Ally Bank 2012 Annual Report Download - page 123

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warranties described in Note 29 may be enforced at any time over the life of the loan. Historically, ResCap assumed all of the customary
representation and warranty obligations for loans purchased from Ally Bank and subsequently sold into the secondary market. A significant
portion of our representation and warranty obligations were eliminated as a result of the deconsolidation of ResCap. As a result of the
deconsolidation of ResCap, we recorded a representation and warranty reserve to Ally Bank. See Note 29 for additional information.
Upon a breach of a representation, we correct the breach in a manner conforming to the provisions of the sale agreement. This may
require us either to repurchase the loan or to indemnify (make-whole) a party for incurred losses or provide other recourse to a GSE or
investor. Repurchase demands and claims for indemnification payments are reviewed on a loan-by-loan basis to validate if there has been a
breach requiring repurchase or a make-whole payment. We actively contest claims to the extent we do not consider them valid. In cases where
we repurchase loans, we bear the credit loss on the loans. Repurchased loans are classified as held-for-sale and initially recorded at fair value
and subsequently at the lower of cost or market. We seek to manage the risk of repurchase and associated credit exposure through our
underwriting and quality assurance practices and by servicing mortgage loans to meet investor standards.
The reserve for representation and warranty obligations reflects management's best estimate of probable lifetime loss. We consider
historical and recent demand trends in establishing the reserve. The methodology used to estimate the reserve considers a variety of
assumptions including borrower performance (both actual and estimated future defaults), repurchase demand behavior, historical loan defect
experience, historical and estimated future loss experience, which includes projections of future home price changes as well as other
qualitative factors including investor behavior. In cases where we may not be able to reasonably estimate losses, a liability is not recognized.
Management monitors the adequacy of the overall reserve and makes adjustments to the level of reserve, as necessary, after consideration of
other qualitative factors including ongoing dialogue with counterparties.
At the time a loan is sold, an estimate of the fair value of the liability is recorded and classified in other liabilities on our Consolidated
Balance Sheet, and recorded as a component of gain (loss) on mortgage and automotive loans, net, in our Consolidated Statement of Income.
We recognize changes in the reserve when additional relevant information becomes available. Changes in the liability are recorded as other
operating expenses in our Consolidated Statement of Income.
Earnings per Common Share
We compute basic earnings (loss) per common share by dividing net income (loss) from continuing operations attributable to common
shareholders after deducting dividends on preferred stock by the weighted-average number of common shares outstanding during the period.
We compute diluted earnings (loss) per common share by dividing net income (loss) from continuing operations after deducting dividends on
preferred stock by the weighted-average number of common shares outstanding during the period plus the dilution resulting from the
conversion of convertible preferred stock, if applicable.
Derivative Instruments and Hedging Activities
We primarily use derivative instruments for risk management purposes. Derivatives that were held for trading purposes were limited to
those entered into by our broker-dealer. Some of our derivative instruments are designated in qualifying hedge accounting relationships; other
derivative instruments do not qualify for hedge accounting or are not elected to be designated in a qualifying hedging relationship. In
accordance with applicable accounting standards, all derivative financial instruments, whether designated for hedge accounting or not, are
required to be recorded on the balance sheet as assets or liabilities and measured at fair value. Additionally, we report derivative financial
instruments on the Consolidated Balance Sheet primarily on a gross basis. For additional information on derivative instruments and hedging
activities, refer to Note 22.
At inception of a hedge accounting relationship, we designate each qualifying derivative financial instrument as a hedge of the fair value
of a specifically identified asset or liability (fair value hedge); as a hedge of the variability of cash flows to be received or paid related to a
recognized asset or liability (cash flow hedge); or as a hedge of the foreign-currency exposure of a net investment in a foreign operation. We
formally document all relationships between hedging instruments and hedged items and risk management objectives for undertaking various
hedge transactions. Both at the hedge's inception and on an ongoing basis, we formally assess whether the derivatives that are used in hedging
relationships are highly effective in offsetting changes in fair values or cash flows of hedged items.
Changes in the fair value of derivative financial instruments that are designated and qualify as fair value hedges along with the gain or
loss on the hedged asset or liability attributable to the hedged risk, are recorded in the current period earnings. For qualifying cash flow
hedges, the effective portion of the change in the fair value of the derivative financial instruments is recorded in accumulated other
comprehensive income, and recognized in the income statement when the hedged cash flows affect earnings. For a derivative designated as
hedging the foreign-currency exposure of a net investment in a foreign operation, the gain or loss is reported in accumulated other
comprehensive income as part of the cumulative translation adjustment. The ineffective portions of fair value, cash flow, and net investment
hedges are immediately recognized in earnings, along with the portion of the change in fair value that is excluded from the assessment of
hedge effectiveness, if any.
The hedge accounting treatment described herein is no longer applied if a derivative financial instrument is terminated or the hedge
designation is removed or is assessed to be no longer highly effective. For these terminated fair value hedges, any changes to the hedged asset
or liability remain as part of the basis of the asset or liability and are recognized into income over the remaining life of the asset or liability.
For terminated cash flow hedges, unless it is probable that the forecasted cash flows will not occur within a specified period, any changes in
fair value of the derivative financial instrument previously recognized remain in accumulated other comprehensive income, and are
reclassified into earnings in the same period that the hedged cash flows affect earnings. The previously recognized net derivative gain or loss
Table of Contents
Notes to Consolidated Financial Statements
Ally Financial Inc. • Form 10-K