UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

 

Commission file number: 1-3754

 

GMAC LLC

(Exact name of registrant as specified in its charter)

 

 

200 Renaissance Center

P.O. Box 200 Detroit, Michigan

48265-2000

(Address of principal executive offices)

(Zip Code)

 

(313) 556-5000

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act (all on the New York Stock Exchange):

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [X] No [ ]

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X]

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the Act).

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [ ] No [X]

 

Aggregate market value of voting and non-voting common equity held by non-affiliates: Not applicable, as GMAC LLC has no publicly traded equity securities.

 

Documents incorporated by reference. None.

 

 

 

INDEX

GMAC LLC • Form 10-K

 

 

 

Explanatory Note

GMAC LLC • Form 10-K

 

 

 

GMAC LLC (referred to herein as GMAC, we, our or us) is restating our historical consolidated financial statements for the years ended December 31, 2005 and 2004, the Consolidated Statements of Income, Changes in Equity and Cash Flows for the year ended December 31, 2004, and other selected financial data as presented in Item 6 as of December 31, 2004 and for the years ended December 31, 2003 and 2002 and certain quarterly financial information included in Item 8. As discussed in our Form 8-K filed on February 16, 2007, this restatement relates to the accounting treatment for certain hedging transactions under Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended and interpreted (SFAS 133). We are also correcting certain other out-of-period errors, which were deemed immaterial, individually and in the aggregate, in the periods in which they were originally recorded and identified. Because of this SFAS 133 restatement, we are correcting these amounts to record them in the proper period.

 

The following table sets forth a reconciliation of previously reported and restated net income for the periods shown. The restatement resulted in a $10 million decrease to retained earnings at January 1, 2002 from $10,815 million to $10,805 million.

 

 

For additional information relating to the effect of the restatement, refer to the following items:

 

 

In light of the restatement, readers should not rely on our previously filed financial statements and other financial information for the periods after the January 1, 2001 adoption of SFAS 133.

GMAC LLC • Form 10-K

 

 

 

General

GMAC was founded in 1919 as a wholly owned subsidiary of General Motors Corporation (General Motors or GM). On November 30, 2006, GM sold a 51% interest in us for approximately $7.4 billion (the Sale Transactions) to FIM Holdings LLC (FIM Holdings). FIM Holdings is an investment consortium led by Cerberus FIM Investors, LLC (the sole managing member), and including Citigroup Inc., Aozora Bank Ltd., and a subsidiary of The PNC Financial Services Group, Inc.

 

Our Business

We are a leading independent global diversified financial services Company with approximately $287 billion of assets and operations in approximately 40 countries. We currently operate in the following lines of business — Automotive Finance, Mortgage (Residential Capital LLC or ResCap) and Insurance. The following table reflects the primary products and services offered by each of our lines of businesses.

 

 

 

Global Automotive Finance

We are one of the world’s largest automotive financing companies with operations in approximately 40 countries. Our automotive finance business extends automotive financing services primarily to franchised GM dealers and their customers through two reporting segments — North American Automotive Finance Operations and our International Automotive Finance Operations.

 

Through our Automotive Financing operations, we:

 

 

GMAC LLC • Form 10-K

 

 

ResCap

We are a leading real estate finance company focused primarily on the residential real estate market. Our business activities include the origination, purchase, servicing, sale and securitization of residential mortgage loans.

 

Through our ResCap operations, we:

 

 

Insurance

We offer automobile service contracts, personal automobile insurance coverages (ranging from preferred to non-standard risk), selected commercial insurance coverages and other consumer products as well as provide certain reinsurance coverages.

 

Through our Insurance operations, we:

 

 

Certain Regulatory Matters

We are subject to various regulatory, financial and other requirements of the jurisdictions in which our businesses operate. Following is a description of some of the primary regulations that affect our business.

 

International Banks and Finance Companies

Certain of our foreign subsidiaries operate in local markets as either banks or regulated finance companies and are subject to regulatory restrictions, including Financial Services Authority (FSA) requirements. These regulatory restrictions, among other things, require that our subsidiaries meet certain minimum capital requirements and may restrict dividend distributions and ownership of certain assets. As of December 31, 2006, compliance with these various regulations has not had a material adverse effect on our consolidated financial position, results of operations or cash flows. Total assets in regulated international banks and finance companies approximated $15.5 billion and $12.9 billion as of December 31, 2006 and 2005, respectively.

 

Depository Institutions

GMAC Bank, which provides services to both the Automotive Finance and ResCap operations, is licensed as an industrial bank pursuant to the laws of Utah and its deposits are insured by the Federal Deposit Insurance Corporation (FDIC). GMAC is required to file periodic reports with the FDIC concerning its financial condition. Assets in GMAC Bank approximated $20.2 billion at December 31, 2006. As of December 31, 2005, certain depository institution assets were held at a Federal savings bank that was wholly-owned by ResCap. Effective November 22, 2006, substantially all of these federal savings bank assets and liabilities were transferred at book value to GMAC Bank. Total assets of these institutions at December 31, 2005, approximated $16.9 billion.

 

Furthermore, our Automotive Finance and ResCap operations have subsidiaries that are required to maintain regulatory capital requirements under agreements with Freddie Mac, Fannie Mae, Ginnie Mae, the Department of Housing and Urban Development, the Utah State Department of Financial Institutions and the Federal Deposit Insurance Corporation.

 

Insurance Companies

Our Insurance operations are subject to certain minimum aggregate capital requirements, restricted net asset and dividend restrictions under applicable state insurance laws and the rules and regulations promulgated by the Financial Services Authority in England, the Office of the Superintendent of Financial Institutions of Canada, the National Insurance and Bonding Commission of Mexico and the National Association of Securities Dealers. Under the various state insurance regulations, dividend distributions may be made only from statutory unassigned surplus, with approvals required from the state regulatory authorities for dividends in excess of certain statutory limitations.

 

As previously disclosed on a Form 8-K filed October 27, 2005, Securities and Exchange Commission (SEC) and federal grand jury subpoenas have been served on our entities in connection with industry-wide investigations into practices in the insurance industry relating to loss mitigation insurance products such as finite risk insurance. We are cooperating with the investigations.

 

GMAC LLC • Form 10-K

 

 

Other Regulations

Some of the other more significant regulations that GMAC is subject to include:

 

Privacy

The Gramm-Leach-Bliley Act imposes additional obligations on us to safeguard the information we maintain on our customers and permits customers to “opt-out” of information sharing with third parties. Regulations have been enacted by several agencies that may increase our obligations to safeguard information. In addition, several federal agencies are considering regulations that require more stringent “opt-out” notices or even require “opt-out” notices. Also, several states have enacted even more stringent privacy legislation. For example, California has passed legislation known as the California Financial Information Privacy Act and the California On-Line Privacy Protection Act. Both pieces of legislation became effective July 2004 and impose additional notification obligations on us that are not preempted by existing federal law. If a variety of inconsistent state privacy rules or requirements are enacted, our compliance costs could increase substantially.

 

Fair Credit Reporting Act

The Fair Credit Reporting Act provides a national legal standard for lenders to share information with affiliates and certain third parties and to provide firm offers of credit to consumers. In late 2003 the Fair and Accurate Credit Transactions Act was enacted, making this preemption of conflicting state and local laws permanent. The Fair Credit Reporting Act was also amended to place further restrictions on the use of information sharing between affiliates, to provide new disclosures to consumers when risk based pricing is used in the credit decision and to help protect consumers from identity theft. All of these new provisions impose additional regulatory and compliance costs on us and reduce the effectiveness of our marketing programs.

 

Employees

We had 31,400 and 33,900 employees worldwide as of December 31, 2006 and 2005, respectively.

 

Additional Information

A description of our lines of business, along with the results of operations for each segment, industry and competition, and the products and services offered are contained in the individual business operations sections of Management’s Discussion and Analysis of Financial Condition and Results of Operations, which begins on page 16. Financial information related to reportable segments and geographic areas is provided in Note 22.

 

Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K (and amendments to such reports) are available on our internet website, free of charge, as soon as reasonably practicable after the reports are electronically filed with or furnished with the SEC. These reports are available at www.gmacfs.com, under United States, Investor Relations, SEC Filings and Annual Review. These reports can also be found on the SEC website located at www.sec.gov.

 

Item 1A. Risk Factors

Because of the following factors, as well as other factors affecting our operating results and financial condition, past financial performance should not be considered a reliable indicator of future performance, and investors should not use historical trends to anticipate results or trends in future periods.

 

Risks Related to Our Business

Rating agencies may downgrade their ratings for GMAC or ResCap in the future, which would adversely affect our ability to raise capital in the debt markets at attractive rates and increase the interest that we pay on our outstanding publicly traded notes, which could have a material adverse effect on our results of operations and financial condition.

 

Substantially all of our unsecured debt has been rated by four nationally recognized statistical rating organizations. Commencing late in 2001, concerns over the competitive and financial strength of GM, including whether it would experience a labor interruption and how it would fund its health care liabilities, resulted in a series of credit rating actions on our unsecured debt concurrent with a series of credit actions that downgraded the credit rating on GM’s debt. As a result, our unsecured borrowing spreads widened significantly over the past several years substantially reducing our access to the unsecured debt markets and impacting our overall cost of borrowing.

 

Future downgrades of our credit ratings would increase borrowing costs and further constrain our access to unsecured debt markets, including capital markets for retail debt, and as a result, would negatively affect our business. In addition, future downgrades of our credit ratings could increase the possibility of additional terms and conditions being added to any new or replacement financing arrangements, as well as impact elements of certain existing secured borrowing arrangements.

 

Our business requires substantial capital, and if we are unable to maintain adequate financing sources, our profitability and financial condition will suffer and jeopardize our ability to continue operations.

 

Our liquidity and ongoing profitability are, in large part, dependent upon our timely access to capital and the costs associated with raising funds in different segments of the capital markets. Currently, our primary sources of financing include public and private securitizations and whole loan sales. To a lesser extent, we also use institutional unsecured term debt, commercial paper and retail debt offerings. Reliance on any one source can change going forward.

 

We depend and will continue to depend on our ability to access diversified funding alternatives to meet future cash flow requirements and to continue to fund our operations. Negative credit events specific to us or our 49% owner, GM, or other events affecting the overall debt markets have adversely impacted our funding sources, and continued or additional negative events could further adversely impact our funding sources, especially over the long term. As an example, an insolvency event for GM would curtail our ability to utilize certain of our automotive wholesale loan

 

GMAC LLC • Form 10-K

 

securitization structures as a source of funding in the future. Furthermore, ResCap’s access to capital can be impacted by changes in the market value of its mortgage products and the willingness of market participants to provide liquidity for such products. If we are unable to maintain adequate financing or if other sources of capital are not available, we could be forced to suspend, curtail or reduce certain aspects of our operations, which could harm our revenues, profitability, financial condition and business prospects.

 

Furthermore, we utilize asset and mortgage securitizations and sales as a critical component of our diversified funding strategy. Several factors could affect our ability to complete securitizations and sales, including conditions in the securities markets generally, conditions in the asset-backed or mortgage-backed securities markets, the credit quality and performance of our contracts and loans, our ability to service our contracts and loans and a decline in the ratings given to securities previously issued in our securitizations. Any of these factors could negatively affect the pricing of our securitizations and sales, resulting in lower proceeds from these activities.

 

Within this Form 10-K, we have restated prior period financial information to eliminate hedge accounting treatment that had been applied to certain callable debt hedged with derivatives. As a result, it is possible that some of our lenders under certain of our liquidity facilities could claim that they are not obligated to honor their lending commitments. We believe that any such claim would not be sustainable. Renewal and revision of these facilities is imminent, which likely will eliminate the issue. There can be no assurance that we are correct in our assessments. If we are not, available funding under certain of our liquidity facilities could be adversely impacted.

 

Our indebtedness and other obligations are significant and could materially adversely affect our business.

 

We have a significant amount of indebtedness. As of December 31, 2006, we had approximately $237 billion in principal amount of indebtedness outstanding. Interest expense on our indebtedness constitutes approximately 67% of our total financing revenues. In addition, under the terms of our current indebtedness, we have the ability to create additional unsecured indebtedness. If our debt payments increase, whether due to the increased cost of existing indebtedness or the incurrence of additional indebtedness, we may be required to dedicate a significant portion of our cash flow from operations to the payment of principal of, and interest on, our indebtedness, which would reduce the funds available for other purposes. Our indebtedness also could limit our ability to withstand competitive pressures and reduce our flexibility in responding to changing business and economic conditions.

 

The profitability and financial condition of our operations are dependent upon the operations of General Motors Corporation.

 

A significant portion of our customers are those of GM, GM dealers and GM related employees. As a result, various aspects of GM’s business, including changes in the production or sale of GM vehicles, the quality or resale value of GM vehicles, the use of GM marketing incentives and other factors impacting GM or its employees could significantly affect our profitability and financial condition.

 

We provide vehicle financing through purchases of retail automotive and lease contracts with retail customers of primarily GM dealers. We also finance the purchase of new and used vehicles by GM dealers through wholesale financing, extend other financing to GM dealers, provide fleet financing for GM dealers to buy vehicles they rent or lease to others, provide wholesale vehicle inventory insurance to GM dealers, provide automotive extended service contracts through GM dealers and offer other services to GM dealers. In 2006 our shares of GM retail sales and sales to dealers were 38% and 80%, respectively, in markets where GM operates. As a result, GM’s level of automobile production and sales directly impacts our financing and leasing volume, the premium revenue for wholesale vehicle inventory insurance, the volume of automotive extended service contracts and the profitability and financial condition of the GM dealers to whom we provide wholesale financing, term loans and fleet financing. In addition, the quality of GM vehicles affects our obligations under automotive extended service contracts relating to such vehicles. Further, the resale value of GM vehicles, which may be impacted by various factors relating to GM’s business such as brand image or the number of new GM vehicles produced, affects the remarketing proceeds we receive upon the sale of repossessed vehicles and off-lease vehicles at lease termination.

 

GM utilizes various rate, residual value and other financing incentives from time to time. The nature, timing and extent of GM’s use of incentives has a significant impact on our consumer automotive financing volume and our share of GM’s retail sales, which we refer to as our penetration level. For example, GM held a 72 hour promotion during July 2006 in which we offered retail contracts at 0% financing for 72 months. Primarily as a result of this promotion, we experienced a significant increase in our consumer automotive financing penetration levels during this period. GM has provided financial assistance and incentives to its franchised dealers through guarantees, agreements to repurchase inventory, equity investments and subsidies that assist dealers in making interest payments to financing sources. These financial assistance and incentive programs are provided at the option of GM, and they may be terminated in whole or in part at any time. While the financial assistance and incentives do not relieve the dealers from their obligations to us or their other financing sources, if GM were to reduce or terminate any of their financial assistance and incentive programs, the timing and amount of payments from GM franchised dealers to us may be adversely affected.

 

We have substantial credit exposure to General Motors Corporation.

 

We have entered into various operating and financing arrangements with GM. As a result of these arrangements, we have substantial credit exposure to GM. However, as part of the Sale Transactions, this credit exposure has been reduced due to the termination of various inter-company credit facilities. In addition, certain unsecured exposure to GM entities in the U.S. has been contractually capped at $1.5 billion (actual exposure of $749 million at December 31, 2006).

 

GMAC LLC • Form 10-K

 

As a marketing incentive GM may sponsor residual support programs as a way to lower customer’s monthly payments. Under residual support programs the contractual residual value is adjusted above GMAC’s standard residual rates. At lease origination, GM pays us the present value of the estimated amount of residual support it expects to owe at lease termination. When the lease terminates, GM makes a “true-up” payment to us if its estimated residual support payment was too low, and it still owes us money. Similarly, we make a “true-up” payment to GM if GM’s estimated residual payment was too high, and it overpaid GMAC. Additionally, under what we refer to as lease pull ahead programs, customers are encouraged to terminate leases early in conjunction with the acquisition of a new GM vehicle. As part of these programs, we waive the customer’s remaining payment obligation under the current lease, and under most programs, GM compensates us for the foregone revenue from the waived payments. Since these programs generally accelerate our remarketing of the vehicle, the re-sale proceeds are typically higher than otherwise would have been realized had the vehicle been remarketed at lease contract maturity. The reimbursement from GM for the foregone payments is, therefore, reduced by the amount of this benefit. GM makes estimated payments to us at the end of each month in which customers have pulled their leases ahead. As with residual support payments, these estimates are “trued up” once all the vehicles that could have been pulled ahead have terminated and been remarketed. To the extent that the original estimates were incorrect, GM or GMAC may be obligated to pay each other the difference, as appropriate under the lease pull-ahead programs. GM is also responsible for risk sharing on returned lease vehicles in the U.S. whose resale proceeds are below standard residual values (limited to a floor).

 

Historically GM has made all payments related to such programs and arrangements on a timely basis. However, if GM is unable to pay, fails to pay or is delayed in paying these amounts, our profitability, financial condition and cash flow could be adversely affected.

 

On October 8, 2005, Delphi Corporation, GM’s largest supplier, filed a petition for Chapter 11 proceedings under the United States Bankruptcy Code. In connection with the split-off of Delphi from GM in 1999, GM entered into contracts with certain unions to provide contingent benefit guarantees for limited pension and post retirement health care and life insurance benefits to certain former GM employees who transferred to Delphi in connection with the split-off. GM is contractually responsible for such payments to the extent Delphi fails to pay these benefits at required levels. Furthermore, there can be no assurance GM will be able to recover the full amount of any benefit guarantee payments as required by an indemnification arrangement between GM and Delphi, and any payment by Delphi may be significantly limited. Also, Delphi has significant financial obligations to GM. As a result of Delphi’s restructuring, Delphi’s obligation may be substantially compromised, which could have an adverse impact on GM.

 

Our earnings may decrease because of increases or decreases in interest rates.

 

Our profitability is directly affected by changes in interest rates. The following are some of the risks we face relating to an increase in interest rates:

 

 

We are also subject to risks from decreasing interest rates. For example, a significant decrease in interest rates could increase the rate at which mortgages are prepaid, which could require us to write down the value of our retained interests. Moreover, if prepayments are greater than expected, the cash we receive over the life of our mortgage loans held for investment and our retained interests would be reduced. Higher-than-expected prepayments could also reduce the value of our mortgage servicing rights and, to the extent the borrower does not refinance with us, the size of our servicing portfolio. Therefore, any such changes in interest rates could harm our revenues, profitability and financial condition.

 

Our hedging strategies may not be successful in mitigating our risks associated with changes in interest rates and could affect our profitability and financial condition, as could our failure to comply with hedge accounting principles and interpretations.

 

We employ various economic hedging strategies to mitigate the interest rate and prepayment risk inherent in many of our assets and liabilities. Our hedging strategies rely on assumptions and projections regarding our assets, liabilities and general market factors. If these assumptions and projections prove to be incorrect or our hedges do not adequately mitigate the impact of changes in interest rates or prepayment speeds, we may experience volatility in our earnings that could adversely affect our profitability and financial condition.

 

In addition, hedge accounting in accordance with SFAS 133 requires the application of significant subjective judgments to a body of accounting concepts that is complex and for which the interpretations have continued to evolve within the accounting profession and amongst the standard-setting bodies. Within this Form 10-K, we have restated prior period financial information to eliminate hedge accounting treatment that had been applied to certain callable debt hedged with derivatives. As a result of this

 

GMAC LLC • Form 10-K

 

matter, we have also communicated in this Form 10-K that we have a material weakness in internal control over financial reporting with regard to the documentation and effectiveness assessment of derivatives used in such callable debt hedge strategies. As further described in Item 1B on page 11, we are in receipt of two comments from the SEC’s Division of Corporation Finance on our 2005 10-K and subsequent filings pertaining to specific aspects of our compliance with SFAS 133. We believe the ultimate resolution of these comments will not have a material affect on our consolidated financial statements presented herein. If, however, upon resolution of these comments the accounting treatment for these matters is determined to be different, it could have a significant impact to our financial condition and results of operations.

 

Our residential mortgage subsidiary’s ability to pay dividends to us is restricted by contractual arrangements.

 

On June 24, 2005, we entered into an operating agreement with GM and ResCap, the holding company for our residential mortgage business, to create separation between GM and ourselves, on the one hand, and ResCap, on the other. The operating agreement restricts ResCap’s ability to declare dividends or prepay subordinated indebtedness to us. As a result of these arrangements, ResCap has obtained investment grade credit ratings for its unsecured indebtedness that are separate from our ratings. This operating agreement was amended on November 27, 2006, and again on November 30, 2006, in conjunction with the Sale Transactions. Among other things, these amendments removed GM as a party to the agreement.

 

The restrictions contained in the ResCap operating agreement include the requirements that ResCap’s member’s equity be at least $6.5 billion for dividends to be paid. If ResCap is permitted to pay dividends pursuant to the previous sentence, the cumulative amount of such dividends may not exceed 50% of our cumulative net income (excluding payments for income taxes from our election for federal income tax purposes to be treated as a limited liability company), measured from July 1, 2005, at the time such dividend is paid. These restrictions will cease to be effective if ResCap’s member’s equity has been at least $12 billion as of the end of each of two consecutive fiscal quarters or if we cease to be the majority owner. In connection with the Sale Transactions, GM was released as a party to this operating agreement, but it remains in effect between ResCap and us. At December 31, 2006, ResCap had consolidated equity of approximately $7.7 billion.

 

A failure of or interruption in the communications and information systems on which we rely to conduct our business could adversely affect our revenues and profitability.

 

We rely heavily upon communications and information systems to conduct our business. Any failure or interruption of our information systems or the third-party information systems on which we rely could cause underwriting or other delays and could result in fewer applications being received, slower processing of applications and reduced efficiency in servicing. The occurrence of any of these events could have a material adverse effect on our business.

 

We use estimates and assumptions in determining the fair value of certain of our assets, in determining our allowance for credit losses, in determining lease residual values and in determining our reserves for insurance losses and loss adjustment expenses. If our estimates or assumptions prove to be incorrect, our cash flow, profitability, financial condition and business prospects could be materially adversely affected.

 

We use estimates and various assumptions in determining the fair value of many of our assets, including retained interests and securitizations of loans and contracts, mortgage servicing rights and other investments, which do not have an established market value or are not publicly traded. We also use estimates and assumptions in determining our allowance for credit losses on our loan and contract portfolios, in determining the residual values of leased vehicles and in determining our reserves for insurance losses and loss adjustment expenses. It is difficult to determine the accuracy of our estimates and assumptions, and our actual experience may differ materially from these estimates and assumptions. As an example, the continued decline of the domestic housing market, especially with regard to the nonprime sector, has resulted in increases of the allowance for loan losses at ResCap for 2006. A material difference between our estimates and assumptions and our actual experience may adversely affect our cash flow, profitability, financial condition and business prospects.

 

Our business outside the United States exposes us to additional risks that may cause our revenues and profitability to decline.

 

We conduct a significant portion of our business outside the United States. We intend to continue to pursue growth opportunities for our businesses outside the United States, which could expose us to greater risks. The risks associated with our operations outside the United States include:

 

 

The effects of these risks may, individually or in the aggregate, adversely affect our revenues and profitability.

 

GMAC LLC • Form 10-K

 

Our business could be adversely affected by changes in currency exchange rates.

 

We are exposed to risks related to the effects of changes in foreign currency exchange rates. Changes in currency exchange rates can have a significant impact on our earnings from international operations. While we carefully watch and attempt to manage our exposure to fluctuation in currency exchange rates, these types of changes can have material adverse effects on our business and results of operations and financial condition.

 

We are exposed to credit risk which could affect our profitability and financial condition.

 

We are subject to credit risk resulting from defaults in payment or performance by customers for our contracts and loans, as well as contracts and loans that are securitized and in which we retain a residual interest. For example, the continued decline in the domestic housing market has resulted in an increase in delinquency rates related to mortgage loans that ResCap either holds or retains an interest in. There can be no assurances that our monitoring of our credit risk as it impacts the value of these assets and our efforts to mitigate credit risk through our risk-based pricing, appropriate underwriting policies and loss mitigation strategies are or will be sufficient to prevent an adverse effect on our profitability and financial condition. As part of the underwriting process, we rely heavily upon information supplied by third parties. If any of this information is intentionally or negligently misrepresented and the misrepresentation is not detected prior to completing the transaction, the credit risk associated with the transaction may be increased.

 

Recent developments in the residential mortgage market, especially in the nonprime sector, may adversely affect our revenues, profitability and financial condition

 

Recently, the residential mortgage market in the United States, and especially the nonprime sector, has experienced a variety of difficulties and changed economic conditions that adversely affected our earnings and financial condition in the fourth quarter of 2006. Delinquencies and losses with respect to ResCap’s nonprime mortgage loans increased significantly and may continue to increase. Housing prices in many states have also declined or stopped appreciating, after extended periods of significant appreciation. In addition, the liquidity provided to the nonprime sector has recently been significantly reduced, which will likely cause ResCap’s nonprime mortgage production to decline. These trends have resulted in significant writedowns to ResCap’s mortgage loans held for sale portfolio and additions to allowance for loan losses for its mortgage loans held for investment and warehouse lending receivables portfolios. The lack of liquidity may also have the effect of reducing the margin available to ResCap in its sales and securitizations of nonprime mortgage loans.

 

Another factor that may result in higher delinquency rates on mortgage loans is the scheduled increase in monthly payments on adjustable rate mortgage loans. This increase in borrowers’ monthly payments, together with any increase in prevailing market interest rates, may result in significantly increased monthly payments for borrowers with adjustable rate mortgage loans. Borrowers seeking to avoid these increased monthly payments by refinancing their mortgage loans may no longer be able to fund available replacement loans at comparably low interest rates. A decline in housing prices may also leave borrowers with insufficient equity in their homes to permit them to refinance their loans or sell their homes. In addition, these mortgage loans may have prepayment premiums that inhibit refinancing.

 

Certain government regulators have observed these issues involving nonprime mortgages and have indicated an intention to review the mortgage loan programs. To the extent that regulators restrict the volume, terms and/or type of nonprime mortgage loan, the liquidity of our nonprime mortgage loan production and our profitability from nonprime mortgage loans could be negatively impacted. Such activity could also negatively impact our Warehouse Lending volumes and profitability.

 

The events surrounding the nonprime segment have forced certain originators to exit the market. Such activities may limit the volume of nonprime mortgage loans available for us to acquire and/or our Warehouse Lending volumes, which could negatively impact our profitability.

 

These events, alone or in combination, may contribute to higher delinquency rates, reduce origination volumes or reduce Warehouse Lending volumes at ResCap. These events could adversely affect our revenues, profitability and financial condition.

 

General business and economic conditions of the industries and geographic areas in which we operate affect our revenues, profitability and financial condition.

 

Our revenues, profitability and financial condition are sensitive to general business and economic conditions in the United States and in the markets in which we operate outside the United States. A downturn in economic conditions resulting in increased unemployment rates, increased consumer and commercial bankruptcy filings or other factors that negatively impact household incomes could decrease demand for our financing and mortgage products and increase delinquency and loss. In addition, because our credit exposures are generally collateralized, the severity of losses is particularly sensitive to a decline in used vehicle and residential home prices.

 

Some further examples of these risks include the following:

 

 

GMAC LLC • Form 10-K

 

 

Our profitability and financial condition may be materially adversely affected by decreases in the residual value of off-lease vehicles.

 

Our expectation of the residual value of a vehicle subject to an automotive lease contract is a critical element used to determine the amount of the lease payments under the contract at the time the customer enters into it. As a result, to the extent the actual residual value of the vehicle, as reflected in the sales proceeds received upon remarketing, is less than the expected residual value for the vehicle at lease inception, we incur a loss on the lease transaction. General economic conditions, the supply of off-lease vehicles and new vehicle market prices heavily influence used vehicle prices and thus the actual residual value of off-lease vehicles. GM’s brand image, consumer preference for GM products and GM’s marketing programs that influence the new and used vehicle market for GM vehicles also influence lease residual values. In addition, our ability to efficiently process and effectively market off-lease vehicles impacts the disposal costs and proceeds realized from the vehicle sales. While GM provides support for lease residual values including through residual support programs, this support by GM does not in all cases entitle us to full reimbursement for the difference between the remarketing sales proceeds for off-lease vehicles and the residual value specified in the lease contract. Differences between the actual residual values realized on leased vehicles and our expectations of such values at contract inception could have a negative impact on our profitability and financial condition.

 

Fluctuations in valuation of investment securities or significant fluctuations in investment market prices could negatively affect revenues.

 

Investment market prices in general are subject to fluctuation. Consequently, the amount realized in the subsequent sale of an investment may significantly differ from the reported market value that could negatively affect our revenues. Fluctuation in the market price of a security may result from perceived changes in the underlying economic characteristics of the investee, the relative price of alternative investments, national and international events and general market conditions.

 

Changes in existing U.S. government-sponsored mortgage programs, or disruptions in the secondary markets in the United States or in other countries in which our mortgage subsidiaries operate, could adversely affect the profitability and financial condition of our mortgage business.

 

The ability of ResCap to generate revenue through mortgage loan sales to institutional investors in the United States depends to a significant degree on programs administered by government-sponsored enterprises such as Fannie Mae, Freddie Mac, Ginnie Mae and others that facilitate the issuance of mortgage-backed securities in the secondary market. These government-sponsored enterprises play a powerful role in the residential mortgage industry and our mortgage subsidiaries have significant business relationships with them. Proposals are being considered in Congress and by various regulatory authorities that would affect the manner in which these government-sponsored enterprises conduct their business, including proposals to establish a new independent agency to regulate the government-sponsored enterprises, to require them to register their stock with the SEC, to reduce or limit certain business benefits they receive from the U.S. government and to limit the size of the mortgage loan portfolios they may hold. Any discontinuation of, or significant reduction in, the operation of these government-sponsored enterprises could adversely affect our revenues and profitability. Also, any significant adverse change in the level of activity in the secondary market, including declines in the institutional investors’ desire to invest in our mortgage products, could adversely affect our business.

 

We may be required to repurchase contracts and provide indemnification if we breach representations and warranties from our securitization and whole loan transactions, which could harm our profitability and financial condition.

 

When we sell retail contracts or leases through whole loan sales or securitize retail contracts, leases or wholesale loans to dealers, we are required to make customary representations and warranties about the contracts, leases or loans to the purchaser or securitization trust. Our whole loan sale agreements generally require us to repurchase retail contracts or provide indemnification if we breach a representation or warranty given to the purchaser. Likewise, we are required to repurchase retail contracts, leases or loans and may be required to provide indemnification if we breach a representation or warranty in connection with our securitizations.

 

Similarly, sales by our mortgage subsidiaries of mortgage loans through whole loan sales or securitizations require us to make customary representations and warranties about the mortgage loans to the purchaser or securitization trust. Our whole loan sale agreements generally require us to repurchase or substitute loans if we breach a representation or warranty given to the purchaser. In addition, our mortgage subsidiaries may be required to repurchase mortgage loans as a result of borrower fraud or if a payment default occurs on a mortgage loan shortly after its origination. Likewise, we are required to repurchase or substitute mortgage loans if we breach a representation or warranty in connection with our securitizations. The remedies available to a purchaser of mortgage loans may be broader than those available to our mortgage subsidiaries against the original seller of the mortgage loan. If a mortgage loan purchaser enforces its remedies against our mortgage subsidiaries, we may not be able to enforce the remedies we have against the seller of the loan or the borrower.

 

GMAC LLC • Form 10-K

 

Significant indemnification payments or contract, lease or loan repurchase activity of retail contracts or leases or mortgage loans could harm our profitability and financial condition.

 

We and our mortgage subsidiaries have repurchase obligations in our respective capacities as servicers in securitizations and whole loan sales. If a servicer breaches a representation, warranty or servicing covenant with respect to an automotive receivable or mortgage loan, then the servicer may be required by the servicing provisions to repurchase that asset from the purchaser. If the frequency at which repurchases of assets occurs increases substantially from its present rate, the result could be a material adverse effect on our financial condition, liquidity and results of operations or those of our mortgage subsidiaries.

 

A loss of contractual servicing rights could have a material adverse effect on our financial condition, liquidity and results of operations.

 

We are the servicer for all of the receivables we have originated and transferred to other parties in securitizations and whole loan sales of automotive receivables. Our mortgage subsidiaries service the mortgage loans we have securitized, and we service the majority of the mortgage loans we have sold in whole loan sales. In each case, we are paid a fee for our services, which fees in the aggregate constitute a substantial revenue stream for us. In each case, we are subject to the risk of termination under the circumstances specified in the applicable servicing provisions.

 

In most securitizations and whole loan sales, the owner of the receivables or mortgage loans will be entitled to declare a servicer default and terminate the servicer upon the occurrence of specified events. These events typically include a bankruptcy of the servicer, a material failure by the servicer to perform its obligations, and a failure by the servicer to turn over funds on the required basis. The termination of these servicing rights, were it to occur, could have a material adverse effect on our financial condition, liquidity and results of operations and those of our mortgage subsidiaries. For the year ended December 31, 2006, our consolidated mortgage servicing fee income was approximately $1.6 billion.

 

The regulatory environment in which we operate could have a material adverse effect on our business and earnings.

 

Our domestic operations may be subject to various laws and judicial and administrative decisions imposing various requirements and restrictions relating to supervision and regulation by state and federal authorities. Such regulation and supervision are primarily for the benefit and protection of our customers, not for the benefit of investors in our securities, and could limit our discretion in operating our business. Noncompliance with applicable statutes or regulations could result in the suspension or revocation of any license or registration at issue, as well as the imposition of civil fines and criminal penalties. In addition, changes in the accounting rules or their interpretation could have an adverse effect on our business and earnings.

 

Our operations are also heavily regulated in many jurisdictions outside the United States. For example, certain of our foreign subsidiaries operate either as a bank or a regulated finance company, and our insurance operations are subject to various requirements in the foreign markets in which we operate. The varying requirements of these jurisdictions may be inconsistent with U.S. rules and may materially adversely affect our business or limit necessary regulatory approvals, or if approvals are obtained, we may not be able to continue to comply with the terms of the approvals or applicable regulations. In addition, in many countries the regulations applicable to the financial services industry are uncertain and evolving, and it may be difficult for us to determine the exact regulatory requirements.

 

Our inability to remain in compliance with regulatory requirements in a particular jurisdiction could have a material adverse effect on our operations in that market with regard to the affected product and on our reputation generally. No assurance can be given that applicable laws or regulations will not be amended or construed differently, that new laws and regulations will not be adopted or that we will not be prohibited by local laws from raising interest rates above certain desired levels, any of which could materially adversely affect our business, financial condition or results of operations.

 

The worldwide financial services industry is highly competitive. If we are unable to compete successfully or if there is increased competition in the automotive financing, mortgage and/or insurance markets or generally in the markets for securitizations or asset sales, our margins could be materially adversely affected.

 

The markets for automotive and mortgage financing, insurance and reinsurance are highly competitive. The market for automotive financing has grown more competitive as more consumers are financing their vehicle purchases, primarily in North America and Europe. Our mortgage business faces significant competition from commercial banks, savings institutions, mortgage companies and other financial institutions. Our insurance business faces significant competition from insurance carriers, reinsurers, third-party administrators, brokers and other insurance-related companies. Many of our competitors have substantial positions nationally or in the markets in which they operate. Some of our competitors have lower cost structures, lower cost of capital and are less reliant on securitization and sale activities. We face significant competition in various areas, including product offerings, rates, pricing and fees, and customer service. If we are unable to compete effectively in the markets in which we operate, our profitability and financial condition could be negatively affected.

 

The markets for asset and mortgage securitizations and whole loan sales are competitive, and other issuers and originators could increase the amount of their issuances and sales. In addition, lenders and other investors within those markets often establish limits on their credit exposure to particular issuers, originators and asset classes, or they may require higher returns to increase the amount of their exposure. Increased issuance by other participants in the market, or decisions by investors to limit their credit exposure to — or to require

 

GMAC LLC • Form 10-K

 

a higher yield for — us or to automotive or mortgage securitizations or whole loans, could negatively affect our ability and that of our subsidiaries to price our securitizations and whole loan sales at attractive rates. The result would be lower proceeds from these activities and lower profits for our subsidiaries and us.

 

Item 1B. Unresolved Staff Comments

On February 16, 2007, we filed a Form 8-K, with respect to Item 4.02(a) “Non-Reliance on Previously Issued Financial Statements or a Related Audit Report or Completed Interim Review”, announcing our intention to make adjustments related to our accounting for certain hedging activities under SFAS 133. As a result of these adjustments, the GMAC Audit Committee determined that our previously issued consolidated financial statements for periods after the January 1, 2001 adoption of SFAS 133 should no longer be relied upon. Following this announcement, we received a letter from the SEC’s Division of Corporation Finance on our 2005 10-K and subsequent filings. The letter, dated February 23, 2007, includes two comments pertaining to our hedging relationship testing methodologies and consideration of credit ratings in assessing hedge effectiveness for purposes of SFAS 133. We submitted our response to these comments to the SEC on March 12, 2007 and will continue to work to resolve these comments with the SEC staff. We believe the ultimate resolution of these comments will not have a material affect on our consolidated financial statements as presented herein. If, however, upon resolution of these comments the accounting treatment for these matters is determined to be different, it could have a significant impact to our financial condition and results of operations.

 

Item 2. Properties

Our primary executive and administrative offices are located in Detroit, Michigan, and comprise approximately 220,000 square feet pursuant to a lease agreement expiring in November 2016. In addition, we have corporate offices in New York, New York, comprising 18,000 square feet of office space under a lease that expires in July 2011.

 

The primary offices for our North American Automotive Finance operations are located in Detroit, Michigan, and are included in the totals referenced above. Our International Automotive Finance operations include leased space in over 30 countries totaling approximately 740,000 square feet. The largest countries include the United Kingdom and Germany with approximately 147,000 square feet and 120,000 square feet of office space under lease, respectively.

 

The primary offices for our U.S. Insurance operations are located in Southfield, Michigan; Maryland Heights, Missouri; and Winston-Salem, North Carolina. In Southfield, we lease approximately 76,000 square feet of office space under leases expiring in September 2008. Our Maryland Heights and Winston-Salem offices are approximately 136,000 square feet and 444,000 square feet, respectively, under leases expiring in September 2014. ABA Seguros, one of our insurance subsidiaries, leases approximately 435,000 square feet for offices throughout Mexico.

 

The primary offices for our ResCap operations are located in Horsham, Pennsylvania and Minneapolis, Minnesota. In Horsham, we lease approximately 427,000 square feet of office space expiring between April 2007 and April 2009. In April 2007 ResCap plans on moving from the Horsham facilities to a facility in Ft. Washington, Pennsylvania. In Ft. Washington, ResCap will be leasing 450,000 square feet of office space pursuant to a lease that expires in November 2019. The Horsham leases will be canceled by the landlord when the operations move into the Ft. Washington facility. In Minneapolis, we lease approximately 525,000 square feet of office space expiring between March 2013 and December 2013. ResCap also has significant leased offices in Costa Mesa, California (151,000 square feet) expiring in December 2013, Dallas, Texas (205,000 square feet) expiring in March 2015 and San Diego, California (90,000 square feet) expiring in March 2008. ResCap also owns a 155,000 square foot facility in Waterloo, Iowa.

 

In addition to the properties described above, we lease additional space throughout the United States and in the approximately 40 countries in which we operate, including additional facilities in Canada, Germany, the United Kingdom and the Netherlands. We believe that our facilities are adequate for us to conduct our present business activities.

 

Item 3. Legal Proceedings

We are subject to potential liability under various governmental proceedings, claims and legal actions that are pending or otherwise have been asserted against us.

 

We are named as defendants in a number of legal actions, and we are occasionally involved in governmental proceedings arising in connection with our respective businesses. Some of the pending actions purport to be class actions. We establish reserves for legal claims when payments associated with the claims become probable and the costs can be reasonably estimated. The actual costs of resolving legal claims may be higher or lower than any amounts reserved for such claims. Based on information currently available, advice of counsel, available insurance coverage and established reserves, it is the opinion of management that the eventual outcome of the actions against us, including those described below, will not have a material adverse effect on our consolidated financial condition, results of operations or cash flows. However, in the event of unexpected future developments, it is possible that the ultimate resolution of legal matters, if unfavorable, may be material to our consolidated financial condition, results of operations or cash flows. Furthermore, any claim or legal action against GM that results in GM incurring significant liability could also have an adverse effect on our consolidated financial condition, results of operations or cash flows. For a discussion of pending cases against GM, refer to Item 3 in GM’s 2006 Annual Report on Form 10-K, filed separately with the SEC, which report is not deemed incorporated into any of our filings under the Securities Act of 1933, as amended (Securities Act) or the Securities Exchange Act of 1934, as amended (Exchange Act).

 

Pending legal proceedings, other than ordinary routine litigation incidental to the business, to which GMAC became, or was, a party

 

GMAC LLC • Form 10-K

 

during the year ended December 31, 2006, or subsequent thereto, but before the filing of this report are summarized as follows:

 

Shareholder Class Actions

On September 19, 2005, a purported class action complaint, Folksam Asset Management v. General Motors, et al., was filed in the U.S. District Court for the Southern District of New York, naming as defendants GM, GMAC, and GM Chairman and Chief Executive Officer G. Richard Wagoner, Jr.; Vice Chairman John Devine; Treasurer Walter G. Borst; and Chief Accounting Officer Peter Bible. Plaintiffs purported to bring the claim on behalf of purchasers of GM debt and/or equity securities during the period February 25, 2002, through March 16, 2005. The complaint alleges that defendants violated Section 10(b) and, with respect to the individual defendants, Section 20(a) of the Exchange Act. The complaint also alleges violations of Sections 11 and 12(a), and, with respect to the individual defendants, Section 15 of the Securities Act, in connection with certain registered debt offerings during the class period. In particular, the complaint alleges that GM’s cash flows during the class period were overstated based on the “reclassification” of certain cash items described in GM’s 2004 Form 10-K. The reclassification involves cash flows relating to the financing of GMAC wholesale receivables from dealers that resulted in no net cash receipts and GM’s decision to revise Consolidated Statements of Net Cash for the years ended 2002 and 2003. The complaint also alleges misrepresentations relating to forward-looking statements of GM’s 2005 earnings forecast that were later revised significantly downward. In October 2005 a similar suit, asserting claims under the Exchange Act based on substantially the same factual allegations, was filed and subsequently consolidated with the Folksam case, Galliani, et al. v. General Motors, et al. The consolidated suit was recaptioned as In re General Motors Securities Litigation. Under the terms of the Sale Transactions, GM is indemnifying GMAC in connection with these cases.

 

On November 18, 2005, plaintiffs in the Folksam case filed an amended complaint, which adds several additional investors as plaintiffs, extends the end of the class period to November 9, 2005, and names as additional defendants three current and one former member of GM’s audit committee, as well as independent accountants, Deloitte & Touche LLP. In addition to the claims asserted in the original complaint, the amended complaint adds a claim against defendants Wagoner and Devine for rescission of their bonuses and incentive compensation during the class period. It also includes further allegations regarding GM’s accounting for pension obligations, restatement of income for 2001, and financial results for the first and second quarters of 2005. Neither the original complaint nor the amended complaint specify the amount of damages sought and the defendants have no means to estimate damages the plaintiffs will seek based upon the limited information available in the complaint. On January 17, 2006, the court made provisional designations of lead plaintiff and lead counsel, which designations were made final on February 6, 2006. Plaintiffs subsequently filed a second amended complaint, which added various underwriters as defendants.

 

Plaintiffs filed a third amended securities complaint in In re General Motors Securities and Derivative Litigation on August 15, 2006 (certain shareholder derivative cases brought against GM were consolidated with In re General Motors Securities Litigation for coordinated or consolidated pretrial proceedings and the caption was modified). The amended complaint did not include claims against the underwriters previously named as defendants, alleged a proposed class period of April 13, 2000, through March 20, 2006, did not include the previously asserted claim for the rescission of incentive compensation against Mr. Wagoner and Mr. Devine, and contained additional factual allegations regarding GM’s restatements of financial information filed with its reports to the SEC. On October 13, 2006, the defendants filed a motion to dismiss the amended complaint in the shareholder class action litigation. This motion remains pending before the Court. On December 14, 2006, plaintiffs filed a motion for leave to file a fourth amended complaint in the event the Court grants the defendants’ motion to dismiss. The defendants will oppose this motion.

 

Motion for Consolidation and Transfer to the Eastern District of Michigan

On December 13, 2005, defendants in In re General Motors Securities Litigation (previously Folksam Asset Management v. General Motors, et al. and Galliani v. General Motors, et al.) and in certain other litigation against GM filed a Motion with the Judicial Panel on Multidistrict Litigation to transfer and consolidate those cases for pretrial proceedings in the United States District Court for the Eastern District of Michigan.

 

On January 5, 2006, the defendants submitted to the Judicial Panel on Multidistrict Litigation an Amended Motion seeking to add to their original Motion several other lawsuits pending against GM for consolidated pretrial proceedings in the United States District Court for the Eastern District of Michigan. On April 17, 2006, the Judicial Panel on Multidistrict Litigation entered an order transferring In re General Motors Securities Litigation to the U.S. District Court for the Eastern District of Michigan for coordinated or consolidated pretrial proceedings with several other lawsuits pending against GM. The case is now captioned In re General Motors Securities and Derivative Litigation.

 

Bondholder Class Actions

On November 29, 2005, Stanley Zielezienski filed a purported class action, Zielezienski, et al. v. General Motors, et al. The action was filed in the Circuit Court for Palm Beach County, Florida, against GM; GMAC; GM Chairman and Chief Executive Officer G. Richard Wagoner, Jr.; GMAC Chairman Eric A. Feldstein; and certain GM and GMAC officers, namely, William F. Muir, Linda K. Zukauckas, Richard J.S. Clout, John E. Gibson, W. Allen Reed, Walter G. Borst, John M. Devine and Gary L. Cowger. The action also names certain underwriters of GMAC debt securities as defendants. The complaint alleges that defendants violated Section 11 of the Securities Act, and with respect to all defendants except GM, Section 12(a)(2) of the Securities Act. The complaint also alleges that GM violated Section 15 of the Securities Act. In particular, the complaint alleges material misrepresentations in

 

GMAC LLC • Form 10-K

 

certain GMAC financial statements incorporated by reference with GMAC’s 2003 Form S-3 Registration Statement and Prospectus. More specifically, the complaint alleges material misrepresentations in connection with the offering for sale of GMAC SmartNotes in certain GMAC financial statements contained in GMAC’s Forms 10-Q for the quarterly periods ended in March 31, 2004, and June 30, 2004, and the Form 8-K which disclosed financial results for the quarterly period ended in September 30, 2004, were materially false and misleading as evidenced by GMAC’s 2005 restatement of these quarterly results. In December 2005 the plaintiff filed an amended complaint making substantially the same allegations as were in the previous filing with respect to additional debt securities issued by GMAC during the period April 23, 2004 — March 14, 2005, and adding approximately 60 additional underwriters as defendants. The complaint does not specify the amount of damages sought and the defendants have no means to estimate damages the plaintiffs will seek based upon the limited information available in the complaint. On January 6, 2006, defendants named in the original complaint removed this case to the U.S. District Court for the Southern District of Florida, and on April 3, 2006, that court transferred the case to the U.S. District Court for the Eastern District of Michigan.

 

On December 28, 2005, J&R Marketing, SEP, filed a purported class action, J&R Marketing, et al. v. General Motors Corporation, et al. The action was filed in the Circuit Court for Wayne County, Michigan, against GM; GMAC; GM Chairman and Chief Executive Officer G. Richard Wagoner, Jr.; GMAC Chairman Eric A. Feldstein; William F. Muir; Linda K. Zukauckas; Richard J.S. Clout; John E. Gibson; W. Allen Reed; Walter G. Borst; John M. Devine; Gary L. Cowger; and several underwriters of GMAC debt securities. Similar to the original complaint filed in the Zielezienski case described above, the complaint alleges claims under Sections 11, 12(a), and 15 of the Securities Act based on alleged material misrepresentations or omissions in the Registration Statements for GMAC SmartNotes purchased between September 30, 2003, and March 16, 2005, inclusive. The complaint alleges inadequate disclosure of GM’s financial condition and performance as well as issues arising from GMAC’s 2005 restatement of quarterly results for the three quarters ended September 30, 2005. The complaint does not specify the amount of damages sought and the defendants have no means to estimate damages the plaintiffs will seek based upon the limited information available in the complaint. On January 13, 2006, defendants removed this case to the U.S. District Court for the Eastern District of Michigan.

 

On February 17, 2006, Alex Mager filed a purported class action, Mager v. General Motors Corporation, et al. The action was filed in the U.S. District Court for the Eastern District of Michigan and is substantively identical to the J&R Marketing case described above. On February 24, 2006, J&R Marketing filed a motion to consolidate the Mager case with its case (discussed above) and for appointment as lead plaintiff and the appointment of lead counsel. On March 8, 2006, the court entered an order consolidating the two cases and subsequently consolidated those cases with the Zielezienski case described above. Lead plaintiffs’ counsel has been appointed, and on July 28, 2006, plaintiffs filed a Consolidated Amended Complaint, differing mainly from the initial complaints by asserting claims for GMAC debt securities purchased during a different time period, of July 28, 2003, through November 9, 2005, and added additional underwriter defendants. On August 28, 2006, the underwriter defendants were dismissed without prejudice.

 

On September 25, 2006, the GM and GMAC defendants filed a motion to dismiss the Consolidated Amended Complaint in these cases filed by J&R Marketing, Zielezienski and Mager. On February 27, 2007, the U.S. District Court for the Eastern District of Michigan issued an opinion granting Defendants’ motion to dismiss and dismissing Plaintiffs’ complaint in these consolidated cases. Under the terms of the Sale Transactions, GM is indemnifying GMAC in connection with these cases.

 

Item 4. Submission of Matters to a Vote of Security Holders

None.

GMAC LLC • Form 10-K

 

 

 

Prior to the Sale Transactions, GMAC was a wholly owned subsidiary of GM and, accordingly, there was no market for our common stock. We paid cash dividends to GM of $4.8 billion in 2006, $2.5 billion in 2005, and $1.5 billion in 2004.

 

Subsequent to the Sale Transactions, there continues to be no established trading market for our ownership interests as we are a privately held company. We have authorized and have outstanding common membership interests consisting of 51,000 Class A Membership Interests (Class A Interests) and 49,000 Class B Membership Interests (Class B Interests) (Class A Interests and Class B Interests are collectively referred to as our Common Equity Interests), which have equal rights and preferences in our assets. FIM Holdings owns all 51,000 Class A Interests (a 51% ownership interest in us) and GM, through a wholly-owned subsidiary of GM, owns all 49,000 Class B Interests (a 49% ownership interest in us). We have further authorized 2,110,000 Preferred Membership Interests (Preferred Interests). In connection with the Sale Transactions, FIM Holdings purchased 555,000 Preferred Interests for a cash purchase price of $500 million and GM and GM Preferred Finance Co. Holdings, Inc., a wholly-owned subsidiary of GM, purchased 1,555,000 Preferred Interests for a cash purchase price of $1.4 billion.

 

We have further authorized 5,820 Class C Membership Interests, which are deemed “profits interests” in GMAC. Class C Membership Interests may be issued from time to time pursuant to the GMAC Management LLC Class C Membership Interest Plan. No Class C Membership Interests have been granted to management as of December 31, 2006.

 

We are required to make quarterly distributions to holders of the Preferred Interests. Distributions will be made in cash on a pro rata basis no later than the tenth business day following the delivery of the quarterly financial statements by GMAC. Distributions are issued in units of $1,000 and will accrue yield during each fiscal quarter at a rate of 10% per annum. Our Board of Managers (Board) may reduce any distribution to the extent required to avoid a reduction of the equity capital of GMAC below a minimum amount of equity capital equal to the net book value of GMAC as of November 30, 2006 (determined in accordance with GAAP). In addition, our Board may suspend the payment of distributions with respect to any one or more fiscal quarters with majority members’ consent. If distributions are not made with respect to any fiscal quarter, the distributions will be non-cumulative and will be reduced to zero. If the accrued yield of GMAC’s Preferred Interests for any fiscal quarter is fully paid to the preferred holders, then the excess of the net financial book income of GMAC in any fiscal quarter over the amount of yield distributed to the holders of our preferred equity interests in such fiscal quarter, will be distributed to the holders of our common equity interests (Class A and Class B Membership Interests) as follows: at least 40% of the excess will be paid for fiscal quarters ending prior to December 31, 2008, and at least 70% of the excess will be paid for fiscal quarters ending after December 31, 2008. In this event, distribution priorities are to common equity interest holders first, up to the agreed upon amounts, and then ratably to Class A, Class B and Class C Membership Interest holders based on the total interest of each such holder.

 

GMAC LLC • Form 10-K

 

The selected financial data set forth in this Item 6 have been restated to reflect corrections of errors in our consolidated financial statements and other financial information. The nature of the restatement and the effect on the financial statement line items are more fully described in Notes 1 and 24 of the Notes to the Consolidated Financial Statements.

 

 

 

Management’s Discussion and Analysis

GMAC LLC • Form 10-K

 

 

 

 

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) contain forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from the results discussed in the forward-looking statements. The following section is qualified in its entirety by the more detailed information, including our financial statements and the notes thereto, which appear elsewhere in this Annual Report.

 

Restatement of Previously Issued Consolidated Financial Statements

As discussed in Notes 1 and 24 to the Consolidated Financial Statements, we are restating our historical Consolidated Balance Sheet as of December 31, 2005 and Consolidated Statements of Income, Changes in Equity and Cash Flows for the two years then ended. This restatement relates to the accounting treatment for certain hedging transactions under Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended and interpreted (SFAS 133). We are also correcting certain other out-of-period errors, which were deemed immaterial, individually and in the aggregate, in the years in which they were originally recorded and identified. These items relate to transactions involving certain transfers of financial assets, valuations of certain financial instruments, amortization of unearned income of certain products, income taxes and other inconsequential items. Because of this derivative restatement, we are correcting these amounts to record them in the proper period.

 

The following table sets forth a reconciliation of previously reported and restated net income for the annual periods shown. The restatement increased January 1, 2004 retained earnings to $14,114 million from $14,078 million. The increase of $36 million was comprised of a $55 million increase related to the elimination of a hedge accounting related to certain debt instruments and a decrease of $16 related to other immaterial items.

 

 

As a result of a recent review of our hedge documentation for certain fair value hedges, management concluded that such documentation and hedge effectiveness assessment methodologies related to particular hedges of callable fixed rate debt instruments funding our North American Automotive Finance operations did not satisfy the requirements of SFAS 133. One of the requirements of SFAS 133 is that hedge accounting is appropriate only for those hedging relationships for which a company has a sufficiently documented expectation that such relationships will be highly effective in achieving offsetting changes in fair values or cash flows attributable to the risk being hedged at the inception of the hedging relationship. To determine whether transactions continue to satisfy this requirement, companies must periodically assess and document the effectiveness of hedging relationships both prospectively and retrospectively.

 

Management determined that hedge accounting treatment should not have been applied to these hedging relationships. As a result, we should not have recorded any adjustments on the debt instruments included in the hedging relationships related to changes in fair value due to movements in the designated benchmark interest rate. Accordingly, we have restated our Consolidated Financial Statements for the years ended December 31, 2005 and 2004 from the amounts previously reported to remove such recorded adjustments on these debt instruments from our reported interest expense during the affected years. The elimination of hedge accounting treatment introduces increased funding cost volatility in our restated results. The changes in the fair value of fixed rate debt previously recorded were affected by changes in the designated benchmark interest rate (LIBOR). Prior to the restatement, adjustments to record increases in the value of this debt occurred in periods when interest rates declined, and adjustments to record decreases in value were made in periods when interest rates rose. As a result, changes in the benchmark interest rates caused volatility in the debt’s fair value adjustments that were recognized in our historical earnings, which were mitigated by the changes in the

Management’s Discussion and Analysis

GMAC LLC • Form 10-K

 

value of the interest rate swaps in the hedge relationships. The interest rate swaps which economically hedge these debt instruments continue to be recorded at fair value with changes in fair value recorded in earnings.

 

The accompanying MD&A considers the effects of this restatement described above and described in Notes 1 and 24 to our Consolidated Financial Statements.

 

Background

GMAC is a leading global financial services firm with approximately $287 billion of assets and operations in approximately 40 countries. Founded in 1919 as a wholly owned subsidiary of General Motors Corporation, GMAC was originally established to provide GM dealers with the automotive financing necessary for the dealers to acquire and maintain vehicle inventories and to provide retail customers the means by which to finance vehicle purchases through GM dealers.

 

On November 30, 2006, GM sold a 51% interest in us for approximately $7.4 billion (the Sale Transactions) to FIM Holdings LLC (FIM Holdings). FIM Holdings is an investment consortium led by Cerberus FIM Investors, LLC, the sole managing member and also including, Citigroup Inc., Aozora Bank Ltd., and a subsidiary of The PNC Financial Services Group, Inc. During the first quarter of 2007, under the terms of the purchase and sale agreement between FIM Holdings and GM, a final purchase price settlement is required to the extent that GMAC’s equity upon the November 30, 2006 closing of the sale transaction differed from a specified level. As a result, we expect to receive a common equity injection from GM of approximately $1 billion, based on these final settlement provisions.

 

Our products and services have expanded beyond automotive financing as we currently operate in the following lines of business — Automotive Finance, ResCap and Insurance. The following table summarizes the operations of each line of business for the periods ended December 31, 2006, 2005 and 2004. Operating results for each of the lines of business are more fully described in the MD&A sections that follow.

 

Management’s Discussion and Analysis

GMAC LLC • Form 10-K

 

 

As part of this transfer of ownership, certain agreements were put in place between ResCap and us that restrict ResCap’s ability to declare dividends or prepay subordinated indebtedness owed to us. While we believe the restructuring of these operations and the agreements between ResCap and us allow ResCap to access more attractive sources of capital, the agreements inhibit our ability to return funds for dividends and debt payments.

 

 

Consolidated Results of Operations

 

The following table summarizes our consolidated operating results for the periods indicated. Refer to the operating segment sections for a more complete discussion of operating results by line of business.

 

n/m=not meaningful

 

2006 Compared to 2005

We earned $2.1 billion in 2006, down 7% from earnings of $2.3 billion in 2005. This reflects record earnings in the insurance business and continued growth in Automotive Finance that provided earnings support for our ResCap business, which was adversely affected by a decline in the residential housing market and deterioration in the nonprime securitization market in the U.S. Net income includes a one-time tax benefit of $791 million in the fourth quarter of 2006 from our conversion of GMAC and several of our domestic subsidiaries to an LLC in connection with the November sale of a controlling investment in GMAC and non-cash after-tax goodwill and intangible asset impairment charges of $695 million in the third quarter of 2006 related to our Commercial Finance business.

Management’s Discussion and Analysis

GMAC LLC • Form 10-K

 

 

Total financing revenue increased by 8% in 2006 compared to 2005. Consumer revenue increased 5% due to growth in the consumer mortgage loan portfolio as well as increases in the mortgage loan yields, driven by an increase in mortgage rates during 2006. Commercial revenue increased 16% primarily due to higher market interest rates as the majority of the commercial lending and mortgage lending portfolio is of a floating rate nature. Operating lease revenue rose 10% due to an increase in the average size of our operating lease portfolio, despite the transfer of operating lease assets to GM during November 2006.

 

Interest expense increased by 19%, consistent with the overall increase in market interest rates during the year, but also reflective of the widening of our corporate credit spreads, based on our credit rating. The provision for credit losses increased 86% as compared to 2005. The increase was primarily the result of higher loss severity trends at ResCap, which is attributable to general economic conditions including slower home price appreciation, and deterioration in nonprime credit performance (including increases in nonprime delinquencies).

 

Insurance premiums and service revenue earned increased by 11% compared to 2005. This increase was driven by the extended service contract line primarily due to premiums and revenue from a higher volume of contracts written in prior years. Growth in domestic consumer products was primarily related to the acquisition of MEEMIC Insurance Services Corporation (MEEMIC), a consumer products business that offers automobile and homeowners insurance in the Midwest, which was partially offset by a decline in its existing business due to a competitive environment.

 

Investment income increased 76% compared to 2005. The increase was primarily attributable to higher realized capital gains of approximately $900 million, as well as increased interest and dividend income due to higher average portfolio balances throughout the majority of the year from our Insurance business. The increased capital gains result primarily from the rebalancing of the investment portfolio in the fourth quarter, reducing the level of equity holdings from about 30 percent of the portfolio to less than 10 percent, reducing the level of investment leverage and freeing up capital for growth and dividends.

 

Gains on sale of equity method investment primarily represented the sale of ResCap’s equity investment during the second quarter of 2006 in a regional homebuilder which resulted in a gain of $415 million ($259 million after-tax). Other income decreased 16% compared to 2005 as a result of a decrease in our net loan servicing income, primarily as a result of servicing asset valuation adjustments related to our ResCap operations as well as decreases in net income as a result of our sale of approximately 79% of the former commercial mortgage business during the first quarter.

 

Insurance losses and loss adjustment expenses increased 3% compared to 2005. The increase was primarily driven by the acquisition of MEEMIC and growth in the domestic assumed reinsurance and international consumer products businesses. This increase was partially offset by favorable loss trends experienced in the domestic and international extended service contract product lines.

 

Impairment of goodwill and other intangible assets increased 18% compared to 2005, as a result of higher impairment charges recorded by our Commercial Finance Group. During the 2006 year, we were able to contain our other expenses, which remained relatively flat, as compared to 2005.

 

Income tax expense was $103 million for 2006, compared to $1.2 billion in 2005. The change was primarily a result of our conversion to an LLC during 2006, which resulted in an income tax benefit of $791 million.

 

2005 Compared to 2004

We earned $2.3 billion in 2005, down $0.6 billion from record earnings of $2.9 billion in 2004. Earnings included non-cash goodwill impairment charges of $439 million (after-tax), which were recognized in the fourth quarter of 2005. The charges related predominately to our Commercial Finance Group and primarily to the goodwill recognized in connection with the 1999 acquisition of the majority of the business. Excluding these impairment charges, we earned $2.7 billion in 2005. Earnings were driven by record results in our mortgage and insurance operations. Strong earnings were achieved despite a difficult environment that included higher market interest rates, a series of credit rating actions and the significant impact of Hurricane Katrina.

 

Total financing revenue increased by 5% primarily due to increases in commercial interest income, operating lease income and revenue from mortgages held for sale. The increase in commercial revenue was primarily the result of higher market interest rates as the majority of the portfolio is floating rate. Operating lease revenue increased due to growth in the size of the leasing portfolio of approximately 20% compared to 2004. Revenues associated with loans held for sale also increased due to an increase in mortgage production.

 

Interest expense increased by 36%, consistent with the overall increase in market interest rates during the year, but also reflective of the widening of our corporate credit spreads, as a result of credit rating actions taking during and before 2005. The provision for credit losses decreased by 45% as compared to 2004, despite the impact of loss reserves recorded in the third quarter of 2005 related to accounts impacted by Hurricane Katrina. The decrease in provision for credit losses was attributable to both our Automotive Finance and ResCap operations. The decrease in provision at our Automotive Finance operations was due to a combination of lower consumer asset levels due to an increase in whole loan sales, improved loss performance on retail contracts and improved performance on the non-automotive commercial portfolio. Lower provision for credit losses at ResCap was primarily due to favorable loss severity and frequency of loss, as compared to previous estimates, primarily as a result of the effects of home price appreciation. Insurance premiums and service revenue earned increased by 7% as a result of contract growth across the major product lines (domestic and international).

Management’s Discussion and Analysis

GMAC LLC • Form 10-K

 

 

Investment and other income increased by 44% and 26%, respectively, as compared to 2004. The increase was primarily due to interest income from cash and investments in U.S. Treasury securities, the favorable impact on the valuation of retained securitization interests at ResCap, higher investment income at our former commercial mortgage business and higher capital gains at our Insurance operations.

 

Depreciation on operating lease assets increased 9% as a result of higher average operating lease asset levels as compared to 2004. In addition, other expense was slightly higher mainly due to increased compensation and benefits expense primarily at our ResCap operations, consistent with the increase in loan production and higher supplemental compensation resulting from increased profitability. Insurance losses and loss adjustment expenses and other operating expenses were relatively stable as compared to 2004.

 

Net income was also negatively impacted by non-cash goodwill impairment charges of $712 million, which were recognized in the fourth quarter of 2005. The charges related predominately to our Commercial Finance Group and primarily to the goodwill recognized in connection with the 1999 acquisition of the majority of this business.

 

Our effective tax rate was 34.4%, consistent with the 32.0% rate experienced in 2004.

 

Outlook

The closing of the Sale Transactions has resulted in a new strategic direction, transforming us from primarily a captive operation into an independent, globally-diversified financial services company. We now have formalized long-term operating agreements with GM, but also have a greater opportunity to leverage existing dealer relationships to expand our presence in non-GM dealer networks. This is expected to provide us with opportunities for an increasingly diversified revenue stream. The sale also created a strengthened capital position with required capital infusions by GM and FIM Holdings, which are expected to provide additional resources for further growth. We have new and expanded funding facilities based on our improved credit profile. Our overall outlook for 2007 is positive with the global automotive finance and insurance business expected to continue to post profits. We further expect the real estate finance business to continue to weaken with declining home sales and mortgage originations, while we seek to increase U.S. market share and pursue growth opportunities worldwide. The following summarizes the key business issues for our operations in 2007:

 

 

We actively manage our credit risk and believe that as of December 31, 2006, we are adequately reserved for potential losses incurred in the portfolios. However, a negative change in economic factors (particularly in the U.S. economy) could adversely impact our future earnings. As many of our credit exposures are collateralized by vehicles, the severity of losses is particularly sensitive to a decline in used vehicle prices, which can also adversely effect residual values in our lease portfolio. In addition, the overall frequency of losses would be negatively influenced by deterioration in macro-economic factors, which, in addition to those noted above, include higher unemployment rates and bankruptcy filings (both consumer and commercial).

 

 

We are exposed to valuation and credit risk on the portfolio of residential mortgage loans held for sale and held for investment, as well as on the interests retained from our securitization activities of these asset classes. In addition, we are exposed to credit risk in our asset-based lending business. Credit losses in our consumer portfolio are influenced by general business and economic conditions of the industries and countries in which we operate. We actively manage our credit risk and believe that as of December 31, 2006, we are adequately reserved for potential losses incurred in the portfolios. However, a negative change in economic factors (particularly in the U.S. economy) could adversely impact our 2007 earnings. As many of our credit exposures are collateralized by homes, the severity of losses is particularly sensitive to a decline in residential home prices. In addition, the overall frequency of losses would be negatively influenced by an increase in macro-economic factors, such as unemployment rates and bankruptcy filings.

 

 

Our extended service product line will face pressures from GM’s recent announcement that it was extending its powertrain warranty in the United States and Canada across its entire new and used car and light-duty truck lineup. Although challenging, we expect to mitigate the impact through the offerings of alternative products to the retail customer. We are also

Management’s Discussion and Analysis

GMAC LLC • Form 10-K

 

dependent on new vehicle market sales and vehicle quality. Our domestic consumer products continue to expect a competitive pricing environment in 2007 with higher loss costs expected in the industry due to medical and repair cost inflation. Extraordinary weather conditions can have a large impact on underwriting results in our consumer and automobile dealership physical damage products. We mitigate our potential loss exposure through active management of claim settlement activities and believe we are adequately reserved for unpaid losses and loss adjustment expenses at December 31, 2006.

 

We expect to have a more stable earnings stream from our investment portfolio due to a higher allocation in fixed income securities. Through the recent review of our portfolio, we sold a significant portion of our equity securities to monetize the high level of unrealized capital gains, which had grown considerably in recent years due to strong market performance, and to reduce our exposure to the inherently volatile equity markets from just over 30% to under 10%. The performance of our portfolio is dependent on the investment market prices and underlying factors.

 

 

 

Results of Operations

The following table summarizes the operating results of our Automotive Finance operations for the periods indicated. The amounts presented are before the elimination of balances and transactions with our other operating segments and include eliminations of balances and transactions among our North American Operations and International operating segments.

Management’s Discussion and Analysis

GMAC LLC • Form 10-K

 

2006 Compared to 2005

Automotive Finance operations net income increased 33% during the 2006 year. Net income was positively impacted by $383 million related to the write-off of certain net deferred tax liabilities as part of our conversion to an LLC during November 2006. Results for 2006 include the earnings impact of $1 billion debt tender offer to repurchase certain deferred interest debentures, which resulted in an after-tax unfavorable impact of $135 million during the third quarter. Absent the impact of the tender offer and the write-off of certain deferred taxes, Automotive Finance net income in 2006 was $46 million higher than in 2005.

 

Total automotive financing revenue was relatively flat in 2006, compared to the prior year, as lower consumer revenue was offset by higher commercial and operating lease revenues in the North American operations. The decrease in consumer revenue was consistent with the reduction in consumer asset levels as a result of continued whole loan sale activity. Consumer automotive finance receivables declined by approximately $10.4 billion, or 15%, since December 31, 2005. The size of our commercial finance receivable portfolio was relatively consistent with 2005. Commercial revenue increased approximately 12% year over year as a result of higher earning rates on the portfolio from an increase in market interest rates in 2006. Operating lease revenue and related depreciation expense increased 10% and 2%, respectively, year over year consistent with the higher average size of the operating lease portfolio. The increase in the average portfolio is reflective of continued strong lease volumes in North American operations and higher average customer balances.

 

Interest expense decreased 2% compared to 2005. When excluding the unfavorable pretax impact of the debt tender offer of approximately $225 million, interest expense decreased approximately 5%. This decline in interest was mainly due to the decrease in our debt balance, which was partially offset by higher market interest rates.

 

The provision for credit losses increased in comparison to the prior year, which is largely a result of a deterioration in the credit performance of the consumer portfolio in North America, as a result of increased loss frequency and severity. Refer to the Credit Risk discussion within this Automotive Finance Operations section of the MD&A for further discussion.

 

Our servicing fee income increased 121% compared to 2005. This increase was primarily related to the increase in our average serviced asset base. Investment income increased in 2006, as compared to 2005. The increase is largely a result of higher short-term interest rates and asset balances in 2006 versus 2005. In addition, noninterest expenses increased in comparison with 2005 levels due to an overall decline in operating lease remarketing results because of a softening in used vehicle prices and an overall decrease in lease termination volume.

 

Total income tax expense declined by $534 million in 2006, as compared to 2005, primarily due to our conversion to an LLC. A decline in pre-tax income for the year, lower Canadian corporate and provincial tax rates and the elimination of the Large Corporation Tax in Canada during the second quarter also contributed to the decline.

 

Prior to the Sale Transactions, we distributed to GM certain assets with respect to automotive leases owned by us and our affiliates having a net book value of $4.0 billion and related deferred tax liabilities of $1.8 billion. The distribution consisted of $12.6 billion of U.S. operating lease assets, $1.5 billion of restricted cash and miscellaneous assets and a $10.1 billion note payable.

 

2005 Compared to 2004

Automotive Finance operations net income was $880 million, a decrease of 34% in comparison to 2004. Income decreased primarily due to lower net interest margins as a result of higher borrowing costs. The decline in net interest margins was partially offset by lower consumer credit provisions, primarily as a result of lower asset levels and improved credit performance. Net income from International operations remained strong at $408 million in 2005, as compared to $415 million earned in 2004, despite a decrease in net interest margins.

 

Total automotive financing revenue increased 2% as compared to 2004. The commercial portfolio benefited from an increase in market interest rates as the majority of the portfolio is of a floating rate nature. Operating lease revenue increased year over year as the size of the operating lease portfolio increased by approximately 20% since December 2004. The increase in the portfolio is reflective of GM’s shift of some marketing incentives to consumer leases from retail contracts late in 2004.

 

Our provision for losses decreased 57% as compared to the 2004 year. This decrease resulted from a combination of lower consumer asset levels primarily due to an increase in whole loan sales, improved loss performance on retail contracts.

 

The increase in interest expense of $1.9 billion is consistent with the overall increase in market interest rates during the year, but also reflective of the widening of our corporate credit spreads as we experienced a series of credit rating actions over the past few years. The impact of the increased spreads will continue to affect results, as our lower cost debt matures, leaving debt borrowed at higher spreads on the books. Refer to the Funding and Liquidity section of this MD&A for further discussion.

 

Our servicing fee income increased 110% compared to 2004, due to an increase in whole loan sales activity.

 

Industry and Competition

The consumer automotive finance market is one of the largest consumer finance segments in the United States. The industry is generally segmented according to the type of vehicle sold (new versus used) and the buyer’s credit characteristics (prime, nonprime or sub-prime). In 2006 and 2005 we purchased or originated

Management’s Discussion and Analysis

GMAC LLC • Form 10-K

 

$60.7 billion and $58.4 billion, respectively, of consumer automotive retail or lease contracts.

 

The consumer automotive finance business is largely dependent on new vehicle sales volumes, manufacturers’ promotions and the overall macroeconomic environment. Competition tends to intensify when vehicle production decreases. Because of our relationship with GM, our penetration of GM volumes generally increases when GM uses subvented financing rates as a part of its promotion program. In conjunction with the Sale Transaction GM has agreed to continue to provide vehicle financing and leasing incentives exclusively through us for a 10 year period.

 

The consumer automotive finance business is highly competitive. We face intense competition from large suppliers of consumer automotive finance, which include captive automotive finance companies, large national banks and consumer finance companies. In addition, we face competition from smaller suppliers, including regional banks, savings and loans associations and specialized providers, such as local credit unions. Some of our larger competitors have access to significant capital and resources. Smaller suppliers often have a dominant position in a specific region or niche segment, such as used vehicle finance or nonprime customers.

 

Commercial financing competitors are primarily comprised of other manufacturer’s affiliated finance companies, independent commercial finance companies and national and regional banks. Refer to Risk Factors in Item 1A for further discussion.

 

Consumer Automotive Financing

We provide two basic types of financing for new and used vehicles: retail automotive contracts and automotive lease contracts. In most cases, we purchase retail contracts and leases for new and used vehicles from GM-affiliated dealers when the vehicles are purchased by consumers. In a number of markets outside the United States, we are a direct lender to the consumer. Our consumer automotive financing operations generate revenue through finance charges or lease payments and fees paid by customers on the retail contracts and leases. In connection with lease contracts, we also recognize a gain or loss on the remarketing of the vehicle. For purposes of discussion in this section of the MD&A, the loans related to our automotive lending activities are referred to as retail contracts. The following discussion centers on our operations in the United States, which are generally reflective of our global business practices; however, certain countries have unique statutory or regulatory requirements that impact business practices. The effects of such requirements are not significant to our consolidated financial condition, results of operations or cash flows.

 

The amount we pay a dealer for a retail contract is based on the negotiated purchase price of the vehicle and any other products, such as extended service contracts, less any vehicle trade-in value and any down payment from the consumer. Under the retail contract, the consumer is obligated to make payments in an amount equal to the purchase price of the vehicle (less any trade-in or down payment) plus finance charges at a rate negotiated between the consumer and the dealer. In addition, the consumer is also responsible for charges related to past due payments. When we purchase the contract, it is normal business practice for the dealer to retain some portion of the finance charge as income for the dealership, such that some of the finance charges the consumer pays to us and the remainder is paid to the dealer. Our agreements with dealers place a limit on the amount of the finance charges they are entitled to retain. While we do not own the vehicles we finance through retail contracts, we hold a perfected security interest in those vehicles.

 

With respect to consumer leasing, we purchase leases (and the associated vehicles) from dealerships. The purchase prices of the consumer leases are based on the negotiated price for the vehicle, less any vehicle trade-in and down payment from the consumer. Under the lease, the consumer is obligated to make payments in amounts equal to the amount by which the negotiated purchase price of the vehicle (less any trade-in value and any down payment) exceeds the projected residual value (including rate support) of the vehicle at lease termination, plus lease charges. The consumer is also responsible for charges for past due payments, excess mileage and excessive wear and tear. When the lease contract is entered into, we estimate the residual value of the leased vehicle at lease termination. We base our determination of the projected residual values on a guide published by an independent publisher of vehicle residual values, which is stated as a percentage of the manufacturer’s suggested retail price. These projected values may be upwardly adjusted as a marketing incentive, if GM or GMAC considers an above-market residual appropriate to encourage consumers to lease vehicles or for a low mileage lease program. Our standard leasing plan, SmartLease, requires a monthly payment by the consumer. We also offer an alternative leasing plan, SmartLease Plus, which requires one up-front payment of all lease amounts at the time the consumer takes possession of the vehicle.

 

In addition to the SmartLease plans, we offer the SmartBuy plan through dealerships to consumers. SmartBuy combines certain features of a lease contract with those of a traditional retail contract. Under the SmartBuy plan, the customer pays regular monthly payments that are generally lower than would otherwise be owed under a traditional retail contract. At the end of the contract, the customer has several options, including keeping the vehicle by making a final balloon payment or returning the vehicle to us and paying a disposal fee plus any applicable excess wear and excess mileage charges. Unlike a lease contract, during the course of the SmartBuy contract the customer owns the vehicle, and we hold a perfected security interest in the vehicle.

 

Management’s Discussion and Analysis

GMAC LLC • Form 10-K

 

With respect to all financed vehicles, whether subject to a retail contract or a lease contract, we require that property damage insurance be maintained by the consumer. In addition, on lease contracts we require that bodily injury and comprehensive and collision insurance be maintained by the consumer.

 

Consumer automotive finance retail revenue accounted for $5.7 billion, $6.5 billion and $6.8 billion of our revenue in 2006, 2005 and 2004, respectively.

 

The following table summarizes our new vehicle consumer financing volume and our share of GM retail sales:

 

 

Our consumer automotive financing volume and penetration levels are significantly impacted by the nature, timing and extent of GM’s use of rate, residual and other financing incentives for marketing purposes on consumer retail automotive contracts and leases. Our penetration levels were higher in 2006 than what was experienced in 2005, primarily as a result of a GM marketing program run in July, the 72-hour sale, which offered consumers special rate financing on retail contracts for up to 72 months. Conversely, GM’s Employee Discount for Everyone marketing program, which was introduced in June 2005 and ran through September 2005, had a negative impact on our penetration levels in 2005. Although GM benefited from an increase in sales, our penetration levels decreased, as the program did not provide consumers with additional incentives to finance with us. Our International operations’ consumer penetration levels declined, primarily as a result of a reduction in GM incentives on new vehicles, as well as the inclusion of GM vehicle sales in China in the penetration calculation, where we commenced operations in late 2004.

 

GM Marketing Incentives

GM may elect to sponsor incentive programs (on both retail contracts and leases) by supporting financing rates below the standard market rates at which we purchase retail contracts. Such marketing incentives are also referred to as rate support or subvention. When GM utilizes these marketing incentives, it pays us at contract inception the present value of the difference between the customer rate and our standard rates, which we defer and recognize as a yield adjustment over the life of the contract.

 

GM may also provide incentives, referred to as residual support, on leases. As previously mentioned, we bear a portion of the risk of loss to the extent the value of a leased vehicle upon remarketing is below the projected residual value of the vehicle at the time the lease contract is signed. However, these projected values may be upwardly adjusted as a marketing incentive, if GM considers an above-market residual appropriate to encourage consumers to lease vehicles. Such residual support by GM results in a lower monthly lease payment by the consumer. GM reimburses us to the extent remarketing sales proceeds are less than the residual value set forth in the lease contract. In addition to GM residual support, in some cases, GMAC may provide residual support on leases to further encourage consumers to lease certain vehicles.

 

In addition to the residual support arrangement, GM shares in residual risk on all off-lease vehicles sold at auction. Specifically, we and GM share a portion of the loss when resale proceeds fall below the standard residual values on vehicles sold at auction. GM reimburses us for a portion of the difference between proceeds and the standard residual value (up to a specified limit).

 

Under what we refer to as pull ahead programs, consumers are encouraged to terminate leases early in conjunction with the acquisition of a new GM vehicle. As part of these programs, we waive the customer’s remaining payment obligation, and under most programs, GM compensates us for the foregone revenue from the waived payments. Additionally, since these programs generally accelerate our remarketing of the vehicle, the sale proceeds are typically higher than otherwise would have been realized had the vehicle been remarketed at lease contract maturity. The reimbursement from GM for the foregone payments is, therefore, reduced by the amount of this benefit.

 

In connection with the sale, we amended our risk sharing agreement with GM. The new agreement will apply to new lease contracts entered into after November 30, 2006. GM is responsible for risk sharing on returned lease vehicles in the U.S. and Canada whose resale proceeds are below standard residual values (limited to a floor). GM will also pay us a quarterly leasing payment in

Management’s Discussion and Analysis

GMAC LLC • Form 10-K

 

connection with the agreement beginning in the first quarter of 2009 and ending in the fourth quarter of 2014.

 

Additionally, we entered into an exclusivity agreement with GM where U.S. vehicle financing and leasing incentives will be offered only through us for a period of 10 years. In connection with our right to use the “GMAC” name and for the exclusivity related to special financing and leasing incentives, we will pay GM an annual fee of $75 million. We will have the right to prepay these exclusivity fees to GM at any time.

 

The following table summarizes the percentage of our annual retail contracts and lease volume that includes GM-sponsored rate and residual incentives.

 

 

Consumer Credit Approval

Before purchasing a retail contract or lease from the dealer, we perform a credit review based on information provided by the dealer. As part of this process we evaluate, among other things, the following factors:

 

 

We use a proprietary credit scoring system to support this credit approval process and to manage the credit quality of the portfolio. We use credit scoring to differentiate expected default rates of credit applicants, enabling us to better evaluate credit applications for approval and to tailor the pricing and financing structure based on this assessment of credit risk. We periodically review our credit scoring models and update them based on historical information and current trends. However, these actions by management do not eliminate credit risk. Improper evaluations of contracts for purchase and changes in the applicant’s financial condition subsequent to approval could negatively affect the quality of our receivables portfolio, resulting in credit losses.

 

Upon successful completion of our credit underwriting process, we purchase the retail automotive financing contract or lease from the dealer.

 

Consumer Credit Risk Management

Credit losses in our consumer automotive retail contract and lease portfolio are influenced by general business and economic conditions, such as unemployment rates, bankruptcy filings and used vehicle prices. We analyze credit losses according to frequency (i.e., the number of contracts that default) and severity (i.e., the dollar magnitude of loss per occurrence of default). We manage credit risk through our contract purchase policy, credit approval process (including our proprietary credit scoring system) and servicing capabilities.

 

In general, the credit quality of the off-balance sheet portfolio is representative of our overall managed consumer automotive retail contract portfolio. However, the process of creating a pool of retail automotive finance receivables for securitization or sale typically involves excluding retail contracts that are greater than 30 days delinquent at such time. In addition, the process involves selecting from a pool of receivables that are currently outstanding and therefore, represent “seasoned” contracts. A seasoned portfolio that excludes delinquent contracts historically results in better credit performance in the managed portfolio than in the on-balance sheet portfolio of retail automotive finance receivables. In addition, the current off-balance sheet transactions are comprised mainly of subvented rate retail automotive finance receivables, which generally attract higher quality customers (who would otherwise be cash purchasers) than customers typically associated with non-subvented receivables.

 

The managed portfolio includes retail receivables held on-balance sheet for investment and receivables securitized and sold that we continue to service and in which we have a continuing involvement (i.e., in which we retain an interest or risk of loss in the underlying receivables); it excludes securitized and sold automotive finance receivables that we continue to service but in which we have no other continuing involvement (serviced-only portfolio). We believe the disclosure of the managed portfolio credit experience presents a more complete presentation of our credit exposure because the managed basis reflects not only on-balance sheet receivables but also securitized assets in which we retain a risk of loss in the underlying assets (typically in the form of a subordinated retained interest).

 

Management’s Discussion and Analysis

GMAC LLC • Form 10-K

 

The following tables summarize pertinent loss experience in the managed and on-balance sheet consumer automotive retail contract portfolio. Consistent with the presentation in our Consolidated Balance Sheet, retail contracts presented in the table represent the principal balance of the automotive finance receivable less unearned income.

 

 

The following table summarizes pertinent delinquency experience in the consumer automotive retail contract portfolio.

 

 

In addition to the preceding loss and delinquency data, the following table summarizes bankruptcies and repossession information for the United States consumer automotive retail contract portfolio (which represents approximately 53% and 65% of our on-balance sheet consumer automotive retail contract portfolio for the 2006 and 2005 year, respectively):

 

 

Servicing

Servicing activities consist largely of collecting and processing customer payments, responding to customer inquiries such as requests for payoff quotes, processing customer requests for account revisions such as payment extensions and refinancings, maintaining a perfected security interest in the financed vehicle, monitoring vehicle insurance coverage, and disposing of off-lease vehicles.

 

Our customers have the option to remit payments based on monthly billing statements, coupon books or electronic funds transfers. Customer payments are processed by regional third-party

Management’s Discussion and Analysis

GMAC LLC • Form 10-K

 

processing centers that electronically transfer payment data to customers’ accounts.

 

Servicing activities also include initiating contact with customers who fail to comply with the terms of the retail contract or lease. Such contacts typically begin with a reminder notice when the account is seven to 15 days past due. Telephone contact typically begins when the account is 10 to 20 days past due. Accounts that become 45 to 48 days past due are transferred to special collection centers that track accounts more closely. The nature and timing of these activities depend on the repayment risk that the account poses.

 

During the collection process, we may offer a payment extension to a customer experiencing temporary financial difficulty. A payment extension enables the customer to delay monthly payments for 30, 60 or 90 days, thereby deferring the maturity date of the contract by such period of delay. Extensions granted to a customer typically do not exceed 90 days in the aggregate over any 12-month period or 180 days in aggregate over the life of the contract. If the customer’s financial difficulty is not temporary, and management believes the customer could continue to make payments at a lower payment amount, we may offer to rewrite the remaining obligation, extending the term and lowering the monthly payment obligation. Extensions and rewrites are techniques that help mitigate financial loss in those cases where management believes the customer will recover from financial difficulty and resume regularly scheduled payments, or can fulfill the obligation with lower payments over a longer time period. Before offering an extension or rewrite, collection personnel evaluate and take into account the capacity of the customer to meet the revised payment terms. While the granting of an extension could delay the eventual charge-off of an account, typically we are able to repossess and sell the related collateral, thereby mitigating the loss. As an indication of the effectiveness of our consumer credit practices, of the total amount outstanding in the United States traditional retail portfolio as of December 31, 2003, only 6.3% of the extended or rewritten accounts were subsequently charged off, through December 31, 2006. A three-year period was utilized for this analysis as this approximates the weighted average remaining term of the portfolio. As of December 31, 2006, 5.5% of the total amount outstanding in the portfolio had been granted an extension or rewritten.

 

Subject to legal considerations, we will normally begin repossession activity once an account becomes 60 days past due. Repossession may occur earlier if management determines the customer is unwilling to pay, the vehicle is in danger of being damaged or hidden, or the customer voluntarily surrenders the vehicle. Approved third-party repossession firms handle repossessions. Normally, the customer is given a period of time to redeem the vehicle by paying off the account or bringing the account current. If the vehicle is not redeemed, it is sold at auction. If the proceeds do not cover the unpaid balance, including unpaid finance charges and allowable expenses, the resulting deficiency is charged off. Asset recovery centers pursue collections on accounts that have been charged off, including those accounts where the vehicle was repossessed and skip accounts where the vehicle cannot be located.

 

We have historically serviced retail contracts and leases in our managed portfolio. We will continue selling retail contracts (on a “whole loan” basis) that we purchase. With respect to retail and lease contracts we sell, we retain the right to service such retail contracts and leases and earn a servicing fee for such servicing functions. Semperian LLC, a subsidiary, performs most servicing activities for U.S. retail contracts and consumer automotive leases on our behalf. Semperian’s servicing activities are performed in accordance with our policies and procedures.

 

As of December 31, 2006 and 2005, our total consumer automotive serviced portfolio was $123.0 billion and $124.1 billion, respectively, while our consumer automotive managed portfolio was $91.9 billion and $108.4 billion in 2006 and 2005, respectively.

 

Allowance for Credit Losses

Our allowance for credit losses is intended to cover management’s estimate of incurred losses in the portfolio. Refer to the Critical Accounting Estimates section of this MD&A and Note 1 to our Consolidated Financial Statements for further discussion.

 

The following table summarizes activity related to the consumer allowance for credit losses for our automotive finance operations.

 

 

The overall credit performance of the consumer portfolio deteriorated from the prior year consistent with the decline in the level of overall managed and on-balance sheet receivables as we continued to execute more whole loan sales. Similar to securitizations, the process of creating a pool of retail automotive finance receivables for whole loan sales typically involves excluding retail contracts that are greater than 30 days delinquent at such

Management’s Discussion and Analysis

GMAC LLC • Form 10-K

 

time and selecting from a pool of receivables currently outstanding, which therefore, represent seasoned contracts. A seasoned portfolio that excludes delinquent contracts historically results in better credit performance, and as a result, the increase in whole loan activity over the past year has impacted the charge-offs as a percentage of the managed and on-balance sheet portfolio, when compared to the comparable period in the prior year. In addition to the impact of whole loan activity, delinquencies in the North American operations managed and on-balance sheet portfolio were negatively impacted by an aging of the overall portfolio as consumer serviced assets continued to decrease, as compared to prior year levels. International consumer credit portfolio performance remained strong as both delinquencies and charge-offs declined as compared to prior year levels.

 

Credit fundamentals in our consumer automotive portfolio deteriorated in 2006 relative to 2005 experience. Delinquencies, repossessions and loss severity all increased as compared to 2005. The increase in loss severity is illustrated by an increase in the average loss incurred per new vehicle repossessed in the United States traditional portfolio, which increased from $7,825 in 2005 to $8,129 in 2006. The increase in loss severity is attributable to a weakening in the used vehicle market resulting from a lower demand for used vehicles, as a result of new vehicle incentive programs, and higher fuel costs. The increase in delinquency trends in the North American portfolio is the result of lower on-balance sheet prime retail asset levels, primarily as a result of an increase in whole loan sales, the shrinking and aging of the portfolio and a weaker U.S. economy as compared to recent years. Conversely, delinquency trends in the International portfolio showed an improvement in 2006, as a result of a change in the mix of new and used retail contracts in the portfolio, as well as a significant improvement in the credit performance in certain international countries.

 

Despite the increase in delinquencies and loss severity, consumer credit loss rates in North America remained relatively stable in 2006 as compared to 2005. The decrease in the number of bankruptcies in the U.S. portfolio in 2006 was due to the change in bankruptcy law, effective October 17, 2005, which subsequently made it more difficult for some U.S. consumers to qualify for certain protections previously afforded to bankruptcy debtors. New bankruptcy filings in our U.S. portfolio increased dramatically in October 2005, prior to the change in law and decreased in 2006.

 

The allowance for credit losses as a percentage of the total on-balance sheet consumer portfolio remained stable in comparison to December 2005 as the consumer allowance year over year decreased along with automotive retail asset levels.

 

Our consumer automotive leases are operating leases and, therefore, exhibit different loss performance as compared to consumer automotive retail contracts. Credit losses on the operating lease portfolio are not as significant as losses on retail contracts because lease losses are limited to past due payments, late charges, and fees for excess mileage and excessive wear and tear. Since some of these fees are not assessed until the vehicle is returned, credit losses on the lease portfolio are correlated with lease termination volume. As further described in the Critical Accounting Estimates section of this MD&A, credit risk is considered within the overall depreciation rate and the resulting net carrying value of the operating lease asset. North American operating lease accounts past due over 30 days represented 1.51% and 1.33% of the total portfolio at December 31, 2006 and 2005, respectively.

 

Remarketing and Sales of Leased Vehicles

When we acquire a consumer lease, we assume ownership of the vehicle from the dealer. Neither the consumer nor the dealer is responsible for the value of the vehicle at the time of lease termination. Typically, the vehicle is returned to us for remarketing through an auction. We generally bear the risk of loss to the extent the value of a leased vehicle upon remarketing is below the projected residual value determined at the time the lease contract is signed. However, GM shares this risk with us in certain circumstances, as described previously at GM Marketing Incentives.

 

When vehicles are not purchased by customers or the receiving dealer at lease termination, we regain possession of the leased vehicles from the customers and sell the vehicles, primarily through physical and internet auctions. The following table summarizes our methods of vehicle sales in the United States at lease termination, stated as a percentage of total lease vehicle disposals.

 

 

We primarily sell our off-lease vehicles through:

 

Management’s Discussion and Analysis

GMAC LLC • Form 10-K

 

 

Lease Residual Risk Management

We are exposed to residual risk on vehicles in the consumer lease portfolio. This lease residual risk represents the possibility that the actual proceeds realized upon the sale of returned vehicles will be lower than the projection of these values used in establishing the pricing at lease inception. The following factors most significantly influence lease residual risk:

 

 

 

The following table summarizes the volume of lease terminations and the average sales proceeds on 24, 36 and 48-month scheduled lease terminations in the United States serviced lease portfolio for the years indicated. The 36 month terminations represented approximately 51%, 69%, and 73% of our total terminations in 2006, 2005 and 2004, respectively.

 

 

Our off-lease vehicle remarketing results remained relatively stable in 2006, as compared to the past few years, despite a weaker used vehicle market, primarily as a result of a decline in the volume of vehicles coming off-lease and the fact that the underlying contractual residual values (on the current portfolio) were lower than the residuals established on prior years’ volume. Additionally, we have continued aggressive use of the internet in disposing of off-lease vehicles. This initiative has improved efficiency, reduced costs and ultimately increased the net proceeds on the sale of off-lease vehicles. In 2007 continued improvement in remarketing results is expected as the favorable effect of lower contractual residual values continues.

 

In recent years, the percentage of lease contracts terminated prior to the scheduled maturity date has increased primarily due to GM-sponsored pull ahead programs. Under these marketing programs, consumers are encouraged to terminate leases early in conjunction with the acquisition of a new GM vehicle. The sales proceeds per vehicle on scheduled lease terminations in the preceding table do not include the effect of payments related to the pull ahead programs.

 

Commercial Automotive Financing

 

Automotive Wholesale Dealer Financing

One of the most important aspects of our automotive financing operations is supporting the sale of GM vehicles through wholesale or floor plan financing, primarily through automotive finance purchases by dealers of new and used vehicles manufactured or distributed by GM and, less often, other vehicle manufacturers, prior to sale or lease to the retail customer. Wholesale automotive financing represents the largest portion of our commercial financing business and is the primary source of funding for GM dealers’ purchases of new and used vehicles. In 2006 we financed six million new GM vehicles (representing an 80% share of GM sales to dealers). In addition, we financed approximately 140,000 new non-GM vehicles. The following discussion centers on our operations in the United States, which are generally reflective of our global business practices; however, certain countries have unique statutory or regulatory requirements that impact business practices. The effects of such requirements are not significant to our consolidated financial condition, results of operations or cash flows.

Management’s Discussion and Analysis

GMAC LLC • Form 10-K

 

 

Wholesale credit is arranged through lines of credit extended to individual dealers. In general, each wholesale credit line is secured by all the vehicles financed by us and, in some instances, by other assets owned by the dealer or the operator’s/owner’s personal guarantee. The amount we advance to dealers is equal to 100% of the wholesale invoice price of new vehicles, which includes destination and other miscellaneous charges, and with respect to vehicles manufactured by GM and other motor vehicle manufacturers, a price rebate, known as a holdback, from the manufacturer to the dealer in varying amounts stated as a percentage of the invoice price. Interest on wholesale automotive financing is generally payable monthly. Most wholesale automotive financing is structured to yield interest at a floating rate indexed to the Prime Rate. The rate for a particular dealer is based on, among other things, competitive factors, the amount and status of the dealer’s creditworthiness and various incentive programs.

 

Under the terms of the credit agreement with the dealer, we may demand payment of interest and principal on wholesale credit lines at any time. However, unless we terminate the credit line or the dealer defaults, we generally require payment of the principal amount financed for a vehicle upon its sale or lease by the dealer to the customer. Ordinarily, a dealer has between one and five days, based on risk and exposure of the account, to satisfy the obligation.

 

Wholesale automotive financing accounted for $1.3 billion, $1.1 billion and $1.1 billion of our revenues in 2006, 2005 and 2004, respectively.

 

The following table summarizes our wholesale financing of new vehicles and share of GM sales to dealers in markets where we operate.

 

 

Our wholesale automotive financing continues to be the primary funding source for GM dealer inventories. Penetration levels in North America in 2006 continued to reflect traditionally strong levels but declined from 2005 levels. International levels increased in 2006 mainly due to growth in China and improvement in their penetration levels.

 

Credit Approval

Prior to establishing a wholesale line of credit, we perform a credit analysis of the dealer. During this analysis, we:

 

 

Based on this analysis, we may approve the issuance of a credit line and determine the appropriate size. The credit lines represent guidelines, not limits. Therefore, the dealers may exceed them on occasion, an example being a dealer exceeding sales targets contemplated in the credit approval process. Generally, the size of the credit line is intended to be an amount sufficient to finance approximately a 90 day supply of new vehicles and a 30-60 day supply of used vehicles. Our credit guidelines ordinarily require that advances to finance used vehicles be approved on a unit by unit basis.

 

Commercial Credit

Our credit risk on the commercial portfolio is markedly different than that of our consumer portfolio. Whereas the consumer portfolio represents a homogeneous pool of retail contracts and leases that exhibit fairly predictable and stable loss patterns, the commercial portfolio exposures are less predictable. In general, the credit risk of the commercial portfolio is tied to overall economic conditions in the countries in which we operate. Further, our credit exposure is concentrated in automotive dealerships (primarily GM dealerships). Occasionally, GM provides payment guarantees on certain commercial loans and receivables we have outstanding. As of December 31, 2006 and 2005, approximately $169 million and $934 million, respectively, in commercial loans and receivables were covered by a GM guarantee.

 

Credit risk is managed and guided by policies and procedures established and controlled by Corporate, that are designed to ensure that risks are accurately and consistently assessed, properly approved and continuously monitored. Our wholly owned subsidiaries approve significant transactions and are responsible for credit risk assessments (including the evaluation of the adequacy of the collateral). Our wholly owned subsidiaries also monitor the credit risk profile of individual borrowers and the aggregate portfolio of borrowers — either within a designated geographic region or a particular product or industry segment. Corporate approval is required for transactions exceeding business unit approval limits. Credit risk monitoring is supplemented at the corporate portfolio level through a periodic review performed by our Chief Credit Officer.

 

Management’s Discussion and Analysis

GMAC LLC • Form 10-K

 

To date, the commercial receivables that have been securitized and accounted for as off-balance sheet transactions primarily represent wholesale lines of credit extended to automotive dealerships, which historically have experienced low losses and some dealer term loans. Historically, only wholesale accounts were securitized, resulting in our managed portfolio being substantially the same as our on-balance sheet portfolio. As a result, only the on-balance sheet commercial portfolio credit experience is presented in the following table:

 

 

Annual charge-offs on the wholesale portfolio remained at traditionally low levels in 2006, while charge-offs declined for the other commercial automotive financing portfolio. Impaired loans in the wholesale commercial loan portfolio increased in comparison to December 2005 levels, as a result of an increase in the amounts outstanding in the wholesale lines of credit for certain dealer accounts. In addition, impaired loans declined in the other commercial automotive financing portfolio since December 2005.

 

Servicing and Monitoring

We service all of the wholesale credit lines in our portfolio as well as the wholesale automotive finance receivables that we have securitized. A statement setting forth billing and account information is prepared by us and distributed on a monthly basis to each dealer. Interest and other non-principal charges are billed in arrears and are required to be paid immediately upon receipt of the monthly billing statement. Generally, dealers remit payments to GMAC through wire transfer transactions initiated by the dealer through a secure web application.

 

Dealers are assigned a credit category based on various factors, including capital sufficiency, operating performance, financial outlook, and credit and payment history. The credit category impacts the amount of the line of credit, the determination of further advances and the management of the account. We monitor the level of borrowing under each dealer’s account daily. When a dealer’s balance exceeds the credit line, we may temporarily suspend the granting of additional credit or increase the dealer’s credit line or take other actions, following evaluation and analysis of the dealer’s financial condition and the cause of the excess.

 

We periodically inspect and verify the existence of dealer vehicle inventories. The timing of the verifications varies and no advance notice is given to the dealer. Among other things, verifications are intended to determine dealer compliance with the financing agreement and confirm the status of our collateral.

 

Other Commercial Automotive Financing

We also provide other forms of commercial financing for the automotive industry. The following describes our other automotive financing markets and products:

 

Management’s Discussion and Analysis

GMAC LLC • Form 10-K

 

 

Results of Operations

The following table summarizes the operating results for ResCap for the periods indicated. The amounts presented are before the elimination of balances and transactions with our other operating segments.