Auto Loan Receivables

3 Months Ended

May 31, 2020

Loans and Leases Receivable, Net Amount [Abstract]

Auto Loans Receivable

Auto loans receivable include amounts due from customers related to retail vehicle sales financed through CAF and are presented net of an allowance for estimated loan losses. We generally use warehouse facilities to fund auto loans receivable originated by CAF until we elect to fund them through an asset-backed term funding transaction, such as a term securitization or alternative funding arrangement. We recognize transfers of auto loans receivable into the warehouse facilities and asset-backed term funding transactions (together, “non-recourse funding vehicles”) as secured borrowings, which result in recording the auto loans receivable and the related non-recourse notes payable on our consolidated balance sheets. The majority of the auto loans receivable serve as collateral for the related non-recourse notes payable of $13.17 billion as of May 31, 2020 and $13.61 billion as of February 29, 2020. See Note 9 for additional information on non-recourse notes payable.

Interest income and expenses related to auto loans are included in CAF income. Interest income on auto loans receivable is recognized when earned based on contractual loan terms. All loans continue to accrue interest until repayment or charge-off. When a charge-off occurs, accrued interest is written off by reversing interest income. Direct costs associated with loan originations are not considered material, and thus, are expensed as incurred. See Note 3 for additional information on CAF income.

Auto Loans Receivable, Net



	As of May 31			As of February 29
(In millions)	2020			2020
Asset-backed term funding	$	10,795.3		$	11,007.1
Warehouse facilities	1,949.7			2,181.7
Overcollateralization ⁽¹⁾	291.0			289.0
Other managed receivables⁽²⁾	135.9			140.0
Total ending managed receivables	13,171.9			13,617.8
Accrued interest and fees	64.8			56.2
Other	(4.9		)	35.5
Less: allowance for loan losses	(437.2		)	(157.8		)
Auto loans receivable, net	$	12,794.6		$	13,551.7


⁽¹⁾	Represents receivables restricted as excess collateral for the non-recourse funding vehicles.


⁽²⁾	Other managed receivables includes receivables not funded through the non-recourse funding vehicles.

Credit Quality. When customers apply for financing, CAF’s proprietary scoring models rely on the customers’ credit history and certain application information to evaluate and rank their risk. We obtain credit histories and other credit data that includes information such as number, age, type of and payment history for prior or existing credit accounts. The application information that is used includes income, collateral value and down payment. The scoring models yield credit grades that represent the relative likelihood of repayment. Customers with the highest probability of repayment are A-grade customers. Customers assigned a lower grade are determined to have a lower probability of repayment. For loans that are approved, the credit grade influences the terms of the agreement, such as the required loan-to-value ratio and interest rate. After origination, credit grades are generally not updated.

CAF uses a combination of the initial credit grades and historical performance to monitor the credit quality of the auto loans receivable on an ongoing basis. We validate the accuracy of the scoring models periodically. Loan performance is reviewed on a recurring basis to identify whether the assigned grades adequately reflect the customers’ likelihood of repayment.

Ending Managed Receivables by Major Credit Grade



	As of May 31, 2020
	Fiscal Year of Origination⁽¹⁾
(In millions)	2021		2020		2019		2018		2017		Prior to 2017		Total		% ⁽²⁾
A	$	493.7	$	2,928.5	$	1,689.5	$	957.6	$	450.1	$	139.7	$	6,659.1	50.6
B	334.0		1,891.8		1,214.7		731.3		367.2		160.9		4,699.9		35.7
C and other	129.7		706.8		438.6		271.8		174.0		92.0		1,812.9		13.7
Total ending managed receivables	$	957.4	$	5,527.1	$	3,342.8	$	1,960.7	$	991.3	$	392.6	$	13,171.9	100.0



	As of February 29
(In millions)	2020⁽¹⁾		% ⁽²⁾
A	$	6,915.9	50.8
B	4,841.2		35.6
C and other	1,860.7		13.6
Total ending managed receivables	$	13,617.8	100.0


⁽¹⁾	Classified based on credit grade assigned when customers were initially approved for financing.


⁽²⁾	Percent of total ending managed receivables.

Allowance for Loan Losses. The allowance for loan losses at May 31, 2020 represents the net credit losses expected over the remaining contractual life of our managed receivables. The allowance for loan losses is determined using a net loss timing curve, primarily based on the composition of the portfolio of managed receivables and historical gross loss and recovery trends. For receivables that have less than 18 months of performance history, the net loss estimate takes into account the credit grades of the receivables and historical losses by credit grade to supplement actual loss data in estimating future performance. Once the receivables have 18 months of performance history, the net loss estimate reflects actual loss experience of those receivables to date, along with forward loss curves, to predict future performance. The forward loss curves are constructed using historical performance data and show the average timing of losses over the course of a receivable’s life.

The output of the net loss timing curve is adjusted to take into account reasonable and supportable forecasts about the future. Specifically, the change in U.S. unemployment rates and the NADA used vehicle price index are used to predict changes in gross loss and recovery rate, respectively. An economic adjustment factor is developed to capture the relationship between changes in these forecasts and changes in gross loss and recovery rates. This factor is applied to the output of the net loss timing curve for the reasonable and supportable forecast period of two years. After the end of this two year period, the impact of the economic factor is phased out of the allowance for loan loss calculation on a straight-line basis over a period of 12 months. We periodically consider whether the use of alternative metrics would result in improved model performance and revise the models when appropriate. The provision for loan losses is the periodic expense of maintaining an adequate allowance.

Allowance for Loan Losses



	Three Months Ended May 31
(In millions)	2020			%⁽¹⁾	2019⁽²⁾			%⁽¹⁾
Balance as of beginning of period	$	157.8		1.16	$	138.2		1.10
Adoption of CECL	202.0				—
Adjusted balance as of beginning of period	359.8			2.64	138.2			1.10
Charge-offs	(70.7		)		(65.9		)
Recoveries⁽³⁾	26.1				36.5
Provision for loan losses	122.0				38.2
Balance as of end of period	$	437.2		3.32	$	147.0		1.14


⁽¹⁾	Percent of total ending managed receivables.


⁽²⁾	The comparative information has not been restated and continues to be reported under the accounting guidance in effect during fiscal 2020.


⁽³⁾	Net of costs incurred to recover vehicle.

As discussed in Note 1, we adopted CECL during the first quarter of fiscal 2021. The adoption of this pronouncement resulted in the recognition of a $202.0 million increase in the allowance for loan losses as of March 1, 2020, with a corresponding net-of-tax decrease of $153.3 million in retained earnings. During the first quarter of fiscal 2021, we recorded a provision for loan losses of $122.0 million. The provision included an $84.0 million increase in our estimate of lifetime losses on existing loans, largely resulting from worsening economic factors in response to COVID-19. In particular, the U.S. unemployment rate rose significantly during the quarter. This rate is used in loss prediction to incorporate how current and forecasted economic conditions impact customer hardship, or ability to pay. Changes in the NADA used vehicle price index were not significant. The remaining $38.0 million of provision recorded in the first quarter of fiscal 2021 largely reflected our estimate of lifetime losses on originations made during the current quarter.

Past Due Receivables. An account is considered delinquent when the related customer fails to make a substantial portion of a scheduled payment on or before the due date. In general, accounts are charged-off on the last business day of the month during which the earliest of the following occurs: the receivable is 120 days or more delinquent as of the last business day of the month, the related vehicle is repossessed and liquidated, or the receivable is otherwise deemed uncollectible. For purposes of determining impairment, auto loans are evaluated collectively, as they represent a large group of smaller-balance homogeneous loans, and therefore, are not individually evaluated for impairment.

Past Due Receivables



	As of May 31, 2020
	Major Credit Grade
(In millions)	A		B		C & Other		Total		% ⁽¹⁾
Current	$	6,632.0	$	4,554.5	$	1,658.7	$	12,845.2	97.52
Delinquent loans:
31-60 days past due	16.4		89.3		92.8		198.5		1.51
61-90 days past due	7.0		38.9		44.3		90.2		0.68
Greater than 90 days past due	3.7		17.2		17.1		38.0		0.29
Total past due	27.1		145.4		154.2		326.7		2.48
Total ending managed receivables	$	6,659.1	$	4,699.9	$	1,812.9	$	13,171.9	100.00



	As of February 29
(In millions)	2020		%⁽¹⁾
Total ending managed receivables	$	13,617.8	100.00
Delinquent loans:
31-60 days past due	$	296.4	2.18
61-90 days past due	138.3		1.01
Greater than 90 days past due	34.2		0.25
Total past due	$	468.9	3.44

⁽¹⁾

Percent of total ending managed receivables.