9. Mortgage Servicing Assets

We originate and periodically sell commercial and residential mortgage loans but continue to service those loans for the buyers. We also may purchase the right to service commercial mortgage loans for other lenders. We record a servicing asset if we purchase or retain the right to service loans in exchange for servicing fees that exceed the going market servicing rate and are considered more than adequate compensation for servicing. Commercial and residential mortgage servicing assets are recorded as a component of “accrued income and other assets” on the balance sheet.

Commercial

Changes in the carrying amount of commercial mortgage servicing assets are summarized as follows:



	Three months ended September 30,						Nine months ended September 30,
in millions	2016			2015			2016			2015
Balance at beginning of period	$	323		$	329		$	321		$	323
Servicing retained from loan sales	31			11			53			39
Purchases	3			4			15			29
Amortization	(21		)	(24		)	(53		)	(71		)
Balance at end of period	$	336		$	320		$	336		$	320
Fair value at end of period	$	416		$	427		$	416		$	427

The fair value of commercial mortgage servicing assets is determined by calculating the present value of future cash flows associated with servicing the loans. This calculation uses a number of assumptions that are based on current market conditions. The range and weighted-average of the significant unobservable inputs used to fair value our commercial mortgage servicing assets at September 30, 2016, December 31, 2015, and September 30, 2015, along with the valuation techniques, are shown in the following table:



September 30, 2016	Valuation Technique	Significant Unobservable Input	Range (Weighted-Average)
dollars in millions	Valuation Technique	Significant Unobservable Input	Range (Weighted-Average)
Commercial mortgage servicing assets	Discounted cash flow	Prepayment speed	1.60 - 20.40% (3.70%)
		Expected defaults	1.00 - 3.00% (1.50%)
		Residual cash flows discount rate	7.00 - 12.10% (7.90%)
		Escrow earn rate	0.80 - 2.60% (2.00%)
		Servicing cost	$150 - $2,700 ($1,163)
		Loan assumption rate	0.00 - 3.00% (1.18%)
		Percentage late	0.00 - 2.00% (0.35%)



December 31, 2015	Valuation Technique	Significant Unobservable Input	Range (Weighted-Average)
dollars in millions	Valuation Technique	Significant Unobservable Input	Range (Weighted-Average)
Commercial mortgage servicing assets	Discounted cash flow	Prepayment speed	1.90 - 17.20% (4.60%)
		Expected defaults	1.00 - 3.00% (1.70%)
		Residual cash flows discount rate	7.00 - 15.00% (7.80%)
		Escrow earn rate	1.00 - 3.50% (2.30%)
		Servicing cost	$150 - $2,700 ($1,215)
		Loan assumption rate	0.00 - 3.00% (1.34%)
		Percentage late	0.00 - 2.00% (0.33%)



September 30, 2015	Valuation Technique	Significant Unobservable Input	Range (Weighted-Average)
dollars in millions	Valuation Technique	Significant Unobservable Input	Range (Weighted-Average)
Commercial mortgage servicing assets	Discounted cash flow	Prepayment speed	1.70 - 16.30% (4.90%)
		Expected defaults	1.00 - 3.00% (1.70%)
		Residual cash flows discount rate	7.00 - 15.00% (7.80%)
		Escrow earn rate	0.90 - 3.50% (2.30%)
		Servicing cost	$150 - $2,719 ($1,151)
		Loan assumption rate	0.00 - 3.00% (1.37%)
		Percentage late	0.00 - 2.00% (0.33%)

If these economic assumptions change or prove incorrect, the fair value of commercial mortgage servicing assets may also change. Expected credit losses, escrow earn rates, and discount rates are critical to the valuation of commercial servicing assets. Estimates of these assumptions are based on how a market participant would view the respective rates and reflect historical data associated with the loans, industry trends, and other considerations. Actual rates may differ from those estimated due to changes in a variety of economic factors. A decrease in the value assigned to the escrow earn rates would cause a decrease in the fair value of our commercial mortgage servicing assets. An increase in the assumed default rates of commercial mortgage loans or an increase in the assigned discount rates would cause a decrease in the fair value of our commercial mortgage servicing assets.

We have elected to account for commercial servicing assets using the amortization method. The amortization of commercial servicing assets is determined in proportion to, and over the period of, the estimated net servicing income. The amortization of commercial servicing assets for each period, as shown in the table at the beginning of this note, is recorded as a reduction to contractual fee income. The contractual fee income from servicing commercial mortgage loans totaled $101 million for the nine-month period ended September 30, 2016, and $104 million for the nine-month period ended September 30, 2015. This fee income was offset by $66 million of amortization for the nine-month period ended September 30, 2016, and $71 million for the nine-month period ended September 30, 2015. Both the contractual fee income and the amortization are recorded, net, in “mortgage servicing fees” on the income statement.

Additional information pertaining to the accounting for commercial mortgage and other servicing assets is included in Note 1 (“Summary of Significant Accounting Policies”) under the heading “Servicing Assets” on page 127 of our 2015 Form 10-K.

Residential

With the First Niagara acquisition, we acquired residential mortgage servicing assets with a fair value of $28 million as of the acquisition date. Activity for the three and nine months ended September 30, 2016, represents the period from the acquisition date of August 1, 2016, through September 30, 2016.

Changes in the carrying amount of residential mortgage servicing assets are summarized as follows:



	Three months ended			Nine months ended
in millions	September 30, 2016			September 30, 2016
Balance at beginning of period	—			—
Servicing retained from loan sales	$	1		$	1
Purchases	28			28
Amortization	(1		)	(1		)
Balance at end of period	$	28		$	28
Fair value at end of period	$	29		$	29

The fair value of mortgage servicing assets is determined by calculating the present value of future cash flows associated with servicing the loans. This calculation uses a number of assumptions that are based on current market conditions. The range and weighted-average of the significant unobservable inputs used to fair value our mortgage servicing assets at September 30, 2016, along with the valuation techniques, are shown in the following table:



September 30, 2016	Valuation Technique	Significant Unobservable Input	Range (Weighted-Average)
dollars in millions	Valuation Technique	Significant Unobservable Input	Range (Weighted-Average)
Residential mortgage servicing assets	Discounted cash flow	Prepayment speed	9.36 - 18.39% (11.81%)
		Discount rate	8.50 - 11.00% (8.55%)
		Servicing cost	$76 - $3,335 ($82.17)

If these economic assumptions change or prove incorrect, the fair value of residential mortgage servicing assets may also change. Prepayment speed, discount rates, and servicing cost are critical to the valuation of servicing assets. Estimates of these assumptions are based on how a market participant would view the respective rates and reflect historical data associated with the loans, industry trends, and other considerations. Actual rates may differ from those estimated due to changes in a variety of economic factors. An increase in the prepayment speed would cause a negative impact on the fair value of our residential mortgage servicing assets. An increase in the assigned discount rates and servicing cost assumptions would cause a decrease in the fair value of our residential mortgage servicing assets.

We have elected to account for residential servicing assets using the amortization method. The amortization of residential servicing assets is determined in proportion to, and over the period of, the estimated net residential servicing income. The amortization of servicing assets for September 30, 2016, as shown in the table above, is recorded as a reduction to contractual fee income. The contractual fee income from servicing residential mortgage loans totaled $3 million for the nine-month period ended September 30, 2016. This fee income was offset by $1 million of amortization for the nine-month period ended September 30, 2016. Both the contractual fee income and the amortization are recorded, net, in “mortgage servicing fees” on the income statement.