Ally Bank 2011 Annual Report Download - page 48

Table of Contents
Management's Discussion and Analysis
Ally Financial Inc. • Form 10−K
Automotive Finance Operations
Our North American Automotive Finance operations and our International Automotive Finance operations (Automotive Finance operations) provide
automotive financing services to consumers and to automotive dealers. For consumers, we offer retail automobile financing and leasing for new and used
vehicles, and through our commercial automotive financing operations, we fund dealer purchases of new and used vehicles through wholesale or floorplan
financing.
Consumer Automotive Financing
Historically, we have provided two basic types of financing for new and used vehicles: retail automobile contracts (retail contracts) and automobile
lease contracts. In most cases, we purchase retail contracts and leases for new and used vehicles from dealers when the vehicles are purchased or leased by
consumers. In a number of markets outside the United States, we are a direct lender to the consumer. Our consumer automotive financing operations
generate revenue through finance charges or lease payments and fees paid by customers on the retail contracts and leases. In connection with lease contracts,
we also recognize a gain or loss on the remarketing of the vehicle at the end of the lease.
The amount we pay a dealer for a retail contract is based on the negotiated purchase price of the vehicle and any other products, such as service
contracts, less any vehicle trade−in value and any down payment from the consumer. Under the retail contract, the consumer is obligated to make payments
in an amount equal to the purchase price of the vehicle (less any trade−in or down payment) plus finance charges at a rate negotiated between the consumer
and the dealer. In addition, the consumer is also responsible for charges related to past−due payments. When we purchase the contract, it is normal business
practice for the dealer to retain some portion of the finance charge as income for the dealership. Our agreements with dealers place a limit on the amount of
the finance charges they are entitled to retain. Although we do not own the vehicles we finance through retail contracts, we hold a perfected security interest
in those vehicles. Due to funding challenges related to the general economic recession at the time, in January 2009, we ceased new financing through
Nuvell, which had focused on nonprime automotive financing primarily through GM−affiliated dealers. More recently, we have begun to prudently expand
our nonprime automotive financing volumes.
With respect to consumer leasing, we purchase leases (and the associated vehicles) from dealerships. The purchase price of consumer leases is based
on the negotiated price for the vehicle less any vehicle trade−in and any down payment from the consumer. Under the lease, the consumer is obligated to
make payments in amounts equal to the amount by which the negotiated purchase price of the vehicle (less any trade−in value or down payment) exceeds
the projected residual value (including residual support) of the vehicle at lease termination, plus lease charges. The consumer is also generally responsible
for charges related to past due payments, excess mileage, excessive wear and tear, and certain disposal fees where applicable. When the lease contract is
entered into, we estimate the residual value of the leased vehicle at lease termination. We generally base our determination of the projected residual values
on a guide published by an independent publisher of vehicle residual values, which is stated as a percentage of the manufacturer's suggested retail price.
These projected values may be upwardly adjusted as a marketing incentive if the manufacturer or Ally considers above−market residual support necessary
to encourage consumers to lease vehicles.
Our standard U.S. leasing plan, SmartLease, requires a monthly payment by the consumer. We also offer an alternative leasing plan, SmartLease Plus,
that requires one up−front payment of all lease amounts at the time the consumer takes possession of the vehicle.
During 2011, we expanded the Ally Buyer's Choice product on new GM and Chrysler vehicles from Canada to select states in the United States. The
Ally Buyer's Choice financing product allows customers to own their vehicle with a fixed rate and payment with the option to sell it to us at a
pre−determined point during the contract term and at a pre−determined price.
Consumer automobile leases are operating leases; therefore, credit losses on the operating lease portfolio are not as significant as losses on retail
contracts because lease losses are primarily limited to payments and assessed fees. Since some of these fees are not assessed until the vehicle is returned,
these losses on the lease portfolio are correlated with lease termination volume. North American operating lease accounts past due over 30 days represented
0.67% and 2.36% of the total portfolio at December 31, 2011 and 2010, respectively. We selectively re−entered the U.S. leasing market in 2009 and have
continued to support lease volumes since that time.
With respect to all financed vehicles, whether subject to a retail contract or a lease contract, we require that property damage insurance be obtained by
the consumer. In addition, for lease contracts, we require that bodily injury, collision, and comprehensive insurance be obtained by the consumer.
The consumer financing revenue of our Automotive Finance operations totaled $4.0 billion, $3.4 billion, and $3.1 billion in 2011, 2010, and 2009,
respectively.
45