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.

Additional information pertaining to the accounting for mortgage and other servicing assets is included in Note 1 (“Summary of Significant Accounting Policies”) under the heading “Servicing Assets” in our 2016 Form 10-K.

Commercial Mortgage Servicing

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	2017			2016			2017			2016
Balance at beginning of period	$	373		$	323		$	356		$	321
Servicing retained from loan sales	24			31			71			53
Purchases	10			3			24			15
Amortization	(22		)	(21		)	(66		)	(53		)
Balance at end of period	$	385		$	336		$	385		$	336
Fair value at end of period	$	508		$	416		$	508		$	416

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 determine the fair value of our commercial mortgage servicing assets at September 30, 2017, and December 31, 2016, along with the valuation techniques, are shown in the following table:



September 30, 2017	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	Expected defaults	1.00 - 3.00% (1.20%)
		Residual cash flows discount rate	7.00 - 15.00% (8.90%)
		Escrow earn rate	0.80 - 3.00% (2.40%)
		Servicing cost	$150 - $38,500 ($1,468)
		Loan assumption rate	0.00 - 3.00% (1.24%)
		Percentage late	0.00 - 2.00% (.27%)



December 31, 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	Expected defaults	1.00 - 3.00% (1.40%)
		Residual cash flows discount rate	7.00 - 12.00% (8.00%)
		Escrow earn rate	1.10 - 3.00% (2.40%)
		Servicing cost	$150 - $2,700 ($1,124)
		Loan assumption rate	0.00 - 3.00% (1.13%)
		Percentage late	0.00 - 2.00% (.34%)

If these economic assumptions change or prove incorrect, the fair value of commercial mortgage servicing assets may also change. Expected credit losses, escrow earning rates, and discount rates are critical to the valuation of commercial mortgage 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 commercial mortgage 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 earning 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. Prepayment activity on commercial serviced loans does not significantly affect the valuation of our commercial mortgage servicing assets. Unlike residential mortgages, commercial mortgages experience significantly lower prepayments due to certain contractual restrictions affecting the borrower’s ability to prepay the mortgage.

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 $113 million for the nine-month period ended September 30, 2017, and $101 million for the nine-month period ended September 30, 2016. This fee income was offset by $66 million of amortization for the nine-month period ended September 30, 2017, and $66 million 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.

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 113 of our 2016 Form 10-K.

Residential Mortgage Servicing

With the First Niagara acquisition, we acquired residential mortgage servicing assets with a fair value of $28 million as of the Acquisition Date.

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



	Three months ended September 30,						Nine months ended September 30,
in millions	2017			2016			2017			2016
Balance at beginning of period	$	29		—			$	28		—
Servicing retained from loan sales	2			$	1		5			$	1
Purchases	—			28			—			28
Amortization	(1		)	(1		)	(3		)	(1		)
Balance at end of period	$	30		$	28		$	30		$	28
Fair value at end of period	$	34		$	29		$	34		$	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, 2017, along with the valuation techniques, are shown in the following table:



September 30, 2017	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	7.95 - 32.49% (10.15%)
		Discount rate	8.50 - 11.00% (8.55%)
		Servicing cost	$76 - $3,335 ($82.19)

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, assigned discount rates, and servicing cost assumptions would also cause a negative impact on 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, 2017, 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 $11 million for the nine-month period ended September 30, 2017, and $3 million for the nine-month period ended September 30, 2016. This fee income was offset by $3 million of amortization for the nine-month period ended September 30, 2017, and $1 million 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.