Ally Bank 2012 Annual Report Download - page 58

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• Held-for-sale loans — Loans that we have the intent to sell. These loans are recorded on our balance sheet at the lower of cost or
estimated fair value and are evaluated by portfolio and product type. Changes in the recorded value are recognized in a valuation
allowance and reflected in current period earnings. We manage the economic risks of these exposures, including market and credit
risks, in various ways including the use of market-based instruments such as derivatives. Refer to the Critical Accounting Estimates
discussion within this MD&A and Note 1 to the Consolidated Financial Statements for further information.
• Off-balance sheet securitized loans — Loans that we transfer off-balance sheet to nonconsolidated variable interest entities. We
primarily report this exposure as cash, servicing rights, or retained interests (if applicable). Similar to finance receivables and loans,
we manage the economic risks of these exposures, including credit risk, through activities including servicing and collections. Refer
to the Critical Accounting Estimates discussion within this MD&A and Note 1 to the Consolidated Financial Statements for further
information.
• Operating lease assets — The net book value of the automobile assets we lease are based on the expected residual values upon
remarketing the vehicles at the end of the lease. We are exposed to fluctuations in the expected residual value upon remarketing the
vehicle at the end of the lease, and as such at contract inception, we generally determine the projected residual values based on
independent data, including independent guides of vehicle residual values, and analysis. A valuation allowance related to lease
credit losses is recorded directly against the lease rent receivable balance which is a component of Other Assets. An impairment to
the carrying value of the assets may be deemed necessary if there is an unfavorable and unrecoverable change in the value of the
recorded asset. Refer to the Critical Accounting Estimates discussion within this MD&A and Note 1 to the Consolidated Financial
Statements for further information.
• Serviced loans and leases — Loans that we service on behalf of our customers or another financial institution. As such, these loans
can be on or off our balance sheet. For our mortgage servicing rights, we record an asset or liability (at fair value) based on whether
the expected servicing benefits will exceed the expected servicing costs. Changes in the fair value of the mortgage servicing rights
are recognized in current period earnings. We also service consumer automobile loans. We do not record servicing rights assets or
liabilities for these loans because we receive a fee that adequately compensates us for the servicing costs. We manage the economic
risks of these exposures, including market and credit risks, in part through market-based instruments such as derivatives and
securities. Refer to the Critical Accounting Estimates discussion within this MD&A and Note 1 to the Consolidated Financial
Statements for further information.
Credit Risk Management
Credit risk is defined as the potential failure to receive payments when due from a creditor in accordance with contractual obligations.
Therefore, credit risk is a major source of potential economic loss to us. To mitigate the risk, we have implemented specific processes across
all lines of business utilizing both qualitative and quantitative analyses. Credit risk is monitored by global and line of business committees and
the Global Risk Management organization. Together they oversee the credit decisioning and management processes and monitor that credit
risk exposures are managed in a safe-and-sound manner and are within our risk appetite. In addition, our Global Loan Review Group provides
an independent assessment of the quality of our credit portfolios and credit risk management practices, and directly reports its findings to the
Risk and Compliance Committee on a regular basis.
We have policies and practices that reflect our commitment to maintain an independent and ongoing assessment of credit risk and credit
quality. Our policies require an objective and timely assessment of the overall quality of the consumer and commercial loan and lease
portfolios. This includes the identification of relevant trends that affect the collectability of the portfolios, segments of the portfolios that are
potential problem areas, loans and leases with potential credit weaknesses, and assessment of the adequacy of internal credit risk policies and
procedures to monitor compliance with relevant laws and regulations. In addition, we maintain limits and underwriting guidelines that reflect
our risk appetite.
We manage credit risk based on the risk profile of the borrower, the source of repayment, the underlying collateral, and current market
conditions. We monitor the credit risk profile of individual borrowers and the aggregate portfolio of borrowers either within a designated
geographic region or a particular product or industry segment. To mitigate risk concentrations, we may take part in loan sales and
syndications.
Additionally, we have implemented numerous initiatives in an effort to mitigate loss and provide ongoing support to customers in
financial distress. For automobile loans, we offer several types of assistance to aid our customers. Loss mitigation includes changing the
maturity date, extending payments, and rewriting the loan terms. We have implemented these actions with the intent to provide the borrower
with additional options in lieu of repossessing their vehicle. For mortgage loans, as part of our participation in certain governmental
programs, we offer mortgage loan modifications to qualified borrowers. Numerous initiatives, such as the Home Affordable Modification
Program (HAMP) are in place to provide support to our mortgage customers in financial distress, including principal forgiveness, maturity
extensions, delinquent interest capitalization, and changes to contractual interest rates.
Furthermore, we manage our counterparty credit exposure based on the risk profile of the counterparty. Within our policies, we have
established minimum standards and requirements for managing counterparty risk exposures in a safe-and-sound manner. Counterparty credit
risk is derived from multiple exposure types, including derivatives, securities trading, securities financing transactions, financial futures, cash
balances (e.g. due from depository institutions, restricted accounts and cash equivalents), and investment in debt securities. For more
information on Derivative Counterparty Credit Risk, refer to Note 22 to the Consolidated Financial Statements.
Table of Contents
Management's Discussion and Analysis
Ally Financial Inc. • Form 10-K