Receivables

9 Months Ended

Sep. 30, 2012

Receivables

4.    Receivables

Receivables consisted of the following:

	September 30, 2012(1)			December 31, 2011
	(in millions)
Real estate secured:
First lien	$	30,143		$	38,235
Second lien		3,820			4,478
Total real estate secured		33,963			42,713
Personal non-credit card		-			5,196
Other		-			3
Total receivables		33,963			47,912
HSBC acquisition purchase accounting fair value adjustments		45			57
Accrued finance income		903			1,184
Credit loss reserve for owned receivables		(4,429	)		(5,952	)
Total receivables, net	$	30,482		$	43,201

⁽¹⁾  The significant decrease in receivables since December 31, 2011 reflects the transfer of our entire portfolio of personal non-credit card receivables and a portion of our real estate secured receivables to receivables held for sale. See Note 6, “Receivables Held for Sale” for additional information.

HSBC acquisition purchase accounting fair value adjustments represent adjustments which have been “pushed down” to record our receivables at fair value at the date of acquisition by HSBC.

Deferred origination fees totaled $231 million and $254 million at September 30, 2012 and December 31, 2011, respectively.

Net unamortized premium on our receivables totaled $140 million and $169 million at September 30, 2012 and December 31, 2011, respectively. Unearned income on personal non-credit card receivables totaled $8 million at December 31, 2011, and is included in the receivable balance in the table above. As discussed more fully in Note 6, “Receivables Held for Sale,” during the second quarter of 2012, we moved our entire portfolio of personal non-credit card receivables as well as certain real estate secured receivables to held for sale.

Collateralized funding transactions  Secured financings previously issued under public trusts with a balance of $3.0 billion at September 30, 2012 are secured by $5.0 billion of closed-end real estate secured receivables. Secured financings previously issued under public trusts with a balance of $3.3 billion at December 31, 2011 were secured by $5.3 billion of closed-end real estate secured receivables.

Age Analysis of Past Due Receivables  The following tables summarize the past due status of receivables held for investment at September 30, 2012 and December 31, 2011. The aging of past due amounts is determined based on the contractual delinquency status of payments made under the receivable. An account is generally considered to be contractually delinquent when payments have not been made in accordance with the loan terms. Delinquency status may be affected by customer account management policies and practices such as re-age or modification. Additionally, delinquency status is also impacted by payment percentage requirements which vary between servicing platforms.

	Days Past Due						Total Past Due		Current		Total Receivables(1)
September 30, 2012	1 – 29 days		30 – 89 days		90+ days
	(in millions)
Real estate secured:
First lien	$	4,844	$	2,851	$	2,603	$	10,298	$	19,845	$	30,143
Second lien		686		330		244		1,260		2,560		3,820
Total real estate secured receivables(2)	$	5,530	$	3,181	$	2,847	$	11,558	$	22,405	$	33,963

	Days Past Due						Total Past Due		Current		Total Receivables(1)
December 31, 2011	1 – 29 days		30 – 89 days		90+ days
	(in millions)
Real estate secured:
First lien	$	5,828	$	4,028	$	6,248	$	16,104	$	22,131	$	38,235
Second lien		754		416		329		1,499		2,979		4,478
Total real estate secured(2)		6,582		4,444		6,577		17,603		25,110		42,713
Personal non-credit card		686		388		315		1,389		3,807		5,196
Other		-		-		-		-		3		3
Total receivables	$	7,268	$	4,832	$	6,892	$	18,992	$	28,920	$	47,912

⁽¹⁾  The receivable balances included in this table reflects the principal amount outstanding on the loan and certain basis adjustments to the loan such as deferred fees and costs on originated loans, purchase accounting fair value adjustments and premiums or discounts on purchased loans. However, these basis adjustments to the loans are excluded in other presentations regarding delinquent account balances.

⁽²⁾  At both September 30, 2012 and December 31, 2011, approximately 57 percent of our real estate secured receivables have been either modified and/or re-aged.

Nonaccrual receivables  Nonaccrual consumer receivables and nonaccrual receivables held for sale are all receivables which are 90 or more days contractually delinquent as well as second lien loans (regardless of delinquency status) where the first lien loan that we own or service is 90 or more days contractually delinquent. Nonaccrual receivables do not include receivables which have made qualifying payments and have been re-aged such that the contractual delinquency status has been reset to current. If a re-aged loan subsequently experiences payment default and becomes 90 or more days contractually delinquent, it will be reported as nonaccrual. Nonaccrual receivables and nonaccrual receivables held for sale are summarized in the following table.

	September 30, 2012(2)		December 31, 2011
	(in millions)
Nonaccrual receivables:
Real estate secured(1)	$	2,878	$	6,544
Personal non-credit card		-		330
Nonaccrual receivables held for sale		2,387		-
Total nonaccrual receivables	$	5,265	$	6,874

⁽¹⁾  At September 30, 2012 and December 31, 2011, nonaccrual real estate secured receivables include $1.5 billion and $4.7 billion, respectively, of receivables that are carried at the lower of amortized cost or fair value of the collateral less cost to sell.

⁽²⁾  The significant decrease in total nonaccrual receivables as compared to December 31, 2011 reflects the transfer of our entire portfolio of personal non-credit card receivables and a portion of our real estate secured receivables to receivables held for sale, which are carried at the lower of amortized cost or fair value. See Note 6, “Receivables Held for Sale” for additional information.

The following table provides additional information on our total nonaccrual receivables:

	Nine Months  Ended September 30,
	2012		2011
	(in millions)
Interest income that would have been recorded if the nonaccrual receivables had been current in accordance with contractual terms during the period	$	759	$	761
Interest income that was recorded on nonaccrual receivables included in interest income on nonaccrual loans during the period(1)		185		251

⁽¹⁾  Portions of the amounts presented above have been written-off as a result of the process to record receivables greater than 180 days contractually delinquent at the lower of amortized cost or fair value of the collateral less cost to sell.

Troubled Debt Restructurings  Troubled debt restructurings (“TDR Loans”) represent receivables for which the original contractual terms have been modified to provide for terms that are less than what we would be willing to accept for new receivables with comparable risk because of deterioration in the borrower’s financial status.

Modifications for real estate secured and personal non-credit card receivables may include changes to one or more terms of the loan, including, but not limited to, a change in interest rate, an extension of the amortization period, a reduction in payment amount and partial forgiveness or deferment of principal. A substantial amount of our modifications involve interest rate reductions which lower the amount of finance income we are contractually entitled to receive in future periods. By lowering the interest rate and making other changes to the loan terms, we believe we are able to increase the amount of cash flow that will ultimately be collected from the loan, given the borrower’s financial condition. Re-aging is an account management action that results in the resetting of the contractual delinquency status of an account to current which generally requires the receipt of two qualifying payments. TDR Loans are reserved for based on the present value of expected future cash flows discounted at the loans’ original effective interest rate which generally results in a higher reserve requirement for these loans.

The following table presents information about receivables and receivables held for sale which as a result of an account management action taken during the three and nine months ended September 30, 2012 became classified as TDR Loans. During the first nine months of 2012 and 2011, substantially all of the actions reflect re-aging of past due accounts or loan modifications involving interest rate reductions.

	Three Months  Ended September 30,				Nine Months  Ended September 30,
	2012		2011		2012		2011
Real estate secured:
First lien	$	739	$	1,073	$	2,787	$	4,700
Second lien		78		117		336		474
Total real estate secured		817		1,190		3,123		5,174
Personal non-credit card		30		206		296		891
Total	$	847	$	1,396	$	3,419	$	6,065

The table below presents information about our receivables and receivables held for sale reported as TDR Loans. As discussed more fully in Note 6, “Receivables Held for Sale,” we transferred our entire personal non-credit card portfolio and a substantial majority of our real estate secured receivables which have been written down to the lower of amortized cost or fair value of the collateral less cost to sell as of June 30, 2012 to held for sale during the second quarter of 2012. As a result, these receivables are now carried at the lower of amortized cost or fair value which creates a lack of comparability between TDR Loan balances as of September 30, 2012 and December 31, 2011.

	September 30, 2012		December 31, 2011
	(in millions)
TDR Loans(1)(2)(3):
Real estate secured:
First lien	$	13,597	$	13,186
Second lien		1,153		1,057
Total real estate secured(4)		14,750		14,243
Personal non-credit card		560		1,341
Total TDR Loans(6)	$	15,310	$	15,584
Credit loss reserves for TDR Loans:
Real estate secured:
First lien	$	3,126	$	3,169
Second lien		525		534
Total real estate secured		3,651		3,703
Personal non-credit card		-		706
Total credit loss reserves for TDR Loans(3)(5)	$	3,651	$	4,409

⁽¹⁾  TDR Loans are considered to be impaired loans regardless of accrual status.

⁽²⁾  The TDR Loan balances included in the table above reflect the current carrying amount of TDR Loans and includes all basis adjustments on the loan, such as unearned income, unamortized deferred fees and costs on originated loans and premiums or discounts on purchased loans as well as any charge-off recorded in accordance with our existing charge-off policies. Additionally, the carrying amount of TDR Loans classified as held for sale has been reduced by both the lower of amortized cost or fair value adjustment as well as the credit loss reserves associated with these receivables prior to the transfer. The following table reflects the unpaid principal balance of TDR Loans:

	September 30, 2012		December 31, 2011
	(in millions)
Real estate secured:
First lien	$	16,761	$	14,813
Second lien		1,290		1,125
Total real estate secured		18,051		15,938
Personal non-credit card		1,211		1,341
Total TDR Loans	$	19,262	$	17,279

⁽³⁾  At September 30, 2012, $2.3 billion of TDR Loans were reported as receivables held for sale for which there are no credit loss reserves as they are carried at the lower of amortized cost or fair value. At December 31, 2011, there were no TDR Loans reported as receivables held for sale.

⁽⁴⁾  At September 30, 2012 and December 31, 2011, TDR Loans held for investment totaling $1.0 billion and $2.5 billion, respectively, are recorded at the lower of amortized cost or fair value of the collateral less cost to sell.

⁽⁵⁾  Included in credit loss reserves.

⁽⁶⁾  TDR Loan balances at September 30, 2012 have been impacted by the transfer of our entire personal non-credit card receivable portfolio and certain real estate secured receivables to held for sale during the second quarter of 2012 and are now carried at the lower of amortized cost or fair value. See Note 6, “Receivables Held for Sale,” for additional information.

We are currently evaluating recently issued regulatory guidance requiring receivables discharged under Chapter 7 bankruptcy and not re-affirmed to be classified as TDR Loan balances. Based on our current analysis, we estimate that this guidance could result in approximately $800 million of receivables discharged under Chapter 7 bankruptcy and not re-affirmed being included in TDR Loan balances beginning in the fourth quarter of 2012. Of this amount, we estimate approximately 60 percent would be reserved for using a discounted cash flow analysis which generally results in a higher reserve requirement than that established using a roll rate migration analysis. The remainder of the receivables which would be classified as TDR Loans beginning in the fourth quarter are currently carried at the lower of amortized cost or fair value of the collateral less cost to sell and as a result, there would be no change in the reserves associated with these receivables.

The following table discloses receivables and receivables held for sale which were classified as TDR Loans during the previous 12 months which became sixty days or greater contractually delinquent during the three and nine months ended September 30, 2012 and 2011:

	Three Months  Ended September 30,				Nine Months  Ended September 30,
	2012		2011		2012		2011
Real estate secured:
First lien	$	418	$	669	$	1,848	$	1,111
Second lien		57		66		211		107
Total real estate secured		475		735		2,059		1,218
Personal non-credit card		34		153		236		264
Total	$	509	$	888	$	2,295	$	1,482

Additional information relating to TDR Loans, including TDR Loans held for sale, is presented in the table below:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2012		2011		2012		2011
	(in millions)
Average balance of TDR Loans:
Real estate secured:
First lien	$	13,486	$	11,875	$	13,738	$	10,763
Second lien		1,152		940		1,146		842
Total real estate secured		14,638		12,815		14,884		11,605
Personal non-credit card		570		1,287		1,041		1,099
Total average balance of TDR Loans	$	15,208	$	14,102	$	15,925	$	12,704
Interest income recognized on TDR Loans:
Real estate secured:
First lien	$	227	$	156	$	628	$	419
Second lien		27		17		76		45
Total real estate secured		254		173		704		464
Personal non-credit card		44		39		132		92
Total interest income recognized on TDR Loans	$	298	$	212	$	836	$	556

Consumer Receivable Credit Quality Indicators  Credit quality indicators used for consumer receivables include a loan’s delinquency status, whether the loan is performing and whether the loan is considered a TDR Loan.

Delinquency The following table summarizes dollars of two-months-and-over contractual delinquency for receivables and receivables held for sale and as a percent of total receivables and receivables held for sale (“delinquency ratio”) for our loan portfolio:

	September 30, 2012(2)					December 31, 2011
	Dollars of Delinquency		Delinquency Ratio			Dollars of Delinquency		Delinquency Ratio
	(dollars are in millions)
Real estate secured:
First lien	$	5,967		17.91	%	$	7,605		19.89	%
Second lien		362		9.47			500		11.16
Total real estate secured(1)		6,329		17.04			8,105		18.98
Personal non-credit card		95		2.98			486		9.35
Total	$	6,424		15.93	%	$	8,591		17.93	%

⁽¹⁾ At September 30, 2012 and December 31, 2011, dollars of real estate secured receivable delinquency include $1.5 billion and $4.8 billion, respectively, of receivables that are carried at the lower of amortized cost or fair value of the collateral less cost to sell. Additionally, September 30, 2012 includes $2.4 billion of receivables held for sale that are carried at the lower of amortized cost or fair value.

⁽²⁾ The transfer of our entire personal non-credit card portfolio and certain real estate secured receivables to held for sale has resulted in these receivables being carried at the lower of amortized cost or fair value as previously discussed, which creates a lack of comparability between dollars of contractual delinquency and the delinquency ratio as of September 30, 2012 and December 31, 2011. See Note 6, “Receivables Held for Sale,” for additional information.

Nonperforming The status of consumer receivables and consumer receivables held for sale is summarized in the following table:

	Performing Loans		Nonperforming Loans		Total
	(in millions)
At September 30, 2012:
Real estate secured(1)(2)	$	31,085	$	2,878	$	33,963
Receivables held for sale		3,974		2,387		6,361
Total	$	35,059	$	5,265	$	40,324	(3)
At December 31, 2011:
Real estate secured(1)	$	36,169	$	6,544	$	42,713
Personal non-credit card		4,866		330		5,196
Total(2)	$	41,035	$	6,874	$	47,909

⁽¹⁾  At September 30, 2012 and December 31, 2011, nonperforming real estate secured receivables held for investment include $1.5 billion and $4.7 billion, respectively, of receivables that are carried at the lower of amortized cost or fair value of the collateral less cost to sell.

⁽²⁾  At September 30, 2012 and December 31, 2011, nonperforming real estate secured receivables held for investment include $1.8 billion and $3.0 billion, respectively, which are TDR Loans, some of which may also be carried at the lower of amortized cost or fair value of the collateral less cost to sell.

⁽³⁾  The decrease since December 31, 2011 reflects, in part, the transfer of our entire portfolio of personal non-credit card receivables and a portion of our real estate secured receivables to receivables held for sale which are carried at the lower of amortized cost or fair value. See Note 6, “Receivables Held for Sale” for additional information.

Troubled debt restructurings See discussion of TDR Loans above for further details on this credit quality indicator.

Concentrations of Credit Risk  We have historically served non-conforming and non-prime consumers. Such customers are individuals who have limited credit histories, modest incomes, high debt-to-income ratios or have experienced credit problems caused by occasional delinquencies, prior charge-offs, bankruptcy or other credit related actions. The majority of our secured receivables have high loan-to-value ratios. Our receivable portfolios include the following types of loans:

• Interest-only loans – A loan which allows a customer to pay the interest-only portion of the monthly payment for a period of time which results in lower payments during the initial loan period. However, subsequent events affecting a customer’s financial position could affect their ability to repay the loan in the future when the principal payments become due.

• Stated income loans – Loans underwritten based upon the loan applicant’s representation of annual income, which is not verified by receipt of supporting documentation.

The following table summarizes the outstanding balances of interest-only loans and stated income loans in our receivable and receivables held for sale portfolios at September 30, 2012 and December 31, 2011:

	September 30, 2012		December 31, 2011
	(in billions)
Interest-only loans(1)	$	.7	$	1.0
Stated income loans		1.8		2.2

⁽¹⁾  Receivable classification as an interest-only loan is based on the classification at the time of receivable origination and does not reflect any changes in the classification that may have occurred as a result of any loan modification or because the interest-only period has expired. Some of our interest-only loans may also be classified as stated income loans based on the type underwriting on the loan.

At both September 30, 2012 and December 31, 2011, interest-only and stated income loans comprised 7 percent of real estate secured receivables and real estate secured receivables held for sale.

Because we primarily lent to individual consumers, we do not have receivables from any industry group that equal or exceed 10 percent of total receivables at September 30, 2012 and December 31, 2011. The following table reflects the percentage of consumer receivables and receivables held for sale by state, which individually account for 5 percent or greater of our portfolio as of September 30, 2012 and December 31, 2011.

	Percentage of Receivables  and Receivables Held for Sale at September 30, 2012									Percentage of Receivables  and Receivables Held for Sale at December 31, 2011
	Real Estate Secured			Personal Non- Credit Card			Total			Real Estate Secured			Personal Non- Credit Card			Total
California		9.4	%		4.6	%		9.0	%		9.5	%		5.1	%		9.1	%
New York		7.4			6.8			7.3			7.2			6.8			7.2
Pennsylvania		6.2			6.9			6.3			6.1			6.7			6.2
Florida		5.8			5.8			5.8			5.9			5.8			5.9
Ohio		5.5			6.4			5.6			5.5			6.3			5.6
Virginia		5.2			3.1			5.1			5.2			3.0			4.9