may continue to reach, bulk settlements, or agreements for bulk settlements, with the GSEs in the ordinary course, in lieu of a loan-by-loan review process, in an effort to resolve legacy-mortgage related issues. For instance, prior to entering into the FNMA Agreement, the Corporation entered into bulk settlements with FNMA to resolve repurchase claims in August 2006, December 2007 and June 2008. In addition, from time to time, we have entered into bulk settlements with various other counterparties in the ordinary course of business.
The FNMA Agreement and the FHLMC Agreement were continuations of the historical process of resolving repurchase claims. For instance, the FNMA Agreement substantially resolved the existing pipeline of repurchase and make-whole claims outstanding as of September 20, 2010 related to loans sold directly by legacy Countrywide to Fannie Mae. The FNMA Agreement merely resolved an aggregated set of claims that we otherwise would have resolved on an individual basis in the ordinary course of business. The FHLMC Agreement extinguished all outstanding and potential mortgage repurchase and make-whole claims arising out of any alleged breaches of selling representations and warranties relat
Show Raw Text
CORRESP 1 filename1.htm Correspondence Confidential Treatment of Portions of this Letter Has Been Requested by Bank of America Corporation Pursuant to 17 C.F.R. § 200.83. Brackets denote such omissions. August 19, 2011 Ms. Suzanne Hayes Assistant Director United States Securities and Exchange Commission Division of Corporation Finance 100 F Street, NE Washington, DC 20549 Re: Bank of America Corporation (the Corporation) Form 10-K for the fiscal year ended December 31, 2010 Filed February 25, 2011 File No. 001-6523 Form 10-Q for the quarterly period ended March 31, 2011 Filed May 5, 2011 Form 8-K filed July 19, 2011 Dear Ms. Hayes: We have received and reviewed your letter dated August 2, 2011. The following are our responses to each of your comments and requests. For ease of reference, we have repeated the Staff’s comments. Our responses are intended to address the comments and questions raised by the Staff. We would be pleased to continue to work with the Staff in resolving any matter requiring further attention. Form 10-K for the Fiscal Year Ended December 31, 2010 Item 1A. Risk Factors Adverse changes to our credit ratings from the major credit ratings agencies could have a material adverse effect on our liquidity, cash flows, competitive position…page 8 1. We note your response to prior comment one of our letter dated June 6, 2011. Your risk factor discussion should include the details necessary for an investor to understand the risk and potential consequences rather than cross reference various discussions in your filing. Please expand future risk factor disclosure to quantify likely losses and additional collateral requirements given a one notch and two notch downgrade. Response: In response to the Staff’s comment, we included the following qualitative disclosure concerning the risks and potential consequences associated with a potential adverse change in the Corporation’s credit ratings in the Risk Factors section of our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2011, filed on August 4, 2011 (the Second Quarter 2011 Form 10-Q): Liquidity Risk Adverse changes to our credit ratings from the major credit ratings agencies could have a material adverse effect on our liquidity, cash flows, competitive position, financial condition and results of operations by significantly limiting our access to the funding or capital markets, increasing our borrowing costs, or triggering additional collateral or funding requirements. Our borrowing costs and ability to obtain funding are directly impacted by our credit ratings. In addition, credit ratings may be important to customers or counterparties when we compete in certain markets and when we seek to engage in certain transactions, including OTC derivatives. Credit ratings and outlooks are opinions on our creditworthiness and that of our obligations or securities, including long-term debt, short-term borrowings, preferred stock and other securities, including asset-backed and mortgage-backed securities. Our credit ratings are subject to ongoing review by the rating agencies and thus may change from time to time based on a number of factors, including our own financial strength and operations, as well as factors not under our control, such as rating agency specific criteria or frameworks for our industry or certain security types, which are subject to revision from time to time, and conditions affecting the financial services industry generally. There can be no assurance that we will maintain our current credit ratings. On June 2, 2011, Moody’s placed our ratings on review for possible downgrade from negative outlook due to its view that the current level of U.S. government support incorporated into our ratings may no longer be appropriate. The ratings agencies have indicated that, as a systemically important financial institution, our credit ratings currently reflect their expectation that, if necessary, we would receive significant support from the U.S. government. All three ratings agencies have indicated they will reevaluate, and could reduce the uplift they include in our ratings for government support, for reasons arising from financial services regulatory reform proposals or legislation. Currently, our long-term senior debt ratings and outlooks expressed by the ratings agencies are as follows: A2 (review for possible downgrade) by Moody’s; A (negative) by S&P; and A+ (Rating Watch Negative) by Fitch. A reduction in certain of our credit ratings would likely have a material adverse effect on our liquidity, access to credit markets, the related cost of funds, our businesses and on certain trading revenues, particularly in those businesses where counterparty creditworthiness is critical. If our short-term credit ratings, or those of our bank or broker-dealer subsidiaries, were downgraded by one or more levels, the potential loss of short-term funding sources such as commercial paper or repo financing, and the effect on our incremental cost of funds would be material. While certain potential impacts of a downgrade are contractual and quantifiable, the full scope of consequences to a credit rating downgrade is inherently uncertain, as it depends upon numerous dynamic, complex and inter-related factors and assumptions, including whether any downgrade of our long-term credit ratings precipitates downgrades to our short-term credit ratings, and assumptions about the behavior of various customers, investors and counterparties, whose responses to a downgrade are unknown and not reasonably knowable in advance. For additional information about our credit ratings and their potential effects to our liquidity, see Liquidity Risk – Credit Ratings in the MD&A on page 74 and Note 4 – Derivatives to the Consolidated Financial Statements. 2 The Corporation also provided quantitative disclosure regarding additional collateral and termination payments required under certain over-the-counter (OTC) derivative contracts and other trading agreements as a result of a one- and two-level downgrade of the long-term credit rating of the Corporation and its subsidiaries by all ratings agencies in Note 4 – Derivatives to the Corporation’s Consolidated Financial Statements in the Second Quarter 2011 Form 10-Q, along with a cross reference in the Risk Factor disclosure. For the reasons identified in the existing Risk Factor disclosure and discussed further below, we do not believe that providing additional quantitative disclosure regarding other potential consequences of an adverse change in the Corporation’s credit ratings, if any, is feasible. The full scope of consequences to a credit ratings downgrade is inherently uncertain, as it depends upon numerous dynamic, complex and inter-related factors and assumptions, including assumptions about the behavior of various customers, investors and counterparties whose responses to a downgrade are unknown and not reasonably determinable in advance. Consistent with the requirements of Securities Exchange Act Rule 12b-21, the Corporation has disclosed such information as it is known or reasonably able to obtain regarding these matters, and the Corporation provided a statement in the Risk Factors section of the Second Quarter 2011 Form 10-Q set forth above that additional information with respect to the responses of various customers, investors and counterparties is unknown and not reasonably knowable in advance. Finally, the Corporation has chosen to include the quantitative disclosure regarding additional collateral and termination payments required under certain OTC derivative contracts and other trading agreements as a result of a one- and two-level downgrade of the long-term credit rating of the Corporation and its subsidiaries by all ratings agencies in the footnotes to the Consolidated Financial Statements rather than in the Risk Factor disclosure because, in the Corporation’s view, to provide this disclosure in the Risk Factors section would vest in these numbers undue prominence relative to other risks applicable to the Corporation that are disclosed in the Risk Factor section, and would risk creating an unbalanced presentation in light of the other consequences that cannot yet be quantified or described accurately in such a Risk Factor at this time. The Corporation will continue to provide in its periodic reports such disclosure regarding the consequences associated with an adverse change in its long-term credit ratings as is known by the Corporation or the Corporation is reasonably able to determine given the available information. Mortgage and Housing Market-Related Risk, page 9 2. In response to comment three of our letter dated June 6, 2011 you have stated that you cannot calculate the maximum funding obligation attributable to rapid amortization because a home equity borrower has the ability to pay down and redraw balances but that undrawn available credit was $639 million at December 31, 2010. It would appear that $639 million could be drawn and repaid multiple times and the amounts repaid would be distributed to the holders of the trust certificates. Please provide further explanation as to your belief that risk factor disclosure is not warranted or provide draft disclosure to be included in future filings. Response: As disclosed in the Second Quarter 2011 Form 10-Q, the Corporation evaluates each of the securitizations that have entered into rapid amortization for potential losses due to non-recoverable advances by estimating the amount and timing of future losses on the underlying loans, the excess spread available to cover such losses and potential cash flow shortfalls during rapid amortization. This evaluation also includes the number of loans still in revolving status, the amount of available credit and when those loans will lose revolving status. At June 30, 2011, the reserve for losses on expected future draw obligations on the home equity loan securitizations in rapid amortization for which the Corporation has a subordinated funding obligation was $107 million compared to $131 million at December 31, 2010. 3 The charges that will ultimately be recorded as a result of rapid amortization events in large part depend on the undrawn available credit on the home equity lines. The undrawn available credit on the home equity loans declined 12% to $564 million at June 30, 2011 compared to $639 million at December 31, 2010. This amount continues to decline based on, among other things, the Corporation’s home equity line management initiatives which seek to reduce or eliminate the amount of available credit based on increases in customer risk profiles. The charges that will be recorded as a result of rapid amortization events also depend on the performance of the home equity loans, the amount of subsequent draws and the timing of related cash flows. The Corporation believes its predictive models, utilizing its historical experience while considering current developments, including customer behavior and projections of future defaults, subsequent draws and the timing of related cash flows, as well as certain other assumptions regarding economic conditions, home prices and other matters, allow it to reasonably estimate the reserve for losses on expected future draw obligations on the home equity loan securitizations in rapid amortization. For the past four quarters, the Corporation has observed that losses on draw obligations averaged approximately $4.7 million per month, with the most recent two quarters averaging $5 million to $6 million per month. The Corporation expects these losses to decline over time. In addition, the Corporation has forecasted aggregate losses of $107 million on expected future draw obligations on the home equity loan securitizations in rapid amortization through 2017, which is when it expects to no longer have any further subordinate funding obligation on these loans. As a result, the Corporation continues to believe possible losses due to the rapid amortization of home equity securitization trusts do not represent a significant risk to its business, operations or financial condition, and accordingly that this matter does not warrant Risk Factor disclosure. 3. We note your response to comment four of our letter dated June 6, 2011. However, we disagree with your belief that the agreements were made in the ordinary course of business. Therefore, we believe they should be filed pursuant to Item 601(b) (10) of Regulation S-K. Response: The Corporation continues to believe that neither the December 31, 2010 agreement with Fannie Mae (FNMA Agreement) nor the December 31, 2010 agreement with Freddie Mac (FHLMC Agreement) is a material contract required to be filed as an exhibit under Item 601(b)(10) of Regulation S-K. The Corporation respectfully disagrees with the Staff’s assertion that the FNMA Agreement and the FHLMC Agreement were entered into other than in the ordinary course of the Corporation’s business. Over the past decade, we and legacy Countrywide sold over $2 trillion of loans to Fannie Mae and Freddie Mac (the GSEs). Those sales were made in the ordinary course of business. In connection with those sales, we or our subsidiaries or legacy companies made various contractual representations and warranties. The GSEs have routinely alleged that in certain cases the Corporation has breached those representations and warranties. As a result of those alleged breaches, the GSEs have made requests to repurchase mortgage loans or to otherwise make whole or provide other remedies to the GSEs (collectively, repurchases). At June 30, 2011, there were outstanding repurchase claims of $5.1 billion from the GSEs. We have an established history of working with the GSEs on repurchase claims, including through bulk settlement. In 2008, 2009 and 2010, we received $2.9 billion, $6.4 billion and $13.6 billion, respectively, in repurchase claims from the GSEs and resolved $1.6 billion, $4.5 billion and $9.1 billion, respectively, of repurchase claims (excluding claims settled through the FNMA Agreement and the FHLMC Agreement). Additionally, we currently employ 900 associates in the Consumer 4 Real Estate Services segment that focus on resolving residential mortgage repurchase claims. The resolution of repurchase claims stemming from alleged breaches of those representations and warranties is a continuous and ordinary course process in the Corporation’s business, although repurchase claims remain at historically elevated levels. We have contested, and will continue to contest, any request for repurchase when we conclude that a valid basis for repurchase does not exist. Nevertheless, we have also reached, and may continue to reach, bulk settlements, or agreements for bulk settlements, with the GSEs in the ordinary course, in lieu of a loan-by-loan review process, in an effort to resolve legacy-mortgage related issues. For instance, prior to entering into the FNMA Agreement, the Corporation entered into bulk settlements with FNMA to resolve repurchase claims in August 2006, December 2007 and June 2008. In addition, from time to time, we have entered into bulk settlements with various other counterparties in the ordinary course of business. The FNMA Agreement and the FHLMC Agreement were continuations of the historical process of resolving repurchase claims. For instance, the FNMA Agreement substantially resolved the existing pipeline of repurchase and make-whole claims outstanding as of September 20, 2010 related to loans sold directly by legacy Countrywide to Fannie Mae. The FNMA Agreement merely resolved an aggregated set of claims that we otherwise would have resolved on an individual basis in the ordinary course of business. The FHLMC Agreement extinguished all outstanding and potential mortgage repurchase and make-whole claims arising out of any alleged breaches of selling representations and warranties relat