Receivables

9 Months Ended

Sep. 30, 2011

Receivables and Credit Loss Reserves [Abstract]

Receivables

5.   Receivables

Receivables from continuing operations consisted of the following:

	September 30,			December 31,
	2011			2010
	(in millions)
Real estate secured:
First lien	$	39,461		$	43,859
Second lien		4,735			5,477
Total real estate secured		44,196			49,336
Personal non-credit card		5,600			7,117
Commercial and other		26			33
Total receivables		49,822			56,486
HSBC acquisition purchase accounting fair value adjustments		38			43
Accrued finance income		1,290			1,444
Credit loss reserves		(5,911	)		(5,512	)
Unearned credit insurance premiums and claims reserves		(82	)		(123	)
Total receivables, net	$	45,157		$	52,338

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.

Net deferred origination fees for real estate secured and personal non-credit card receivables totaled $265 million and $304 million at September 30, 2011 and December 31, 2010, respectively.

Net unamortized premium on our receivables totaled $182 million and $254 million at September 30, 2011 and December 31, 2010, respectively. Unearned income on personal non-credit card receivables totaled $11 million and $30 million at September 30, 2011 and December 31, 2010, respectively.

Collateralized funding transactions  Secured financings previously issued under public trusts with a balance of $3.4 billion at September 30, 2011 are secured by $5.4 billion of closed-end real estate secured receivables. Secured financings previously issued under public trusts with a balance of $3.9 billion at December 31, 2010 were secured by $5.9 billion of closed-end real estate secured receivables.

Age Analysis of Past Due Receivables  The following tables summarize the past due status of our receivables from continuing and discontinued operations at September 30, 2011 and December 31, 2010. 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				Total
September 30, 2011	1 – 29 days		30 – 89 days		90+ days		Past Due		Current		Receivables(1)
	(in millions)
Continuing operations:
Real estate secured:
First lien	$	6,265	$	4,372	$	5,804	$	16,441	$	23,020	$	39,461
Second lien		821		465		342		1,628		3,107		4,735
Total real estate secured(2)		7,086		4,837		6,146		18,069		26,127		44,196
Personal non-credit card		749		444		322		1,515		4,085		5,600
Commercial and other		-		-		-		-		26		26
Total receivables – continuing operations	$	7,835	$	5,281	$	6,468	$	19,584	$	30,238	$	49,822
Discontinued credit card operations(3)	$	440	$	300	$	292	$	1,032	$	7,645	$	8,677

	Days Past Due						Total				Total
December 31, 2010	1 – 29 days		30 – 89 days		90+ days		Past Due		Current		Receivables(1)
	(in millions)
Continuing operations:
Real estate secured:
First lien	$	7,024	$	4,909	$	5,977	$	17,910	$	25,949	$	43,859
Second lien		935		568		421		1,924		3,553		5,477
Total real estate secured(2)		7,959		5,477		6,398		19,834		29,502		49,336
Personal non-credit card		968		604		507		2,079		5,038		7,117
Commercial and other		-		-		-		-		33		33
Total receivables – continuing operations	$	8,927	$	6,081	$	6,905	$	21,913	$	34,573	$	56,486
Discontinued credit card operations(3)	$	473	$	363	$	437	$	1,273	$	8,624	$	9,897

(1)	The receivable balances included in this table reflects the principal amount outstanding on the loan and various 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 on the loans are excluded in other presentations regarding delinquent account balances.
(2)	At September 30, 2011 and December 31, 2010, approximately 56 percent and 54 percent, respectively, of our real estate secured receivables have been either modified and/or re-aged.
(3)	At September 30, 2011, discontinued credit card receivables are included as part of the disposal group held for sale to Capital One which is carried at the lower of amortized cost or fair value. At December 31, 2010, discontinued credit card receivables were carried at amortized cost and as such are not directly comparable to the current period balances.

Nonperforming receivables Nonaccrual receivables (including receivables held for sale) for both continuing and discontinued operations are summarized in the following table.

	September 30,			December 31,
	2011			2010
	(dollars are in millions)
Continuing operations:
Nonaccrual receivable portfolios(1):
Real estate secured(2)	$	6,114		$	6,360
Personal non-credit card		337			530
Total nonperforming receivables		6,451			6,890
Real estate owned		371			962
Total nonperforming assets – continuing operations		6,822			7,852
Discontinued credit card operations(4)(5)		319			447
Total nonperforming assets	$	7,141		$	8,299
Credit loss reserves as a percent of nonperforming receivables – continuing operations(3)		91.6	%		80.0	%

(1)	Nonaccrual receivables reflect all loans which are 90 or more days contractually delinquent. Nonaccrual receivables do not include receivables which have made qualifying payments and have been re-aged and the contractual delinquency status 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.
(2)	At September 30, 2011 and December 31, 2010, nonaccrual real estate secured receivables include $4.3 billion and $4.1 billion, respectively, of receivables that are carried at the lower of amortized cost or fair value less cost to sell.
(3)	Ratio excludes nonperforming receivables associated with receivable portfolios which are considered held for sale as these receivables are carried at the lower of amortized cost or fair value with no corresponding credit loss reserves.
(4)	At September 30, 2011, discontinued credit card receivables are included as part of the disposal group held for sale to Capital One which is carried at the lower of amortized cost or fair value. At December 31, 2010, discontinued credit card receivables were carried at amortized cost and as such are not directly comparable to the current period balances.
(5)	Credit card receivables continue to accrue interest after they become 90 or more days delinquent, consistent with industry practice.

Interest income on nonaccrual receivables that would have been recorded if the nonaccrual receivables had been current in accordance with contractual terms during the period was approximately $761 million during the nine months ended September 30, 2011 and approximately $856 million during the nine months ended September 30, 2010. Interest income that was recorded on these nonaccrual loans was approximately $251 million during the nine months ended September 30, 2011 and approximately $362 million during the nine months ended September 30, 2010 of which portions have been written-off.

Troubled Debt Restructurings  Troubled debt restructurings 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.

During the third quarter of 2011 we adopted a new Accounting Standards Update which provided additional guidance to determine whether a restructuring of a receivable meets the criteria to be considered a TDR Loan. Under this new guidance, we have determined that all receivables modified as a result of a financial difficulty for periods of greater than three months, including all modifications with trial periods, regardless of whether the modification was permanent or temporary, should be reported as TDR Loans. Additionally, we have determined that all re-ages, except first time early stage delinquency re-ages where the customer has not been granted a prior re-age since the first quarter of 2007, should be considered TDR Loans. Accordingly, $1.1 billion of first-time early stage delinquency accounts which have been re-aged since January 1, 2011 are not being reported as TDR Loans at September 30, 2011. As required, the new guidance was applied retrospectively to restructurings occurring on or after January 1, 2011 and has resulted in the reporting of an additional $4.1 billion of real estate secured receivables and an additional $717 million of personal non-credit card receivables as TDR Loans at September 30, 2011 with credit loss reserves of $1.3 billion associated with these receivables at September 30, 2011. An incremental loan loss provision for these receivables using a discounted cash flow analysis of approximately $925 million was recorded during the third quarter of 2011 which also includes the impact of changes in market conditions during the quarter of approximately $180 million. The TDR Loan balances and related credit loss reserves for consumer receivables reported as of December 31, 2010 use our previous definition of TDR Loans as described in our 2010 Form 10-K and as such, are not directly comparable to the current period balances. See Note 2, “Discontinued Operations,” in the accompanying consolidated financial statements for discussion of the impact of adopting this new guidance on our discontinued credit card operations.

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. 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. Once a loan is classified as a TDR, it continues to be reported as such until it is paid off or charged-off.

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

	Three Months Ended		Nine Months Ended
	September 30, 2011		September 30, 2011
	(in millions)
Real estate secured:
First lien	$	1,073	$	4,700
Second lien		117		474
Total real estate secured		1,190		5,174
Personal non-credit card		206		891
Total	$	1,396	$	6,065

The following table presents information about our TDR Loans and the related credit loss reserves for TDR Loans:

	September 30,		December 31,
	2011		2010
	(in millions)
TDR Loans(1)(2):
Real estate secured:
First lien	$	12,105	$	8,697
Second lien		960		647
Total real estate secured(3)(4)		13,065		9,344
Personal non-credit card		1,315		704
Total TDR Loans	$	14,380	$	10,048

	September 30,		December 31,
	2011		2010
	(in millions)
Credit loss reserves for TDR Loans:
Real estate secured:
First lien	$	2,876	$	1,728
Second lien		499		258
Total real estate secured		3,375		1,986
Personal non-credit card		668		395
Total credit loss reserves for TDR Loans(5)	$	4,043	$	2,381

(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. The following table reflects the unpaid principal balance of TDR Loans:

	September 30,		December 31,
	2011		2010
	(in millions)
Real estate secured:
First lien	$	13,524	$	9,650
Second lien		1,024		709
Total real estate secured		14,548		10,359
Personal non-credit card		1,315		705
Total TDR Loans	$	15,863	$	11,064

(3)	At September 30, 2011 and December 31, 2010, TDR Loans totaling $2.2 billion and $1.5 billion, respectively, are recorded at the lower of amortized cost or fair value less cost to sell.
(4)	The following table summarizes real estate secured TDR Loans for our Mortgage Services and Consumer Lending businesses:

	September 30,		December 31,
	2011		2010
	(in millions)
Mortgage Services	$	4,753	$	4,114
Consumer Lending		8,312		5,230
Total real estate secured	$	13,065	$	9,344

⁽⁵⁾ Included in credit loss reserves.

The following table discloses receivables 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, 2011:

	Three Months Ended		Nine Months Ended
	September 30, 2011		September 30, 2011
	(in millions)
Real estate secured:
First lien	$	669	$	1,111
Second lien		66		107
Total real estate secured		735		1,218
Personal non-credit card		153		264
Total	$	888	$	1,482

Additional information relating to TDR Loans is presented in the table below:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2011		2010		2011		2010
			(in millions)
Average balance of TDR Loans(1):
Real estate secured:
First lien	$	11,875	$	8,851	$	10,763	$	8,876
Second lien		940		705		842		716
Total real estate secured		12,815		9,556		11,605		9,592
Personal non-credit card		1,287		736		1,099		744
Total average balance of TDR Loans	$	14,102	$	10,292	$	12,704	$	10,336
Interest income recognized on TDR Loans:
Real estate secured:
First lien	$	156	$	101	$	419	$	309
Second lien		17		9		45		30
Total real estate secured		173		110		464		339
Personal non-credit card		39		12		92		35
Total interest income recognized on TDR Loans	$	212	$	122	$	556	$	374

⁽¹⁾ The increase in the average balance of TDR Loans during the three and nine months ended September 30, 2011 reflects, in part, the higher levels of receivables considered to be TDR Loans as a result of the adoption of the new accounting guidance as discussed above. These averages assume the new guidelines were adopted January 1, 2011.

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 continuing operations and as a percent of total receivables and receivables held for sale (“delinquency ratio”) for our loan portfolio for continuing and discontinued operations:

	September 30, 2011					December 31, 2010
	Dollars of		Delinquency			Dollars of		Delinquency
	Delinquency		Ratio			Delinquency		Ratio
			(dollars are in millions)
Continuing operations:
Real estate secured:
First lien	$	7,233		18.33	%	$	7,504		17.11	%
Second lien		530		11.21			667		12.18
Total real estate secured		7,763		17.57			8,171		16.56
Personal non-credit card		518		9.24			779		10.94
Total – continuing operations		8,281		16.63			8,950		15.85
Discontinued credit card operations(1)		457		5.27			612		6.18
Total	$	8,738		14.94	%	$	9,562		14.41	%

⁽¹⁾ At September 30, 2011, discontinued credit card receivables are included as part of the disposal group held for sale to Capital One which is carried at the lower of amortized cost or fair value. At December 31, 2010, discontinued credit card receivables were carried at amortized cost and as such are not directly comparable to the current period balances.

Nonperforming The status of our consumer receivable portfolio for continuing and discontinued operations are summarized in the following table:

					Accruing Loans
					Contractually Past
	Performing		Nonaccrual		Due 90 Days or
	Loans		Loans		More(1)		Total
	(in millions)
At September 30, 2011
Continuing operations:
Real estate secured(2)	$	38,082	$	6,114	$	-	$	44,196
Personal non-credit card		5,263		337		-		5,600
Total – continuing operations(3)		43,345		6,451		-		49,796
Discontinued operations(4)		8,358		-		319		8,677
Total	$	51,703	$	6,451	$	319	$	58,473
At December 31, 2010
Continuing operations
Real estate secured(2)	$	42,976	$	6,360	$	-	$	49,336
Personal non-credit card		6,587		530		-		7,117
Total – continuing operations(3)		49,563		6,890		-		56,453
Discontinued operations(4)		9,450		-		447		9,897
Total	$	59,013	$	6,890	$	447	$	66,350

(1)	Credit card receivables continue to accrue interest after they become 90 days or more delinquent, consistent with industry practice.
(2)	At September 30, 2011 and December 30, 2010, nonperforming real estate secured receivables include $4.3 billion and $4.1 billion, respectively, of receivables that are carried at fair value less cost to sell.
(3)	At September 30, 2011 and December 30, 2010, nonperforming receivables for continuing operations include $2.2 billion and $1.9 billion, respectively, which are TDR Loans, some of which may also be carried at fair value less cost to sell.
(4)	At September 30, 2011, discontinued credit card receivables are included as part of the disposal group held for sale to Capital One which is carried at the lower of amortized cost or fair value. At December 31, 2010, discontinued credit card receivables were carried at amortized cost and as such are not directly comparable to the current period balances.

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 and receivables held for sale have high loan-to-value ratios. Our receivables and receivables held for sale 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 are required.

•  ARM loans – A loan which allows the lender to adjust pricing on the loan in line with interest rate movements. A customer’s financial situation and the general interest rate environment at the time of the interest rate reset could affect the customer’s ability to repay or refinance the loan after adjustment.

•  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, ARM loans and stated income loans in our receivable portfolios at September 30, 2011 and December 31, 2010:

	September 30,		December 31,
	2011		2010
	(in billions)
Interest-only loans	$	1.0	$	1.3
ARM loans(1)(2)		6.3		7.5
Stated income loans		2.3		2.7

(1)	Receivable classification as ARM loans 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.
(2)	We do not have any adjustable rate mortgages loans in our portfolio where the borrower is offered options on the amount of monthly payment they can make.

At September 30, 2011 and December 31, 2010, interest-only, ARM and stated income loans comprised 17 percent and 18 percent, respectively, of real estate secured receivables, including receivables held for sale.