Variable Interest Entities and Securitizations

6 Months Ended

Jun. 30, 2011

Variable Interest Entities and Securitizations

Variable Interest Entities and Securitizations

NOTE 7—VARIABLE INTEREST ENTITIES AND SECURITIZATIONS

In the normal course of business, we enter into various types of transactions with entities that are considered to be variable interest entities ("VIEs"). Historically, our primary involvement with VIEs related to our securitization transactions in which we transferred assets from our balance sheet to securitization trusts. These securitization trusts typically meet the definition of a VIE. We generally securitized credit card loans, auto loans, home loans and installment loans, which provided a source of funding for us and as a means of transferring a certain portion of the economic risk of the loans or debt securities to third parties.

Under revised consolidation accounting guidance that became effective on January 1, 2010, the entity that has a controlling financial interest in a VIE is referred to as the primary beneficiary and is required to consolidate the VIE. As a result of this guidance, the vast majority of the VIEs in which we are involved have been consolidated in our financial statements.

Summary of Consolidated and Unconsolidated VIEs

The table below presents a summary of VIEs, aggregated based on VIEs with similar characteristics, in which we had continuing involvement or held a variable interest as of June 30, 2011 and December 31, 2010. We separately present information for consolidated and unconsolidated VIEs.

For consolidated VIEs, we present the carrying amount of assets and liabilities reflected on our consolidated balance sheets. The assets of consolidated VIEs primarily consist of cash and loans, which we report on our consolidated balance sheets under restricted cash for securitization investors and restricted loans for securitization investors, respectively. The assets of a particular VIE are the primary source of funds to settle its obligations. The creditors of the VIEs typically do not have recourse to the general credit of our company. The liabilities primarily consist of debt securities issued by the VIEs, which we report under securitized debt obligations. For unconsolidated VIEs, we present the carrying amount of assets and liabilities reflected on our consolidated balance sheets and our maximum exposure to loss. Our maximum exposure to loss is estimated based on the unlikely event that all of the assets in the VIEs became worthless and we were required to meet our maximum remaining funding obligations.

	June 30, 2011
	Consolidated				Unconsolidated
(Dollars in millions)	Carrying Amount of Assets		Carrying Amount of Liabilities		Carrying Amount of Assets			Carrying Amount of Liabilities			Maximum Exposure  to Loss(3)
Securitization-related VIEs:
Credit card loan securitizations	$	47,977	$	20,386	$	0		$	0		$	0
Auto loan securitizations		693		578		0			0			0
Mortgage loan securitizations		0		0		160	(1)		34	(2)		277
Other asset securitizations		37		37		0			0			0
Total securitization related VIEs		48,707		21,001		160			34			277
Other VIEs:
Affordable housing entities		0		0		1,804			233			1,804
Entities that provide capital to low-income and rural communities		251		0		6			3			6
Other		0		0		153			0			153
Total Other VIEs		251		0		1,963			236			1,963
Total VIEs	$	48,958	$	21,001	$	2,123		$	270		$	2,240
	December 31, 2010
	Consolidated				Unconsolidated
(Dollars in millions)	Carrying Amount of Assets		Carrying Amount of Liabilities		Carrying Amount of Assets(1)			Carrying Amount of Liabilities(2)			Maximum Exposure  to Loss(3)
Securitization-related VIEs:
Credit card loan securitizations	$	53,694	$	25,622	$	0		$	0		$	0
Auto loan securitizations		1,784		1,518		0			0			0
Mortgage loan securitizations		0		0		174			37			297
Other asset securitizations		198		64		0			0			0
Total securitization related VIEs		55,676		27,204		174			37			297
Other VIEs:
Affordable housing entities		0		0		1,681			304			1,681
Entities that provide capital to low-income and rural communities		230		0		6			3			6
Other		0		0		174			0			174
Total Other VIEs		230		0		1,861			307			1,861
Total VIEs	$	55,906	$	27,204	$	2,035		$	344		$	2,158

⁽¹⁾  The carrying amount of assets of unconsolidated securitization-related VIEs consists of retained interests and letters of credit related to manufactured housing securitizations. Mortgage servicing rights related to unconsolidated VIEs are reported on our consolidated balance sheets under goodwill and other intangible assets. See "Note 8—Goodwill and Other Intangible Assets" for additional information on our mortgage servicing rights. Other retained interests are reported on our consolidated balance sheets under accounts receivable from securitizations.

⁽²⁾  The carrying amount of liabilities of unconsolidated securitization-related VIEs consists of obligations to fund negative amortization bonds associated with the securitization of option-adjustable rate mortgage loans ("option-ARMs") and obligations on certain swap agreements associated with the securitization of manufactured housing loans.

⁽³⁾  The maximum exposure to loss represents the amount of loss we would incur in the unlikely event that all our assets in the VIE become worthless and we were required to meet our maximum remaining funding obligations.

Securitization-Related VIEs

We historically have securitized credit card loans, auto loans, home loans and installment loans. In a securitization transaction, assets from our balance sheet are transferred to a trust, which typically meets the definition of a VIE. The trust then issues various forms of interests in those assets to investors. We typically receive cash proceeds and/or other interests in the securitization trust for the assets we transfer. If the transfer of the assets to an unconsolidated securitization trust qualifies as a sale, we remove the assets from our consolidated balance sheet and recognize a gain or loss on the transfer. Alternatively, if the transfer does not qualify as a sale but instead is considered a secured borrowing or the transfer of assets is to a consolidated VIE, the assets remain on our consolidated financial statements and we record an offsetting liability for the proceeds received. We did not execute any new securitizations during the second quarter of 2011; however, we have continuing involvement in the securitization trusts.

Our continuing involvement in the majority of our securitization transactions consists primarily of holding certain retained interests and acting as the primary servicer. We also may be required to repurchase receivables from the trust if the outstanding balance of the receivables falls to a level where the cost exceeds the benefits of servicing such receivables. We also may have exposure associated with contractual obligations to repurchase previously transferred loans due to breaches of representations and warranties. See "Note 15—Commitments, Contingencies and Guarantees" for information related to reserves we have established for our potential mortgage representation and warranty exposure.

The table below presents the securitization-related VIEs in which we had continuing involvement as of June 30, 2011 and December 31, 2010:

	June 30, 2011
	Non-Mortgage						Mortgage
(Dollars in millions)	Credit Card		Auto Loan		Other Loan		Option ARM			GreenPoint HELOCs			GreenPoint Manufactured Housing
Securities held by third-party investors	$	19,348	$	533	$	25	$	3,380		$	242		$	1,313
Receivables in the trust		46,768		574		38		3,494			242			1,320
Cash balance of spread or reserve accounts		64		72		0		8			0			175
Retained interests		Yes		Yes		Yes		Yes			Yes			Yes
Servicing retained		Yes		Yes		Yes		Yes	(1)		Yes	(1)		No	(3)
Amortization event(4)		No		No		No		No			Yes	(2)		No

	December 31, 2010
	Non-Mortgage						Mortgage
(Dollars in millions)	Credit Card		Auto Loan		Other Loan		Option ARM			GreenPoint HELOCs			GreenPoint Manufactured Housing
Securities held by third-party investors	$	25,415	$	1,453	$	48	$	3,690		$	284		$	1,386
Receivables in the trust		52,355		1,528		191		3,813			284			1,393
Cash balance of spread or reserve accounts		77		147		0		8			0			183
Retained interests		Yes		Yes		Yes		Yes			Yes			Yes
Servicing retained		Yes		Yes		Yes		Yes	(1)		Yes	(1)		No	(3)
Amortization event(4)		No		No		No		No			Yes	(2)		No

⁽¹⁾  We continue to service some of the outstanding balance of securitized mortgage receivables.

⁽²⁾  See information below regarding on-going involvement in the GreenPoint Home Equity Line of Credit ("HELOC") securitizations.

⁽³⁾  The manufactured housing securitizations are serviced by a third party. For two of the deals, that third party works in the capacity of subservicer with Capital One being the Master Servicer.

⁽⁴⁾  Amortization events vary according to each specific trust agreement but generally are triggered by declines in performance or credit metrics such as charge-off rates or delinquency rates below certain predetermined thresholds. Generally, the occurrence of an amortization event changes the sequencing and amount of trust related cash flows to the benefit of senior noteholders.

Non-Mortgage Securitizations

As of June 30, 2011 and December 31, 2010, we were deemed to be the primary beneficiary of all of our non-mortgage securitization trusts. Accordingly, all of these trusts have been consolidated in our financial statements. For additional information on our principal involvement with non-mortgage securitization trusts and the impact of the consolidation of these trusts on our financial statements, see "Note 1—Summary of Significant Accounting Policies" and "Note 7—Variable Interest Entities and Securitizations" of our 2010 Form 10-K.

Mortgage Securitizations

Option-ARM Loans

We had previously securitized option-ARM loans by transferring the mortgage loans to securitization trusts that issued mortgage-backed securities to investors. The outstanding balance of debt securities held by third-party investors related to our mortgage securitization trusts was $3.4 billion as of June 30, 2011 and $3.7 billion as of December 31, 2010.

We continue to service some of the outstanding balance of securitized mortgage receivables. We also retain rights to future cash flows arising from the receivables, the most significant being certificated interest-only bonds issued by the trusts, certain of which we sold during the first quarter of 2010. We generally estimate the fair value of these retained interests based on the estimated present value of expected future cash flows from securitized and sold receivables, using our best estimates of the key assumptions – credit losses, prepayment speeds and discount rates commensurate with the risks involved. We do not consolidate these trusts because we do not have the right to receive benefits that could potentially be significant nor the obligation absorb losses that could potentially be significant to the trusts.

In connection with the securitization of certain option-ARM loans, a third party is obligated to advance a portion of any "negative amortization" resulting from monthly payments that are less than the interest accrued for that payment period. We have an agreement in place with the third party that mirrors this advance requirement. The amount advanced is tracked through mortgage-backed securities retained as part of the securitization transaction. As the borrowers make principal payments, these securities receive their net pro rata portion of those payments in cash, and advances of negative amortization are refunded accordingly. As advances occur, we record an asset in the form of negative amortization bonds, which are classified as available-for-sale securities. We have also entered into certain derivative contracts related to the securitization activities. These are classified as free standing derivatives, with fair value adjustments recorded in non-interest income. See "Note 10—Derivative Instruments and Hedging Activities" for further details on these derivatives.

GreenPoint Mortgage HELOCs

Our discontinued wholesale mortgage banking unit, GreenPoint, previously sold home equity lines of credit in whole loan sales and subsequently acquired a residual interest in certain trusts which securitized some of those loans. As the residual interest holder, GreenPoint is required to fund advances on the home equity lines of credit when certain performance triggers are met due to deterioration in asset performance. We had funded $27 million in advances as of June 30, 2011, all of which was expensed as funded. Our unfunded commitment related to these residual interests was $11 million as of June 30, 2011. We have not consolidated these trusts because the residual certificates did not provide the obligation to absorb losses or the right to receive benefits that could potentially be significant to the trusts.

GreenPoint Mortgage Manufactured Housing

We retain the primary obligation for certain provisions of corporate guarantees, recourse sales and clean-up calls related to the discontinued manufactured housing operations of GreenPoint Credit LLC ("GPC") which was sold to a third party in 2004. Although we are the primary obligor, recourse obligations related to former GPC whole loan sales, commitments to exercise mandatory clean-up calls on certain GPC securitization transactions and servicing were transferred to a third party in the sale transaction. We do not consolidate the trusts used for the securitization of manufactured housing loans because we do not have the power to direct the activities that most significantly impact the economic performance of the trusts since we no longer service the loans.

We were required to fund letters of credit in 2004 to cover losses, and are obligated to fund future amounts under swap agreements for certain transactions. We have the right to receive any funds remaining in the letters of credit after the securities are released. The amount available under the letters of credit was $175 million and $183 million as of June 30, 2011 and December 31, 2010, respectively. The fair value of the expected residual balances on the funded letters of credit was $36 million and $35 million as of June 30, 2011 and December 31, 2010, respectively, and is included in other assets on the consolidated balance sheet. Our maximum exposure under the swap agreements was $25 million and $27 million as of June 30, 2011 and December 31, 2010, respectively. The value of our obligations under these swaps, which is included in other liabilities on our consolidated balance sheets, was $17 million as of June 30, 2011 and $18 million as of December 31, 2010.

The unpaid principal balance of manufactured housing securitization transactions where we are the residual interest holder was $1.3 billion and $1.4 billion as of June 30, 2011 and December 31, 2010, respectively. In the event the third party does not fulfill on its obligations to exercise the clean-up calls on certain transactions, the obligation reverts to us and we would assume approximately $420 million of loans receivable upon our execution of the clean-up call with the requirement to absorb any losses on the loans receivable. There have been no instances of non-performance to date by the third party.

We monitor the underlying assets for trends in delinquencies and related losses and reviews the purchaser's financial strength as well as servicing performance. These factors are considered in assessing the adequacy of the liabilities established for these obligations and the valuations of the assets.

Retained Interests in Unconsolidated Securitizations

Accounts Receivable from Securitizations

Retained interests in unconsolidated securitizations are included in accounts receivable from securitizations on our consolidated balance sheets. These retained interests consist of interest-only strips, retained tranches, cash collateral accounts, cash reserve accounts and unpaid interest and fees on the third-party investors' portion of the transferred principal receivables.

The following table provides details of accounts receivable from securitizations as of June 30, 2011 and December 31, 2010:

(Dollars in millions)	June 30, 2011		December 31, 2010
Interest-only strip classified as trading	$	67	$	75
Retained interests classified as trading:
Retained notes		31		34
Cash collateral		8		8
Investor accrued interest receivable		0		0
Total retained interests classified as trading		39		42
Retained notes classified as available for sale		0		0
Other retained interests		0		3
Total accounts receivable from securitizations	$	106	$	120

We may retain tranches in certain of the securitization transactions which are considered to be higher investment grade securities and subject to lower risk of loss. Those retained tranches are classified as available-for-sale securities, and changes in the estimated fair value are recorded in other comprehensive income.

The components of the net gains (losses) recognized as a result of changes in the fair value of retained interests are presented below:

	Three Months Ended June  30,					Six Months Ended June  30,
(Dollars in millions)	2011			2010(1)		2011			2010(1)
Interest only strip valuation changes	$	(4	)	$	6	$	(7	)	$	10
Fair value adjustments related to spread accounts		12			0		25			0
Fair value adjustments related to investors' accrued interest receivable		0			0		0			0
Fair value adjustments related to retained subordinated notes		(17	)		0		1			0
Total income statement impact	$	(9	)	$	6	$	19		$	10

⁽¹⁾  2010 includes both mortgage related amounts representing valuation changes of mortgage interest only strips, spread accounts, and retained interests held at December 31, 2010 and non-mortgage related amounts representing the one installment loan securitization that remained off-balance sheet through September 15, 2010.

The changes in the fair value of retained interests are primarily driven by rate assumption changes and volume fluctuations. All of these retained residual interests are subject to loss in the event assumptions used to determine the estimated fair value do not prevail, or if borrowers default on the related securitized receivables and our retained subordinated tranches are used to repay investors. See the table below for key assumptions and sensitivities for retained interest valuations.

Key Assumptions and Sensitivities for Retained Interest Valuations

The key assumptions used in determining the fair value of the interest-only strip and other retained residual interests include the weighted average ranges for principal payment rates, lives of receivables and discount rates, all of which are included in the following table. The principal repayment rate assumptions were determined using actual and forecast trust principal payment rates based on the collateral. The lives of receivables were determined as the number of months necessary to repay the investors given the principal payment rate assumptions. The discount rates were determined using primarily trust specific statistics and forward rate curves, and were reflective of what market participants would use in a similar valuation. Additionally, accrued interest receivable, cash reserve and spread accounts were discounted over the estimated life of the assets.

If these assumptions are not met, or if they change, the interest-only strip, retained interests and related servicing and securitizations income would be affected. The following adverse changes to the key assumptions and estimates are hypothetical and should be used with caution. As the figures indicate, any change in fair value based on a 10% or 20% variation in assumptions cannot be extrapolated because the relationship of a change in assumption to the change in fair value may not be linear. Also, the effect of a variation in a particular assumption on the fair value of the interest-only strip is calculated independently from any change in another assumption. However, changes in one factor may result in changes in other factors, which might magnify or counteract the sensitivities.

For the periods ending June 30, 2011 and December 31, 2010, the assumptions and sensitivities shown below included all credit card and installment loan securitizations:

(Dollars in millions)	June 30, 2011			December 31, 2010
Interest-only strip and retained interests	$	124	(1)	$	136	(1)
Weighted average life for receivables (months)		65			60
Principal repayment rate (weighted average rate)		14.9 – 17.1	%		16.3 – 18.1	%
Impact on fair value of 10% adverse change	$	(3	)	$	2
Impact on fair value of 20% adverse change		(5	)		(6	)
Discount rate (weighted average rate)		25.1 – 42.2	%		25.2 – 42.2	%
Impact on fair value of 10% adverse change	$	(7	)	$	(7	)
Impact on fair value of 20% adverse change		(13	)		(14	)

⁽¹⁾  Does not include liquidity swap related to the negative amortization bonds of $18 million as of June 30, 2011 and $19 million at December 31, 2010.

Static pool credit losses were calculated by summing the actual and projected future credit losses and dividing them by the original balance of each pool of assets. Due to the short-term revolving nature of the loan receivables, the weighted average percentage of static pool credit losses was not considered materially different from the assumed charge-off rates used to determine the fair value of the retained interests.

We act as a servicing agent and receive contractual servicing fees of between 0.5% and 4% of the investor principal outstanding, based upon the type of assets serviced. For off-balance sheet securitizations, we generally did not record material servicing assets or liabilities for these rights since the contractual servicing fee approximates market rates.

Cash Flows Related to the Unconsolidated Securitizations

The following provides the details of the cash flows related to securitization transactions that qualified as off-balance sheet for the three and six months ended June 30, 2011 and 2010:

	Three Months Ended June  30,				Six Months Ended June  30,
(Dollars in millions)	2011		2010		2011		2010
Servicing fees received	$	7	$	4	$	15	$	9
Cash flows received on retained interests(1)		12		17		25		94

⁽¹⁾  Includes all cash receipts of excess spread and other payments (excluding servicing fees) from the program.

Supplemental Loan Information

The table below displays the unpaid principal balance of off-balance sheet single-family residential loans we serviced as of June 30, 2011 and December 31, 2010. We also display the unpaid principal balance of loans past due 90 days or more as of June 30, 2011 and December 31, 2010. Net credit losses associated with these loans totaled $22 million and $28 million for the six months ended June 30, 2011 and 2010, respectively, and $136 million for the year ended December 31, 2010.

(Dollars in millions)	June 30, 2011		December 31, 2010
Total principal amount of loans	$	1,305	$	1,396
Principal amount of loans past due 90 days or more	$	240	$	257

Other VIEs

Affordable Housing Entities

As part of our community reinvestment initiatives, we invest in private investment funds that make equity investments in multi-family affordable housing properties. We receive affordable housing tax credits for these investments. The activities of these entities are financed with a combination of invested equity capital and debt. For those investment funds considered to be VIEs, we are not required to consolidate if we do not have the power to direct the activities that most significantly impact the economic performance of those entities. We record our interests in these unconsolidated VIEs in loans held for investment, other assets and other liabilities. Our interests consisted of assets of approximately $1.8 billion and $1.7 billion as of June 30, 2011 and December 31, 2010, respectively. Our maximum exposure to these entities is limited to our variable interests in the entities and is $1.8 billion as of June 30, 2011. The creditors of the VIEs have no recourse to our general credit and we do not provide additional financial or other support during the period that we were not previously contractually required to provide. The total assets of the unconsolidated VIE investment funds were approximately $8.7 billion and $7.5 billion as of June 30, 2011 and December 31, 2010, respectively.

Entities that Provide Capital to Low-Income and Rural Communities

We hold variable interests in entities ("Investor Entities") that invest in community development entities ("CDEs") that provide debt financing to businesses and non-profit entities in low-income and rural communities. Investments of the consolidated Investor Entities are also our variable interests. The activities of the Investor Entities are financed with a combination of invested equity capital and debt. The activities of the CDEs are financed solely with invested equity capital. We receive federal and state tax credits for these investments. We consolidate the VIEs in which we have the power to direct the activities that most significantly impact the VIE's economic performance and the obligation to absorb losses or the right to receive benefits that could be potentially significant to the VIE. The assets of the VIEs that we consolidated totaled approximately $251 million and $230 million as of June 30, 2011 and December 31, 2010, respectively. The assets of the consolidated VIEs are reflected on our consolidated balance sheets in cash, loans held for investment, interest receivable and other assets. The liabilities are reflected in other liabilities.

The total assets of the VIEs that we held an interest in but were not required to consolidate totaled approximately $6 million as of June 30, 2011 and December 31, 2010. Our interests in these unconsolidated VIEs are reflected on our consolidated balance sheets in loans held for investment and other assets. Our maximum exposure to these entities is limited to our variable interest of $6 million as of June 30, 2011. The creditors of the VIEs have no recourse to our general credit. We have not provided additional financial or other support during the period that we were not previously contractually required to provide.

Other

We also have a variable interest in a trust that has a royalty interest in certain oil and gas properties. The activities of the trust are financed solely with debt. The total assets of the trust were $332 million and $395 million as of June 30, 2011 and December 31, 2010, respectively. We were not required to consolidate the trust because we do not have the power to direct the activities of the trust that most significantly impact the trust's economic performance. Our retained interest in the trust, which totaled approximately $153 million and $174 million as of June 30, 2011 and December 31, 2010, respectively, is reflected on our consolidated balance sheets under loans held for investment. Our maximum exposure is limited to our variable interest of $153 million as of June 30, 2011. The creditors of the trust have no recourse to our general credit. We have not provided additional financial or other support during the period that we were not previously contractually required to provide.