Ally Bank 2014 Annual Report Download - page 109

Table of Contents
Notes to Consolidated Financial Statements
Ally Financial Inc. • Form 10-K
97
Consumer Mortgage Portfolio Segment
The allowance for loan losses within the consumer mortgage portfolio segment is calculated by using proprietary statistical models based
on pools of loans with similar risk characteristics, including credit score, loan-to-value, loan age, documentation type, product type, and loan
purpose, to arrive at an estimate of incurred losses in the portfolio. These statistical loss forecasting models are utilized to estimate incurred
losses and consider a variety of factors including, but not limited to, historical loss experience, estimated foreclosures or defaults based on
portfolio trends, delinquencies, and general economic and business trends.
The forecasted losses are statistically derived based on a suite of behavioral based transition models. This transition framework predicts
various stages of delinquency, default, and voluntary prepayment over the course of the life of the loan. The transition probability is a function
of the loan and borrower characteristics and economic variables and considers historical factors such as frequency and loss severity. When a
default event is predicted, a severity model is applied to estimate future loan losses. Loss severity within the consumer mortgage portfolio
segment is impacted by the market values of foreclosed properties, which is affected by numerous factors, including geographic
considerations and the condition of the foreclosed property. The historical loss experience is updated quarterly to incorporate the most recent
data reflective of the current economic environment.
The quantitative assessment component is supplemented with qualitative reserves based on management's determination that such
adjustments provide a better estimate of credit losses. This qualitative assessment takes into consideration relevant internal and external
factors that have occurred but are not yet reflected in the forecasted losses and may affect the credit quality of the portfolio.
Commercial Loans
The allowance for loan losses within the commercial portfolio is comprised of reserves established for specific loans evaluated as
impaired and portfolio-level reserves based on nonimpaired loans grouped into pools based on similar risk characteristics and collectively
evaluated.
A commercial loan is considered impaired when it is probable that we will be unable to collect all amounts due according to the
contractual terms of the loan agreement based on current information and events. These loans are primarily evaluated individually and are
risk-rated based on borrower, collateral, and industry-specific information that management believes is relevant in determining the occurrence
of a loss event and measuring impairment. Management establishes specific allowances for commercial loans determined to be individually
impaired based on the present value of expected future cash flows, discounted at the loan's effective interest rate, observable market price or
the fair value of collateral, whichever is determined to be the most appropriate. Estimated costs to sell or realize the value of the collateral on
a discounted basis are included in the impairment measurement, when appropriate.
Loans not identified as impaired are grouped into pools based on similar risk characteristics and collectively evaluated. Our risk rating
models use historical loss experience, concentrations, current economic conditions, and performance trends. The commercial historical loss
experience is updated quarterly to incorporate the most recent data reflective of the current economic environment. The determination of the
allowance is influenced by numerous assumptions and many factors that may materially affect estimates of loss, including volatility of loss
given default, probability of default, and rating migration. In assessing the risk rating of a particular loan, several factors are considered
including an evaluation of historical and current information involving subjective assessments and interpretations. In addition, the allowance
related to the commercial portfolio segment is influenced by estimated recoveries from automotive manufacturers relative to guarantees or
agreements with them to repurchase vehicles used as collateral to secure the loans.
The quantitative assessment component may be supplemented with qualitative reserves based on management's determination that such
adjustments provide a better estimate of credit losses. This qualitative assessment takes into consideration relevant internal and external
factors that have occurred and may affect the credit quality of the portfolio.
Securitizations and Variable Interest Entities
We securitize, transfer, and service consumer and commercial automotive loans, operating leases, and commercial loans. Securitization
transactions typically involve the use of VIEs and are accounted for either as sales or secured financings. We may retain economic interests in
the securitized and sold assets, which are generally retained in the form of senior or subordinated interests, interest- or principal-only strips,
cash reserve accounts, residual interests, and servicing rights.
In order to conclude whether or not a variable interest entity is required to be consolidated, careful consideration and judgment must be
given to our continuing involvement with the variable interest entity. In circumstances where we have both the power to direct the activities of
the entity that most significantly impact the entity's performance and the obligation to absorb losses or the right to receive benefits of the
entity that could be significant, we would conclude that we would consolidate the entity, which would also preclude us from recording an
accounting sale on the transaction. In the case of a consolidated variable interest entity, the accounting is consistent with a secured financing,
(i.e., we continue to carry the loans and we record the related securitized debt on our balance sheet).
In transactions where either one or both of the power or economic criteria mentioned above are not met, we then must determine whether
or not we achieve a sale for accounting purposes. In order to achieve a sale for accounting purposes, the assets being transferred must be
legally isolated, not be constrained by restrictions from further transfer, and be deemed to be beyond our control. If we were to fail any of the
three criteria for sale accounting, the accounting would be consistent with the preceding paragraph (i.e., a secured borrowing). Refer to Note
10 for discussion on VIEs.