Ally Bank 2014 Annual Report Download - page 128

Table of Contents
Notes to Consolidated Financial Statements
Ally Financial Inc. • Form 10-K
116
to enter into derivatives or other yield maintenance contracts to hedge or mitigate certain risks related to the financial assets or beneficial
interests of the entity. A servicer, who is generally us, is appointed pursuant to the underlying legal documents to service the assets the
securitization entity holds and the beneficial interests it issues. Servicing functions include, but are not limited to, general collection activity
on current and noncurrent accounts, loss mitigation efforts including repossession and sale of collateral, as well as advancing principal and
interest payments before collecting them from individual borrowers. Our servicing responsibilities, which constitute continued involvement in
the transferred financial assets, consist of primary servicing (i.e., servicing the underlying transferred financial assets) and master servicing
(i.e., servicing the beneficial interests that result from the securitization transactions).
Cash flows from the assets initially transferred into the securitization entity represent the sole source for payment of distributions on the
beneficial interests issued by the securitization entity and for payments to the parties that perform services for the securitization entity, such as
the servicer or the trustee. In certain securitization transactions, a liquidity facility may exist to provide temporary liquidity to the entity. The
liquidity provider generally is reimbursed prior to other parties in subsequent distribution periods.
We typically hold retained beneficial interests in our securitizations, which may represent a form of significant continuing economic
interest. These retained interests include, but are not limited to, senior or subordinate ABS and residuals; and other residual interests. Certain
of these retained interests provide credit enhancement to the trust as they may absorb credit losses or other cash shortfalls. Additionally, the
securitization agreements may require cash flows to be directed away from certain of our retained interests due to specific over-
collateralization requirements, which may or may not be performance-driven.
We generally hold certain conditional repurchase options specific to securitizations that allow us to repurchase assets from the
securitization entity. The majority of the securitizations provide us, as servicer, with a call option that allows us to repurchase the remaining
transferred financial assets or redeem outstanding beneficial interests at our discretion once the asset pool reaches a predefined level, which
represents the point where servicing becomes burdensome (a clean-up call option). The repurchase price is typically the par amount of the
loans plus accrued interest. Additionally, we may hold other conditional repurchase options that allow us to repurchase a transferred financial
asset if certain events outside our control occur. The typical conditional repurchase option is a delinquent loan repurchase option that gives us
the option to purchase the loan or contract if it exceeds a certain prespecified delinquency level. We generally have discretion regarding when
or if we will exercise these options, but we would do so only when it is in our best interest.
Other than our customary representation and warranty provisions, these securitizations are nonrecourse to us, thereby transferring the
risk of future credit losses to the extent the beneficial interests in the securitization entities are held by third parties. Representation and
warranty provisions generally require us to repurchase loans or indemnify the investor or other party for incurred losses to the extent it is
determined that the loans were ineligible or were otherwise defective at the time of sale. We did not provide any noncontractual financial
support to any of these entities during 2014 or 2013.
Consolidation of Variable Interest Entities
The determination of whether the assets and liabilities of the VIEs are consolidated on our balance sheet (also referred to as on-balance
sheet) or not consolidated on our balance sheet (also referred to as off-balance sheet) depends on the terms of the related transaction and our
continuing involvement (if any) with the VIE. We are deemed the primary beneficiary and therefore consolidate VIEs for which we have both
(a) the power, through voting rights or similar rights, to direct the activities that most significantly impact the VIE's economic performance,
and (b) a variable interest (or variable interests) that (i) obligates us to absorb losses that could potentially be significant to the VIE; and/or
(ii) provides us the right to receive residual returns of the VIE that could potentially be significant to the VIE. We determine whether we hold
a significant variable interest in a VIE based on a consideration of both qualitative and quantitative factors regarding the nature, size, and
form of our involvement with the VIE. We assess whether we are the primary beneficiary of a VIE on an ongoing basis.
We are generally determined to be the primary beneficiary in VIEs established for our securitization activities when we have a
controlling financial interest in the VIE, primarily due to our servicing activities, and we hold a beneficial interest in the VIE that could be
potentially significant. The consolidated VIEs included in the Consolidated Balance Sheet represent separate entities with which we are
involved. The third-party investors in the obligations of consolidated VIEs have legal recourse only to the assets of the VIEs and do not have
such recourse to us, except for the customary representation and warranty provisions or when we are the counterparty to certain derivative
transactions involving the VIE. In addition, the cash flows from the assets are restricted only to pay such liabilities. Thus, our economic
exposure to loss from outstanding third-party financing related to consolidated VIEs is limited to the carrying value of the consolidated VIE
assets. Generally, all assets of consolidated VIEs, presented below based upon the legal transfer of the underlying assets in order to reflect
legal ownership, are restricted for the benefit of the beneficial interest holders.
The nature, purpose, and activities of nonconsolidated securitization entities are similar to those of our consolidated securitization
entities with the primary difference being the nature and extent of our continuing involvement. We are generally not determined to be the
primary beneficiary in VIEs established for our securitization activities when we either do not hold potentially significant variable interests or
do not provide servicing or asset management functions for the financial assets held by the securitization entity. Additionally, to qualify for
off-balance sheet treatment, transfers of financial assets must meet appropriate sale accounting conditions. For nonconsolidated securitization
entities, the transferred financial assets are removed from our balance sheet provided the conditions for sale accounting are met. The financial
assets obtained from the securitization are primarily reported as cash, or retained interests (if applicable). Liabilities incurred as part of these
securitization transactions, such as representation and warranty provisions, are recorded at fair value at the time of sale and are reported as
accrued expenses and other liabilities on our Consolidated Balance Sheet. Upon the sale of the loans, we recognize a gain or loss on sale for
the difference between the assets recognized, the assets derecognized, and the liabilities recognized as part of the transaction.