Ally to Dealers: Send Us Every Loan Application You Have

Auto lender Ally Financial reports lower net income and fewer originations in the second quarter, despite record second-quarter credit application volume.

Nevertheless, the current crop of loans and leases are “some of our most profitable originations we’ve ever seen,” says CEO Michael Rhodes.

That is, the margin on recent originations is high, even though income is down overall. Ally net income attributable to common shareholders was $266 million in the second quarter, down 11.6% vs. a year ago.

The takeaway for dealership F&I managers is that while, yes, Ally is primarily interested in acquiring the highest-quality, lowest-risk loans and leases, they want dealers to send them 100% of their finance applications,. That includes applications that don’t fit Ally’s typical prime-risk credit profile and are passed by Ally to partner lenders for a fee.

“We aim to provide all-in value to our dealer partners,” Rhodes says in an earnings conference, his first as Ally CEO.

Ally says that in the past decade, it has increased dealership relationships to 22,000 from 15,600; application volume to more than 14 million annually from 9.1 million; automated 74% of its approvals from 30%; and raised used-vehicle originations to 65% of the total, from 29%.

In 2022, Ally tightened its lending standards. That has resulted in a greater mix of newly originated loans and leases in its highest, least-risky credit tier, which Ally refers to as its “S” tier.

“Talking about Ally specifically…we’ve been tightening our underwriting consistently over…more than the past year,” Russ Hutchinson chief financial officer, says. 

“You see it most clearly in that percentage of S-tier,” Hutchinson says. In the second quarter, 44% of the lender’s retail auto originations were in Ally’s highest credit-quality tier, up from 40% a year earlier. In the second quarter of 2022, it was just 24%.

That’s been a positive move to reduce charge-offs on the most recent originations, but volume is off. Ally’s U.S. consumer auto origination volume for the second quarter was $9.8 billion, down 5.8% from $10.4 billion a year earlier.

However, application volume reached record levels. Ally recorded 3.7 million credit decisions in the second quarter, vs. 3.5 million year-ago.

Overall, Ally net charge-offs for bad loans were $378 million in the second quarter, up 36.5% from $277 million a year ago. Originations from 2022 were the biggest contributor, Ally says. That single vintage accounts for 42% of retail auto losses for the quarter, the company says.

Hutchinson says Ally believes losses from the 2022 vintage probably peaked in the second quarter. Those originations date back to the peak of high transaction prices due to new vehicle shortages and thinly stretched household budgets.

Overall, Ally expects net charge-offs to decline in the second half of 2024. That’s as losses from 2022 originations decline and as originations since 2022, under the tighter approval standards, account for a growing share of the loan and lease portfolio.