Ally Bank 2014 Annual Report Download - page 82

Table of Contents
Management's Discussion and Analysis
Ally Financial Inc. • Form 10-K
70
Off-balance Sheet Arrangements
Refer to Note 10 to the Consolidated Financial Statements.
Securitization
We are involved in several types of securitization and financing transactions that allow us to diversify funding sources by converting
assets into cash earlier than what would have occurred in the normal course of business. Securitized assets include consumer and commercial
automotive loans, operating leases, and commercial loans. Information regarding our securitization activities is further described in Note 10 to
the Consolidated Financial Statements.
As part of these securitization activities, we sell assets to various securitization entities. In turn, the securitization entities establish
separate trusts to which they transfer the assets in exchange for the proceeds from the sale of securities issued by the trust. The trusts'
activities are generally limited to acquiring the assets, issuing securities, making payments on the securities, and periodically reporting to the
investors.
These securitization entities are separate legal entities that assume the risks and rewards of ownership of the receivables they hold. The
assets of the securitization entities are not available to satisfy our claims or those of our creditors. In addition, the trusts do not invest in our
equity or in the equity of any of our affiliates. Our economic exposure related to the securitization trusts is generally limited to cash reserves,
retained interests, and customary representation and warranty provisions described in Note 10 to the Consolidated Financial Statements. The
trusts have a limited life and generally terminate upon final distribution of amounts owed to investors or upon exercise of a cleanup call
option by us, as servicer, when the costs of servicing the contracts becomes burdensome.
Certain of these securitization transactions meet the criteria to be accounted for as off-balance sheet arrangements if we either do not
hold a potentially significant economic interest or do not provide servicing or asset management functions for the financial assets held by the
securitization entity. Certain of our securitization transactions do not meet the required criteria to be accounted for as off-balance sheet
arrangements; therefore, they are accounted for as secured financings. As secured financings, the underlying automotive finance retail
contracts, wholesale loans, automotive leases, or commercial loans remain on our Consolidated Balance Sheet with the corresponding
obligation (consisting of the beneficial interests issued by the securitization entity) reflected as debt. We recognize interest income on the
finance receivables, automotive leases and loans, and interest expense on the beneficial interests issued by the securitization entity; and we
provide for loan losses on the finance receivables and loans as incurred or adjust to fair value for fair value-elected loans. At December 31,
2014 and 2013, $69.2 billion and $72.0 billion of our total assets, respectively, were related to secured financings. Refer to Note 16 to the
Consolidated Financial Statements for further discussion.
As part of our securitization activities, we typically agree to service the transferred assets for a fee, and we may also earn other related
fees. The amount of the fees earned is disclosed in Note 11 to the Consolidated Financial Statements. We may also retain a portion of senior
and subordinated interests issued by the trusts. Subordinate interests typically provide credit support to the more highly rated senior interest in
a securitization transaction and may be subject to all or a portion of the first loss position related to the sold assets. For off-balance sheet
arrangements, these interests are reported as investment securities or other assets on our Consolidated Balance Sheet and are disclosed in Note
6 and Note 13 to the Consolidated Financial Statements. For secured financings, retained interests are not recognized as a separate asset on
our Consolidated Balance Sheet.
In October 2014, U.S. regulatory agencies adopted risk retention rules that require sponsors of asset-backed securitizations, such as Ally,
to retain not less than five percent of the credit risk of the assets collateralizing asset-backed securitizations. Ally Bank has complied with the
FDIC’s Safe Harbor Rule requiring it to retain five percent risk retention in retail automotive loan and lease securitizations. Ally Financial
intends to comply with the new risk retention rules for automotive asset-backed securitizations, which become effective on December 24,
2016.
Guarantees
Guarantees are defined as contracts or indemnification agreements that contingently require us to make payments to third parties based
on changes in an underlying agreement that is related to a guaranteed party. Our guarantees include standby letters of credit and certain
contract provisions associated with securitizations and sales. Refer to Note 29 to the Consolidated Financial Statements for more information
regarding our outstanding guarantees to third parties.