Expect Ally Financial to come to the securitization market a little less often.
On Tuesday, the banking company announced that its government overseers are allowing the company to move a higher-risk slice of its flagship car-lending business into Ally Bank, the online deposit franchise that the company built in the wake of the financial crisis.
The regulatory thumbs-up allows Ally to fund a larger percentage of its loans with deposits, which cost the company nearly 3 percentage points less than other funding options.
Specifically, auto loans to borrowers with FICO scores of 620-660 will now be allowed into Ally Bank. By many definitions those are subprime loans. Ally executives on Tuesday did not identify the regulator that provided the necessary blessing, but Ally Bank's primary federal regulator is the Federal Deposit Insurance Corp.
The regulators' approval should raise the percentage of the firm's assets funded through its bank from 68% to closer to 75%, Chief Financial Officer Christopher Halmy said during the company's quarterly earnings call. "But obviously we are focused on eventually getting everything funded at the bank," he said.
Today, Ally loans to car buyers with FICO scores of less than 620 still cannot be funded with bank deposits. That is a borrower segment in which the company has been looking to expand, to partly compensate forGeneral Motors' decision to phase out Ally's role in the automaker's subsidized leasing business.
Loans to borrowers with FICO scores below 620 accounted for 13.7% of Ally's auto loan originations in the second quarter, up from 9.4% a year earlier, the company reported.
When Chief Executive Officer Jeffrey Brown was asked Tuesday about what it will take to get approval for using Ally Bank deposits to fund loans to those less creditworthy borrowers, his response was succinct, if not terribly encouraging in the short term.
"Patience," he said in response to an analyst's question.
"It's an ongoing dialogue that we have with our regulators to make sure they are comfortable with the quality of loans," Brown added. "You look at some of our large and regional bank competitors that book everything inside of the bank — we don't think there's any reason why, through time, we won't get there."
Many of the regulatory edicts that Ally must abide by are not public knowledge. But they clearly include restrictions on the exposure that the firm's $104 billion-asset, federally insured bank has to some risks.