Ally Bank 2011 Annual Report Download - page 135

Table of Contents
Notes to Consolidated Financial Statements
Ally Financial Inc. • Form 10−K
Impaired Loans
All classes of loans are considered impaired when we determine it is probable that we will be unable to collect all amounts due (both principal and
interest) according to the terms of the loan agreement.
For all classes of consumer loans, impaired loans are loans that have been modified in troubled debt restructurings.
All classes of commercial loans are considered impaired on an individual basis and reported as impaired when we determine it is probable that we will
be unable to collect all amounts due according to the terms of the loan agreement.
For all classes of impaired loans, income recognition is consistent with that of nonaccrual loans discussed above. For collateral dependent loans, if the
recorded investment in impaired loans exceeds the fair value of the collateral, a valuation allowance is established consistent with the previous discussion
within TDRs above.
Charge−offs
As a general rule, consumer automobile loans are written down to estimated collateral value, less costs to sell, once a loan becomes 120 days past due;
and second−lien consumer mortgage loans within our home equity class are charged off at 180 days past due. Consumer first−lien mortgage loans, which
consists of our entire 1st mortgage class and a subset of our home equity class that are secured by real estate in a first−lien position are written down to the
estimated fair value of the collateral, less costs to sell, once a mortgage loan becomes 180 days past due. Second−lien consumer mortgage loans in
bankruptcy that are 60 days past due are fully charged off within 60 days of receipt of notification of filing from the bankruptcy court. Consumer
automobile and first−lien consumer mortgage loans in bankruptcy that are 60 days past due are written down to the estimated fair value of the collateral, less
costs to sell, within 60 days of receipt of notification of filing from the bankruptcy court. Regardless of other timelines noted within this policy, loans are
considered collateral dependent at the time foreclosure proceedings begin and are charged off to the estimated fair value of the underlying collateral, less
costs to sell at that time.
Commercial loans are individually evaluated and where collectability of the recorded balance is in doubt are written down to the estimated fair value
of the collateral less costs to sell. Generally, all commercial loans, both collateral and noncollateral dependent, are charged off when they are 360 days or
more past due.
Allowance for Loan Losses
The allowance for loan losses (the allowance) is management's estimate of incurred losses in the lending portfolios. We determine the amount of the
allowance required for each of our portfolio segments based on its relative risk characteristics. The evaluation of these factors for both consumer and
commercial finance receivables and loans involves complex, subjective judgments. Additions to the allowance are charged to current period earnings
through the provision for loan losses; amounts determined to be uncollectible are charged directly against the allowance, net of amounts recovered on
previously charged−off accounts.
The allowance is comprised of two components: specific reserves established for individual loans evaluated as impaired and portfolio−level reserves
established for large groups of typically smaller balance homogenous loans that are collectively evaluated for impairment. We evaluate the adequacy of the
allowance based on the combined total of these two components. Determining the appropriateness of the allowance is complex and requires judgment by
management about the effect of matters that are inherently uncertain. It is possible that others, given the same information, may at any point in time reach
different reasonable conclusions.
Measurement of impairment for specific reserves is generally determined on a loan−by−loan basis. Loans determined to be specifically impaired are
measured based on the present value of expected future cash flows discounted at the loan's effective interest rate, an observable market price, or the
estimated fair value of the collateral less estimated costs to sell, whichever is determined to be the most appropriate. When these measurement values are
lower than the carrying value of that loan, impairment is recognized. Loans that are not identified as individually impaired are pooled with other loans with
similar risk characteristics for evaluation of impairment for the portfolio−level allowance.
For the purpose of calculating portfolio−level reserves, we have grouped our loans into three portfolio segments: consumer automobile, consumer
mortgage, and commercial. The allowance consists of the combination of a quantitative assessment component based on statistical models, a retrospective
evaluation of actual loss information to loss forecasts, and could include a qualitative component based on management judgment. Management takes into
consideration relevant qualitative factors, including external and internal trends such as the impacts of changes in underwriting standards, collections and
account management effectiveness, geographic concentrations, and economic events, among other factors, that have occurred but are not yet reflected in the
quantitative assessment component. All qualitative adjustments are adequately documented, reviewed, and approved through our established risk
governance processes. Refer to Note 9 for information on the allowance for loan losses.
Consumer Loans
Our consumer automobile and consumer mortgage portfolio segments are reviewed for impairment based on an analysis of loans that are grouped into
common risk categories (i.e., past due status, loan or lease type, collateral type, borrower, industry or geographic concentrations). We perform periodic and
systematic detailed reviews of our lending portfolios to identify inherent risks and to assess the overall collectability of those portfolios. Loss models are
utilized for these portfolios, which consider a variety of factors including, but not limited to, historical loss experience, current economic conditions,
anticipated repossessions or foreclosures based on portfolio trends, delinquencies and credit scores, and expected loss factors by loan type.
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