--Company recorded a $170 million charge tied to settlements
with government agencies
--CEO: Advisers have told the company an IPO is still
feasible
--Company said CFPB has warned it about auto-dealer
practices
(Adds details on CFPB probe in paragraphs seven through
eleven.)
By Andrew R. Johnson
Ally Financial Inc.'s third-quarter profit dropped 76% as the
government-owned lender took additional steps to put behind it
costly mortgage litigation by reaching settlements with federal
regulators.
But the Detroit company warned of additional challenges as the
U.S. consumer-finance watchdog ramps up an investigation of
auto-lending practices.
The Detroit company said Tuesday its profit fell to $91 million,
from $384 million a year earlier. Core pretax income, which
reflects continuing operations and the exclusion of certain items,
was $269 million, down from $373 million a year earlier.
The smaller profit was driven by a $170 million charge related
to agreements Ally announced last month with the Federal Deposit
Insurance Corp. and Federal Housing Finance Agency, the regulator
for government-controlled mortgage-finance firms Freddie Mac (FMCC)
and Fannie Mae (FNMA), over mortgage-backed securities. Including
the charge, Ally has reserved $520 million for both matters.
The settlements are the latest move by Ally to get out from
under legal liabilities that have been a drag on its financial
performance and a roadblock to efforts to repay a government
bailout it received during the financial crisis.
"We continue to put mortgage in the rearview mirror," Chief
Executive Michael Carpenter said during a conference call with
analysts Tuesday.
However, Ally also disclosed in a regulatory filing Tuesday that
the Consumer Financial Protection Bureau has told the company it
hasn't fulfilled its obligation to prevent anti-discriminatory
practices by auto dealers.
In March, the CFPB told lenders they must do more to ensure that
car loans comply with laws barring discrimination against
minorities, women and other protected groups.
At issue are markups that dealers are allowed to make to
interest rates charged on loans to consumers. Critics have long
argued that dealers have generated larger markups for minority
consumers. Dealers, however, argue they do not discriminate and say
consumers can bargain with their dealer by bringing in competing
offers from other lenders.
Ally said it could face penalties and be forced to change
business practices as a result of the CFPB's actions.
A spokeswoman for the CFPB declined to comment.
With the majority of its mortgage-related problems off its
plate, Ally is focused on repaying the $17.2 billion bailout it
received through the U.S. Treasury Department's Troubled Asset
Relief Program.
Mr. Carpenter said Ally expects to receive an answer from the
Federal Reserve in the next few weeks on its request to repurchase
about $5.9 billion in preferred shares the Treasury owns in the
company.
That move is part of a plan Ally announced in August under which
it is also raising $1 billion through the sale of common stock to
about a dozen investors. The sale is intended to boost Ally's
common-equity levels, which the Fed deemed too low to survive a
hypothetical economic downturn under the regulator's "stress tests"
of big banks earlier this year.
The Treasury currently owns 74% of Ally, which will have repaid
$6.3 billion of its bailout as of this month. If the Fed approves
its plan, Ally will boost repayment to $12.3 billion, and lower the
Treasury's stake in the firm to about 65%.
The question then becomes how will the Treasury unload its
remaining stake in the firm.
Ally in 2011 had planned an initial public offering that would
allow the Treasury to reduce its ownership in the company. However,
it scrapped those plans as legal problems tied to its subprime
mortgage subsidiary, Residential Capital LLC, mounted, and the
financial markets faced turmoil.
ResCap, once one of the country's largest subprime lenders,
filed for Chapter 11 bankruptcy in May 2012 in a move intended to
help Ally shake itself free of liabilities tied to soured mortgage
bonds and foreclosure practices. In July, a U.S. Bankruptcy Judge
approved a $2.1 billion settlement Ally reached with ResCap and the
subsidiary's creditors that will help shield Ally from ResCap's
legal liabilities.
A bankruptcy judge will consider ResCap's Chapter 11 plan at a
Nov. 19 hearing.
How the Treasury chooses to deal with its remaining stake in
Ally is "their decision and not ours," Mr. Carpenter said. "The
timing and the exact method of exit is completely under their
control, not under our control."
A Treasury spokesman declined to comment.
Mr. Carpenter indicated an IPO could still be a top option for
the company.
"The market environment right now is very, very responsive, so
our advisers are telling us that an IPO is certainly very feasible
in the near term," he said. Doing a private-placement transaction
could also be an option for the Treasury, he added.
"I don't think Treasury wants to be a long-term shareholder so I
imagine...they won't wait for several years to make a decision," he
said.
Ally's goal is to focus its efforts on its auto-lending
business, which provides financing to auto dealers and car buyers,
as well as Ally Bank, its online depository unit that offers
checking and savings accounts and other banking products.
The company's auto-lending business posted income from
continuing operations of $339 million, versus $337 million a year
earlier and $382 million in the prior quarter.
But Ally, formerly the in-house financing arm for General Motors
Co., also faces headwinds in that business, including increased
competition from other banks, such as Wells Fargo & Co. (WFC)
and U.S. Bancorp (USB).
Key agreements with its two biggest partners--GM and Chrysler
Group LLC--are also phasing out. Ally has had contracts with both
auto makers under which it had the exclusive right to finance a
certain portion of their auto sales.
Ally's agreement with Chrysler ended in April, while its
agreement with GM expires at the end of this year.
Total auto-loan originations were $9.6 billion in the quarter,
unchanged from a year earlier but down from $9.8 billion in the
second quarter.
To diversify, the company has made efforts to increase financing
for leases and used-car purchases. Lease originations were $2.8
billion in the quarter, up from $2.6 billion a year earlier and
flat with the previous quarter. Used originations increased to $2.6
billion from $2.3 billion a year earlier and $2.5 billion in the
previous quarter.
--Alan Zibel and Ben Fox Rubin contributed to this article.
Write to Andrew R. Johnson at andrewr.johnson@wsj.com
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