A fly on the wall – Ally discusses new repossession strategy

“around repossession timing, which is essentially just giving our customers a little bit more time to pay.”- Jenn LaClair — Chief Financial Officer

Has anyone seen a reduction in assignment volume or recovery ratios for Ally Financial repossession assignments? If so, there might be a good reason, that unless you could be a fly on the wall in one of their executive strategic meetings, you would probably never know. But a reason was just disclosed in an investor meeting that confirmed their changes in repossession assignment strategies.

On July 19^th, Ally Financial held their quarterly call report meeting for investors. Most of it is pretty mundane and deals with everything from GAAP and dealer engagement to pledged equal media spend across both men’s and women’s sports. But two mention worthy comments eluded to changes to their repossession strategies. Changes that may have been effecting recovery ratios over the past few months and could affect recovery ratios and volume for months to come.

Last week, published on The Motley Fool’s transcripts blog, was Ally Financial’s Earnings Call Transcript for the period ending June 30, 2022. This meeting is a quarterly investor meeting where they executive staff of Ally discuss with investors current trends and data statistics relative to the ongoing business and earnings of Ally. While topics like repossession activity are rare in such meetings, an increase in delinquency exposed a change in strategies.

In the course of discussing a return to normalcy of delinquency rates to the 2019 level, they explained an increase in delinquency in their 60-day (3 payments past due) tranche as being attributed to “the impact of strategic repossession timing changes that have improved flow to loss rates.”

Read the Entire Transcript Here!

ALLY earnings call for the period ending June 30, 2022

Meeting Date and Time – Jul 19, 2022, 9:00 am EST

“In the bottom right, 30-day delinquencies increased due to typical seasonality and a gradual normalization of consumer trends but remained below 2019. 60-day delinquencies are equal to 2019. However, they are elevated due to the impact of strategic repossession timing changes that have improved flow to loss rates. We expect gradual increase in delinquencies as consumer trends normalize post pandemic, and we are closely monitoring additional inflationary pressures.”

“We have continued to invest in talent and technology to enhance our servicing and collection capabilities and remain confident in our ability to effectively manage credit in a variety of environments. On Slide 13, consolidated coverage increased 5 basis points to 2.68%, reflecting growth in our retail auto, unsecured consumer lending and corporate finance portfolios. The total reserve increased to $3.5 billion or $900 million higher than CECL day 1 level. Retail auto coverage of 3.51% increased 2 basis points and remains 17 basis points higher than CECL day 1.”

Jeff Brown — Chief Executive Officer

Later in the meeting, Betsy Graseck, an analyst with Morgan Stanley, requested some follow up to this statement;

“And then could you just give us a little more color on the comments that you had around the delinquencies? When you were on Page 12, I think you mentioned that you have taken some actions or recognized some parts of the portfolio differently maybe than you had in prior quarters. So maybe you could give us a sense as to what drove that delinquencies up? And if you could speak to what your expectation is as you look out over the next is 6 to 12 months, how you see that trajecting either seasonally or structurally because the financial slide was removed, the financial outlook slide was removed this deck and there’s been some questions on how you’re thinking about the delinquencies and the NCOs there? Thanks.”

Responding, Jenn LaClair, Ally’s Chief Financial Officer, replied;

“So first on the delinquencies and settlement to the guide. So on delinquencies look, you’re seeing some normalization flow through both the 30-day and the 60-day, it’s all within our expectations. I did mention in the 60-day, look, we are always investing in new strategies and new approaches to help our customers, keep our customers in their cars longer.”

“So I made note of one of those around repossession timing, which is essentially just giving our customers a little bit more time to pay. We have had tremendous success with that approach, and that just keeps that 60-day number up temporarily as we are rolling through this new policy. But it’s normalization of the portfolio as expected. There is some seasonality in there from a delinquency perspective and then some policy changes that are driving that growth.”

Policy Changes

Policy changes could mean a lot of things. Aside from the kinder and gentler approach preceding repossession assignment, it’ll be interesting to see what those policy changes are. I suspect that they, as well as many lenders, are gearing up for another round of loan modifications like during the pandemic hoping to stave off large swells of repossessions during Q4 which are likely.

Avoiding an actual surge in repossession activity is very important for the “Too Big To Fail” lenders. The public image of being heavy handed during a recession or any major natural or financial disaster, is not a good one. Furthermore, it raises the unwanted attention of the CFPB, which is never desired.

As for their CFO’s comment relating to their explanation for an increase in delinquency; “and that just keeps that 60-day number up temporarily as we are rolling through this new policy.” Temporarily? That sounds like veiled wishful thinking to me. Rings of the Fed’s Powell and Yellen’s 2021 statements of inflation being merely transitory.

Strategy

Of interest in the first statement, was CEO, Jeff Brown’s reporting of the impact of conversion to CECL (Current Expected Credit Losses) on their reserves which climbed to $3.5 billion or $900 million higher than CECL day 1 level. CECL is the new accounting standard methodology for lenders issued by The Financial Accounting Standards Board (FASB) that goes into effect on December 15, 2022, but is being adopted early by many lenders.

This more stringent reserve methodology on expected losses, as evidenced above, increases the amount of funds that must be “reserved” for future losses and diminishes profits.

Now, I by no means profess to know more than these fine people, but considering that these delinquent borrowers, who are already down 3 payments going on 4, are getting more time, it would seem to me that the probability of them bringing these accounts current would diminish by the day.

As a rule of thumb, the longer you wait to repossess, the lower the recovery ratio. Likewise, the worse the condition and the higher the mileage. Hence, lower recovery to the allowance for loan loss (ALL) already taken by day 60 when they were reserved for as impaired assets.

So what is Ally doing?

Of course, there is the other possibility that Ally has chosen to quit repossessing and let the portfolio age into charge off through the replevin strategy as foretold by Scott Jackson just two weeks ago.

It’s also quite possible that they’re simply sending “Final Warning Letters” before assigning them out for repossession. I suppose that’s better than what Chase and Capital One have allegedly been doing by sending our warning letters at the same time as assigning repossessions to their agents/forwarders.

Time will tell, but it is an interesting peek under the hood at Ally and proof that the major banks are experimenting with new repossession strategies to soften the blow for the eminent actual surge in delinquency.

So, like drought ravaged farmers doing rain dances at the alter of economic woe, the repossession industry prays for increases in repossession assignment for survival. Volume that may come, but like during the pandemic, will likely again be softened by a Santa Claus like benevolence of lenders handing out deferments and loan modifications like candy canes.

Remember, lenders are in the lending business, not the repossession business. While the lenders are reliant on the repossession industry, it’s a relationship they like to keep at a distance to avoid reputational damage. And while repossessions are inevitable to occur, rest assured that they will do everything they can to avoid them. It’s just business.

Source: The Motley Fool