Securitizations and Variable Interest Entities

Overview

We securitize, transfer, and service consumer and commercial automotive loans, and operating leases. We often securitize these loans and notes secured by operating leases (collectively referred to as financial assets) through the use of special-purpose entities (SPEs). A SPE is a legal entity that is designed to fulfill a specified limited need of the sponsor. Our principal use of SPEs is to obtain liquidity by securitizing certain of our financial assets and operating lease assets which may, or may not, be included on our Consolidated Balance Sheet.

The transaction-specific SPEs involved in our securitization transactions are often considered VIEs. VIEs are entities that have either a total equity investment at risk that is insufficient to permit the entity to finance its activities without additional subordinated financial support or whose equity investors at risk lack the ability to control the entity’s activities.

Securitizations

In executing a securitization transaction, we typically sell pools of financial assets to a wholly-owned, bankruptcy-remote SPE, which then transfers the financial assets to a separate, transaction-specific SPE for cash, and typically, other retained interests. The securitization entity is funded through the issuance of beneficial interests, which could take the form of notes or residual interests, and can be sold to investors and/or retained by us. We typically hold retained beneficial interests in our securitizations including, but not limited to, retained notes, certificated residual interests, as well as certain noncertificated interests retained from the sale of automotive finance receivables. If sold, the beneficial interests only entitle the investors to specified cash flows generated from the underlying securitized assets. If retained, the interests provide credit enhancement to the SPE as they may absorb credit losses or other cash shortfalls and may represent a form of significant continuing economic interests. In addition to providing a source of liquidity and cost-efficient funding, securitizing these financial assets also reduces our credit exposure to the borrowers beyond any economic interest we may retain.

The SPEs are limited to specific activities by their respective legal documents, but are generally allowed to acquire the financial assets, to issue beneficial interests to investors to fund the acquisition of the financial assets, and 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 SPE 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 preparing and furnishing statements summarizing the asset and beneficial interest performance. These servicing responsibilities constitute continued involvement in the transferred financial assets.

Cash flows from the securitized financial assets represent the sole source for payment of distributions on the beneficial interests issued by the SPE and for payments to the parties that perform services for the SPE, such as the servicer or the trustee.

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 discounted securitization balance of the assets plus accrued interest when applicable. 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.

On December 24, 2016, the risk retention rules under the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) of 2010 became effective, requiring us to retain at least five percent of the credit risk of the assets underlying asset-backed securitizations.

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 assets or indemnify the investor or other party for incurred losses to the extent it is determined that the assets were ineligible or were otherwise defective at the time of sale. We did not provide any non-contractual financial support to any of these entities during 2017, 2016, or 2015.

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 and 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 our beneficial interest in the VIE that could be potentially significant. The consolidated VIEs included on 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. 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. For additional information regarding the company’s significant accounting policies for consolidated VIEs, refer to the Securitizations and Variable Interest Entities section of Note 1.

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. 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.

The pretax gain on sales of financial assets into non-consolidated VIEs was $2 million for the year ended December 31, 2017. There were no pretax gains or losses for the year ended December 31, 2016, while there was a pretax loss of $3 million for the year ended December 31, 2015. For additional information regarding the company’s significant accounting policies for non-consolidated VIEs, refer to the Securitizations and Variable Interest Entities section of Note 1.

We provide long-term guarantee contracts to investors in certain nonconsolidated affordable housing entities and have extended a line of credit to provide liquidity. Since we do not have control over the entities or the power to make decisions, we do not consolidate the entities and our involvement is limited to the guarantee and the line of credit.

We have involvement with various other nonconsolidated equity investments, including affordable housing entities and venture capital funds and loan funds. We do not consolidate these entities and our involvement is limited to our outstanding investment, additional capital committed to these funds plus any previously recognized low income housing tax credits that are subject to recapture.

The following table presents our involvement in consolidated and nonconsolidated VIEs in which we hold variable interests. For additional detail related to the assets and liabilities of consolidated variable interest entities refer to the Consolidated Balance Sheet.



December 31, ($ in millions)	Carrying value of total assets			Carrying value of total liabilities			Assets sold to nonconsolidated VIEs (a)		Maximum exposure to loss in nonconsolidated VIEs
2017
On-balance sheet variable interest entities
Consumer automotive	$	17,597	(b)	$	7,677	(c)
Commercial automotive	12,550			2,558
Off-balance sheet variable interest entities
Consumer automotive	37		(d)	—			$	1,964	$	2,001	(e)
Commercial other	592		(f)	248		(g)	—		790		(h)
Total	$	30,776		$	10,483		$	1,964	$	2,791
2016
On-balance sheet variable interest entities
Consumer automotive	$	20,869	(b)	$	8,557	(c)
Commercial automotive	16,278			4,764
Off-balance sheet variable interest entities
Consumer automotive	24		(f)	—			$	2,899	$	2,923	(e)
Commercial other	460		(f)	169		(g)	—		651		(h)
Total	$	37,631		$	13,490		$	2,899	$	3,574


(a)	Asset values represent the current unpaid principal balance of outstanding consumer finance receivables and loans within the VIEs.


(b)	Includes $8.5 billion and $9.6 billion of assets that are not encumbered by VIE beneficial interests held by third parties at December 31, 2017, and December 31, 2016, respectively. Ally or consolidated affiliates hold the interests in these assets.


(c)	Includes $29 million and $50 million of liabilities that are not obligations to third-party beneficial interest holders at December 31, 2017, and December 31, 2016, respectively.

(d)

Represents retained notes and certificated residual interests, of which $36 million is classified as held-to-maturity securities and $1 million is classified as other assets at December 31, 2017. These assets represent our compliance with the risk retention rules under the Dodd-Frank Act, requiring us to retain at least five percent of the credit risk of the assets underlying asset-backed securitizations, which became effective on December 24, 2016.

(e)

Maximum exposure to loss represents the current unpaid principal balance of outstanding loans, retained notes, certificated residual interests, as well as certain noncertificated interests retained from the sale of automotive finance receivables. This measure is based on the very unlikely event that all of our sold loans have defects that would trigger a representation and warranty provision and the underlying collateral supporting the loans becomes worthless. This required disclosure is not an indication of our expected loss.


(f)	Amounts are classified as other assets.


(g)	Amounts are classified as accrued expenses and other liabilities.

(h)

For certain nonconsolidated affordable housing entities, maximum exposure to loss represents the yield we guaranteed investors through long-term guarantee contracts. The amount disclosed is based on the unlikely event that the underlying properties cease generating yield to investors and the yield delivered to investors in the form of low income tax housing credits is recaptured. For nonconsolidated equity investments, maximum exposure to loss represents our outstanding investment, additional committed capital, and low income housing tax credits subject to recapture. The amount disclosed is based on the unlikely event that our committed capital is funded, our investments become worthless, and the tax credits previously delivered to us are recaptured. This required disclosure is not an indication of our expected loss.

On-balance Sheet Variable Interest Entities

The consolidated VIEs included on 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. 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 significantly less than the carrying value of the consolidated VIE assets. 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.



December 31, ($ in millions)	2017			2016
Assets
Finance receivables and loans, net
Consumer	$	8,186		$	8,929
Commercial	12,437			15,701
Allowance for loan losses	(136		)	(173		)
Total finance receivables and loans, net	20,487			24,457
Investment in operating leases, net	444			1,745
Other assets	689			1,390
Total assets	$	21,620		$	27,592
Liabilities
Long-term debt	$	10,197		$	13,259
Accrued expenses and other liabilities	9			12
Total liabilities	$	10,206		$	13,271

Cash Flows with Off-balance Sheet Securitization Entities

The following table summarizes cash flows received and paid related to securitization entities and asset-backed financings where the transfer is accounted for as a sale and we have a continuing involvement with the transferred consumer automotive assets (e.g., servicing) that were outstanding during the years ended December 31, 2017, 2016, and 2015. Additionally, this table contains information regarding cash flows received from and paid to nonconsolidated securitization entities that existed during each period.



Year ended December 31, ($ in millions)	2017			2016		2015
Cash proceeds from transfers completed during the period	$	1,187		$	1,715	$	1,551
Cash disbursements for repurchases during the period (a)	(491		)	—		—
Servicing fees	31			35		28
Cash flows received on retained interests in securitization entities	21			—		—
Other cash flows	4			8		—


(a)	During the second quarter of 2017, we elected to not renew a retail automotive credit conduit facility and also purchased the related retail automotive loans and settled associated retained interests.

Delinquencies and Net Credit Losses

The following table represents off-balance sheet securitizations and whole-loan sales where we have continuing involvement. The table presents quantitative information about delinquencies and net credit losses.



	Total amount				Amount 60 days or more past due				Net credit losses
December 31, ($ in millions)	2017		2016		2017		2016		2017		2016
Off-balance sheet securitization entities
Consumer automotive	$	1,964	$	2,392	$	16	$	13	$	13	$	8
Total off-balance sheet securitization entities	1,964		2,392		16		13		13		8
Whole-loan sales (a)	1,399		3,164		4		6		3		3
Total	$	3,363	$	5,556	$	20	$	19	$	16	$	11


(a)	Whole-loan sales are not part of a securitization transaction, but represent consumer automotive pools of loans sold to third-party investors.