Ally Bank 2014 Annual Report Download - page 110

Table of Contents
Notes to Consolidated Financial Statements
Ally Financial Inc. • Form 10-K
98
Gains or losses on off-balance sheet securitizations take into consideration the fair value of the retained interests including the value of
certain servicing assets or liabilities, if any, which are initially recorded at fair value at the date of sale. The estimate of the fair value of the
retained interests and servicing requires us to exercise significant judgment about the timing and amount of future cash flows from the
interests. Refer to Note 25 for a discussion of fair value estimates.
Gains or losses on off-balance sheet securitizations and sales are reported in gain (loss) on mortgage and automotive loans, net, in our
Consolidated Statement of Income. Declines in the fair value of retained interests below the carrying amount are reflected in other
comprehensive income, or as other gain on investments, net, in our Consolidated Statement of Income if such declines are determined to be
other-than-temporary. Retained interests, as well as any purchased securities, are generally included in available-for-sale investment
securities, or other assets. Securities that are noncertificated and cash reserve accounts related to securitizations are included in other assets on
our Consolidated Balance Sheet.
We retain servicing responsibilities for all of our consumer and commercial automotive loan, operating lease, and commercial loan
securitizations. We may receive servicing fees based on the securitized loan balances and certain ancillary fees, all of which are reported in
servicing fees in the Consolidated Statement of Income.
Whether on- or off-balance sheet, the investors in the securitization trusts generally have no recourse to our assets outside of customary
market representation and warranty repurchase provisions.
Mortgage Servicing Rights
We capitalized the value expected to be realized from performing specified mortgage servicing activities for others as mortgage servicing
rights (MSRs) when the expected future cash flows from servicing were projected to be more than adequate compensation for such activities.
These capitalized servicing rights were purchased or retained upon sale or securitization of mortgage loans. MSRs were not recorded on
securitizations accounted for as secured financings.
We measured all mortgage servicing assets and liabilities at fair value. We defined our servicing rights based on both the availability of
market inputs and the manner in which we managed the risks of our servicing assets and liabilities. We leveraged all available relevant market
data to determine the fair value of our recognized servicing assets and liabilities. We sold our remaining MSRs during the year ended
December 31, 2013. Refer to Note 11 for further details.
Repossessed and Foreclosed Assets
Assets are classified as repossessed and foreclosed and included in other assets when physical possession of the collateral is taken
regardless of whether foreclosure proceedings have taken place. Repossessed and foreclosed assets are carried at the lower of the outstanding
balance at the time of repossession or foreclosure or the fair value of the asset less estimated costs to sell. Losses on the revaluation of
repossessed and foreclosed assets are charged to the allowance for loan losses at the time of repossession. Declines in value after repossession
are charged to other operating expenses for loans and depreciation expense for operating lease assets as incurred.
Investment in Operating Leases
Investment in operating leases represents the automobiles that are underlying the automotive lease contracts and is reported at cost, less
accumulated depreciation and net of impairment charges and origination fees or costs. Depreciation of vehicles is generally provided on a
straight-line basis to an estimated residual value over the lease term. Manufacturer support payments that we receive are treated as a reduction
to the cost-basis in the underlying lease asset, which has the effect of reducing depreciation expense over the life of the contract. We
periodically evaluate our depreciation rate for leased vehicles based on projected residual values and adjust depreciation expense over the
remaining life of the lease if deemed appropriate. Income from operating lease assets that includes lease origination fees, net of lease
origination costs, is recognized as operating lease revenue on a straight-line basis over the scheduled lease term.
We have significant investments in the residual values of the assets in our operating lease portfolio. The residual values represent an
estimate of the values of the assets at the end of the lease contracts. At contract inception, we determine the projected residual value based on
an internal evaluation of the expected future value. This evaluation is based on a proprietary model, which includes variables such as age,
expected mileage, seasonality, segment factors, vehicle type, economic indicators, production cycle, automotive manufacturer incentives, and
shifts in used vehicle supply. This internally-generated data is compared against third party, independent data for reasonableness and analysis.
Realization of the residual values is dependent on our future ability to market the vehicles under the prevailing market conditions. Over the
life of the lease, we evaluate the adequacy of our estimate of the residual value and may make adjustments to the depreciation rates to the
extent the expected value of the vehicle at lease termination changes. In addition to estimating the residual value at lease termination, we also
evaluate the current value of the operating lease asset and test for impairment to the extent necessary based on market considerations and
portfolio characteristics. Impairment is determined to exist if the undiscounted expected future cash flows are lower than the carrying value of
the asset. No impairment was recognized in 2014, 2013, or 2012. If our operating lease assets are considered to be impaired, the impairment is
measured as the amount by which the carrying amount of the assets exceeds the fair value as estimated by discounted cash flows. The accrual
of revenue on operating leases is generally discontinued at the time an account is determined to be uncollectible, at the earliest of time of
repossession, within 60 days of bankruptcy notification and greater than 60 days past due, or greater than 120 days past due.
When a lease vehicle is returned to us, the asset is reclassified from investment in operating leases, net, to other assets and recorded at
the lower-of-cost or estimated fair value, less costs to sell, on our Consolidated Balance Sheet.