NOTE 9 - CERTAIN TRANSFERS OF FINANCIAL ASSETS AND VARIABLE INTEREST ENTITIES

The Company has transferred loans and securities in sale or securitization transactions for which the Company retains certain beneficial interests, servicing rights, and/or recourse. These transfers of financial assets include certain residential mortgage loans, commercial and corporate loans, and consumer loans, as discussed in the following section, "Transfers of Financial Assets." Cash receipts on beneficial interests held related to these transfers were $2 million and $3 million for the three months ended March 31, 2017 and 2016, respectively. The servicing fees related to these asset transfers (excluding servicing fees for residential and commercial mortgage loan transfers to GSEs, which are discussed in Note 8, “Goodwill and Other Intangible Assets”) were immaterial for both the three months ended March 31, 2017 and 2016.

When a transfer or other transaction occurs with a VIE, the Company first determines whether it has a VI in the VIE. A VI is typically in the form of securities representing retained interests in transferred assets and, at times, servicing rights, and for commercial mortgage loans sold to Fannie Mae, the loss share guarantee. When determining whether to consolidate the VIE, the Company evaluates whether it is a primary beneficiary which has both (i) the power to direct the activities that most significantly impact the economic performance of the VIE, and (ii) the obligation to absorb losses, or the right to receive benefits, that could potentially be significant to the VIE.

To determine whether a transfer should be accounted for as a sale or a secured borrowing, the Company evaluates whether: (i) the transferred assets are legally isolated, (ii) the transferee has the right to pledge or exchange the transferred assets, and (iii) the Company has relinquished effective control of the transferred assets. If all three conditions are met, then the transfer is accounted for as a sale.

Except as specifically noted herein, the Company is not required to provide additional financial support to any of the entities to which the Company has transferred financial assets, nor has the Company provided any support it was not otherwise obligated to provide. No events occurred during the three months ended March 31, 2017 that changed the Company’s previous conclusions regarding whether it is the primary beneficiary of the VIEs described herein. Furthermore, no events occurred during the three months ended March 31, 2017 that changed the Company’s sale conclusion with regards to previously transferred residential mortgage loans, indirect auto loans, student loans, or commercial and corporate loans.

Transfers of Financial Assets

The following discussion summarizes transfers of financial assets to entities for which the Company has retained some level of continuing involvement.

Residential Mortgage Loans

The Company typically transfers first lien residential mortgage loans in conjunction with Ginnie Mae, Fannie Mae, and Freddie Mac securitization transactions, whereby the loans are exchanged for cash or securities that are readily redeemable for cash, and servicing rights are retained.

The Company sold residential mortgage loans to Ginnie Mae, Fannie Mae, and Freddie Mac (collectively, "the Agencies"), which resulted in pre-tax net losses of $4 million and pre-tax net gains of $69 million for the three months ended March 31, 2017 and 2016, respectively. Net gains/losses on the sale of residential mortgage loans are recorded at inception of the associated IRLCs and reflect the change in value of the loans resulting from changes in interest rates from the time the Company enters into the related IRLCs with borrowers, but do not include the results of hedging activities initiated by the Company to mitigate this market risk. See Note 14, "Derivative Financial Instruments," for further discussion of the Company's hedging activities. The Company has made certain representations and warranties with respect to the transfer of these loans. See Note 13, “Guarantees,” for additional information regarding representations and warranties.

In a limited number of securitizations, the Company has received securities in addition to cash in exchange for the transferred loans, while also retaining servicing rights. The securities received are measured at fair value and classified as securities AFS. At March 31, 2017 and December 31, 2016, the fair value of securities received totaled $29 million and $30 million, respectively.

The Company evaluates securitization entities in which it has a VI for potential consolidation under the VIE consolidation model. Notwithstanding the Company's role as servicer, the Company typically does not have power over the securitization entities as a result of rights held by the master servicer. In certain transactions, the Company does have power as the servicer, but does not have an obligation to absorb losses, or the right to receive benefits, that could potentially be significant. In all such cases, the Company does not consolidate the securitization entity. Total assets of the unconsolidated entities in which the Company has a VI were $196 million and $203 million at March 31, 2017 and December 31, 2016, respectively.

The Company’s maximum exposure to loss related to these unconsolidated residential mortgage loan securitizations is comprised of the loss of value of any interests it retains, which was $29 million and $30 million at March 31, 2017 and December 31, 2016, respectively, and any repurchase obligations or other losses it incurs as a result of any guarantees related to these securitizations, which is discussed further in Note 13, “Guarantees.”

Commercial and Corporate Loans

In connection with the Pillar acquisition completed in December 2016, the Company acquired licenses and approvals to originate and sell certain commercial mortgage loans to Fannie Mae and Freddie Mac, to originate FHA insured loans, and to issue and sell Ginnie Mae commercial MBS backed by FHA insured loans. The Company transferred commercial loans to these Agencies, which resulted in pre-tax net gains of $9 million for the three months ended March 31, 2017. The loans are exchanged for cash or securities that are readily redeemable for cash, with servicing rights retained. The Company has made certain representations and warranties with respect to the transfer of these loans and has entered into a loss share guarantee related to certain loans transferred to Fannie Mae. See Note 13, “Guarantees,” for additional information regarding the commercial mortgage loan loss share guarantee.

In March 2017, the Company sold its immaterial preference share exposure in a CLO entity that owned commercial leveraged loans and bonds, certain of which were transferred to the entity by the Company. The CLO entity was a VIE and the Company was not the primary beneficiary because it did not possess the power to direct the activities that most significantly impact the economic performance of the entity. At December 31, 2016, total assets and total liabilities of the unconsolidated entity in which the Company had a VI were $185 million and $159 million, respectively. The Company's immaterial amount of preference share exposure at December 31, 2016, represented its maximum exposure to loss at December 31, 2016.

Consumer Loans

Guaranteed Student Loans

The Company has securitized government-guaranteed student loans through a transfer of loans to a securitization entity and retained the residual interest in the entity. The Company concluded that this entity should be consolidated because the Company has (i) the power to direct the activities that most significantly impact the economic performance of the VIE and (ii) the obligation to absorb losses, and the right to receive benefits, that could potentially be significant. At March 31, 2017 and December 31, 2016, the Company’s Consolidated Balance Sheets reflected $216 million and $225 million of assets held by the securitization entity and $214 million and $222 million of debt issued by the entity, respectively, inclusive of related accrued interest.

To the extent that the securitization entity incurs losses on its assets, the securitization entity has recourse to the guarantor of the underlying loan, which is backed by the Department of Education up to a maximum guarantee of 100%. When not fully guaranteed, losses reduce the amount of available cash payable to the Company as the owner of the residual interest. To the extent that losses result from a breach of servicing responsibilities, the Company, which functions as the master servicer, may be required to repurchase the defaulting loan(s) at par value. If the breach was caused by the subservicer, the Company would seek reimbursement from the subservicer up to the guaranteed amount. The Company’s maximum exposure to loss related to the securitization entity would arise from a breach of its servicing responsibilities. To date, loss claims filed with the guarantor that have been denied due to servicing errors have either been, or are in the process of, being cured, or reimbursement has been provided to the Company by the subservicer, or in limited cases, absorbed by the Company.

Indirect Auto Loans

In June 2015, the Company transferred indirect auto loans to a securitization entity, which was determined to be a VIE, and accounted for the transfer as a sale. The Company retained servicing rights for the transferred loans, but did not retain any debt or equity interest in the securitization entity. The fees received for servicing do not represent a VI and, therefore, the Company does not consolidate the securitization entity. See Note 8, "Goodwill and Other Intangible Assets," for additional information regarding the servicing asset recognized in this transaction.

To the extent that losses on the transferred loans are the result of a breach of representations and warranties related to either the initial transfer or the Company's ongoing servicing responsibilities, the Company may be obligated to either cure the breach or repurchase the affected loans. The Company’s maximum exposure to loss related to the loans transferred to the securitization entity would arise from a breach of representations and warranties and/or a breach of the Company's servicing obligations. Potential losses suffered by the securitization entity that the Company may be liable for are limited to approximately $448 million, which reflects the total remaining UPB of transferred loans and the carrying value of the servicing asset.

The Company's total managed loans, including the LHFI portfolio and other transferred loans (securitized and unsecuritized), are presented in the following table by portfolio balance and delinquency status (accruing loans 90 days or more past due and all nonaccrual loans) at March 31, 2017 and December 31, 2016, as well as the related net charge-offs for the three months ended March 31, 2017 and 2016.



	Portfolio Balance				Past Due and Nonaccrual				Net Charge-offs
	March 31, 2017		December 31, 2016		March 31, 2017		December 31, 2016		Three Months Ended March 31
(Dollars in millions)	March 31, 2017		December 31, 2016		March 31, 2017		December 31, 2016		2017			2016
LHFI portfolio:
Commercial		$78,253		$78,224		$365		$426		$50			$22
Residential	38,550		38,990		761		758		20			35
Consumer	26,726		26,084		890		949		42			28
Total LHFI portfolio	143,529		143,298		2,016		2,133		112			85
Managed securitized loans ¹:
Commercial ²	5,060		4,761		—		—		—			—
Residential	132,805		126,641		131		114		2		³	2		³
Consumer	448		512		1		1		1			1
Total managed securitized loans	138,313		131,914		132		115		3			3
Managed unsecuritized loans ⁴	2,828		2,985		415		438		—			—
Total managed loans		$284,670		$278,197		$2,563		$2,686		$115			$88

¹ Excludes loans that have completed the foreclosure or short sale process (i.e., involuntary prepayments).

² Comprised of commercial mortgages sold through Fannie Mae, Freddie Mac, and Ginnie Mae securitizations, whereby servicing has been retained by the Company.

³ Net charge-offs are associated with $392 million and $410 million of managed securitized residential loans at March 31, 2017 and December 31, 2016, respectively. Net charge-off data is not reported to the Company for the remaining balance of $132.4 billion and $126.2 billion of managed securitized residential loans at March 31, 2017 and December 31, 2016, respectively.

⁴ Comprised of unsecuritized residential loans the Company originated and sold to private investors with servicing rights retained. Net charge-offs on these loans are not presented in the table as the data is not reported to the Company by the private investors that own these related loans.

Other Variable Interest Entities

In addition to exposure to VIEs arising from transfers of financial assets, the Company also has involvement with VIEs from other business activities.

Total Return Swaps

The outstanding notional amounts of the Company's VIE-facing TRS contracts and related senior financing outstanding to VIEs were $2.1 billion at both March 31, 2017 and December 31, 2016. These financings were measured at fair value and classified within trading assets and derivative instruments on the Consolidated Balance Sheets. The Company entered into client-facing TRS contracts of the same outstanding notional amounts. The notional amounts of the TRS contracts with VIEs represent the Company’s maximum exposure to loss, although this exposure has been mitigated via the TRS contracts with third party clients. For additional information on the Company’s TRS contracts and its involvement with these VIEs, see Note 14, “Derivative Financial Instruments,” in this Form 10-Q, as well as Note 10, "Certain Transfers of Financial Assets and Variable Interest Entities," to the Company's 2016 Annual Report on Form 10-K.

Community Development Investments

As part of its community reinvestment initiatives, the Company invests in multi-family affordable housing developments and other community development entities as a limited and/or general partner and/or a debt provider. The Company receives tax credits for its limited partner investments. The Company has determined that the majority of the related partnerships are VIEs.

In limited circumstances, the Company owns both the limited partner and general partner interests, in which case the related partnerships are not considered VIEs and are consolidated by the Company. During the three months ended March 31, 2017, two community development properties with a carrying value of $1 million were sold for gains of $4 million, and the Company no longer owns consolidated community development properties at March 31, 2017. There were no properties sold during the three months ended March 31, 2016.

The Company has concluded that it is not the primary beneficiary of affordable housing partnerships when it invests as a limited partner and there is a third party general partner. The investments are accounted for in accordance with the accounting guidance for investments in affordable housing projects. The general partner, or an affiliate of the general partner, often provides guarantees to the limited partner, which protects the Company from construction and operating losses and tax credit allocation deficits. Assets of $1.9 billion and $1.7 billion in these and other community development partnerships were not included in the Consolidated Balance Sheets at March 31, 2017 and December 31, 2016, respectively. The Company's limited partner interests had carrying values of $834 million and $780 million at March 31, 2017 and December 31, 2016, respectively, and are recorded in other assets on the Company’s Consolidated Balance Sheets. The Company’s maximum exposure to loss for these investments totaled $1.2 billion and $1.1 billion at March 31, 2017 and December 31, 2016, respectively. The Company’s maximum exposure to loss would result from the loss of its limited partner investments, net of liabilities, along with $338 million and $306 million of loans, interest-rate swap fair value exposures, or letters of credit issued by the Company to the entities at March 31, 2017 and December 31, 2016, respectively. The remaining exposure to loss is primarily attributable to unfunded equity commitments that the Company is required to fund if certain conditions are met.

The Company also owns noncontrolling interests in funds whose purpose is to invest in community developments. At March 31, 2017 and December 31, 2016, the Company's investment in these funds totaled $217 million and $200 million, respectively. The Company's maximum exposure to loss on its investment in these funds is comprised of its equity investments in the funds, loans issued, and any additional unfunded equity commitments, which totaled $612 million and $562 million at March 31, 2017 and December 31, 2016, respectively.

During the three months ended March 31, 2017 and 2016, the Company recognized $25 million and $19 million of tax credits for qualified affordable housing projects, and $24 million and $19 million of amortization on these qualified affordable housing projects, respectively. These tax credits and amortization, net of the related tax benefits, are recorded in the provision for income taxes.

Certain of the Company's community development investments do not qualify as affordable housing projects for accounting purposes. The Company recognized tax credits for these investments of $17 million and $13 million during the three months ended March 31, 2017 and 2016, respectively, in the provision for income taxes. Amortization on these investments totaled $12 million and $9 million during the three months ended March 31, 2017 and 2016, respectively, recognized in amortization in the Company's Consolidated Statements of Income.