ALLOWANCE FOR CREDIT LOSSES

The allowance for credit losses represents our estimate of the probable loss on the collection of finance receivables and operating leases as of the balance sheet date. The adequacy of the allowance for credit losses is assessed quarterly, and the assumptions and models used in establishing the allowance are regularly evaluated. Because credit losses can vary substantially over time, estimating credit losses requires a number of assumptions about matters that are uncertain.

Consumer

The majority of our credit losses are attributable to our consumer receivables segment. We estimate the allowance for credit losses on our consumer receivables segment and on our investments in operating leases using a combination of measurement models and management judgment. The models consider factors such as historical trends in credit losses and recoveries (including key metrics such as delinquencies, repossessions and bankruptcies), the composition of our present portfolio (including vehicle brand, term, risk evaluation and new/used vehicles), trends in historical and projected used vehicle values, and economic conditions. Estimates from these models rely on historical information and may not fully reflect losses inherent in the present portfolio. Therefore, we may adjust the estimate to reflect management's judgment regarding justifiable changes in recent economic trends and conditions, portfolio composition and other relevant factors.

We make projections of two key assumptions to assist in estimating the consumer allowance for credit losses:


•	Frequency – the number of finance receivables that are expected to default over the loss emergence period, measured as repossessions


•	Loss severity – the expected difference between the amount a customer owes when the finance contract is charged-off and the amount received, net of expenses, from selling the repossessed vehicle, including any recoveries from the customer

NOTE 4. ALLOWANCE FOR CREDIT LOSSES (Continued)

The consumer receivables portfolio allowance is evaluated primarily using a collective loss-to-receivables (“LTR”) model that based on historical experience indicates credit losses have been incurred in the portfolio even though the particular receivables that are uncollectible cannot be specifically identified. The LTR model is based on the most recent years of history. Each LTR is calculated by dividing credit losses by average end-of-period receivables excluding unearned interest supplements and allowance for credit losses. A weighted-average LTR is calculated for each class of consumer receivables and multiplied by the end-of-period receivable balances for that given class.

The loss emergence period (“LEP”) is a key assumption within our models and represents the average amount of time between when a loss event first occurs to when it is charged-off. This time period starts when the consumer begins to experience financial difficulty. It is evidenced later, typically through delinquency, before eventually resulting in a charge-off. The LEP is a multiplier in the calculation of the collective consumer allowance for credit losses.

For consumer receivables greater than 120 days past due, the uncollectible portion of the receivable is charged-off, such that the remaining recorded investment in the loan is equal to the estimated fair value of the collateral less costs to sell.

After establishing the collective allowance for credit losses, if management believes the allowance does not reflect all losses inherent in the portfolio due to changes in recent economic trends and conditions, or other relevant factors, an adjustment is made based on management judgment.

Non-Consumer

We estimate the allowance for credit losses for non-consumer receivables based on historical LTR ratios, expected future cash flows, and the fair value of collateral.

Collective Allowance for Credit Losses. We estimate an allowance for non-consumer receivables that are not specifically identified as impaired using a LTR model for each financing product based on historical experience. This LTR is a weighted-average of the most recent historical experience and is calculated consistent with the consumer receivables LTR approach. All accounts that are specifically identified as impaired are excluded from the calculation of the non-specific or collective allowance.

Specific Allowance for Impaired Receivables. The wholesale and dealer loan portfolio is evaluated by grouping individual loans into risk pools determined by the risk characteristics of the loan (such as the amount of the loan, the nature of the collateral, and the financial status of the debtor). The risk pools are analyzed to determine if individual loans are impaired, and a specific allowance is estimated based on the present value of the expected future cash flows of the receivable discounted at the loan's effective interest rate or the fair value of any collateral adjusted for estimated costs to sell.

After establishment of the collective and specific allowance for credit losses, if management believes the allowance does not reflect all losses inherent in the portfolio due to changes in recent economic trends and conditions, or other relevant factors, an adjustment is made based on management judgment.

NOTE 4. ALLOWANCE FOR CREDIT LOSSES (Continued)

Allowance for Credit Losses

Following is an analysis of the allowance for credit losses related to finance receivables and investment in operating leases for the periods ended June 30, 2011 (in millions):



	Second Quarter 2011
	Finance Receivables									Net Investment in
	Consumer			Non-Consumer			Total			Operating Leases			Total Allowance
Allowance for credit losses
Beginning balance	$	622		$	47		$	669		$	75		$	744
Charge-offs	(92		)	(9		)	(101		)	(26		)	(127		)
Recoveries	52			1			53			25			78
Provision for credit losses	(21		)	6			(15		)	(10		)	(25		)
Other (a)	2			1			3			0			3
Ending balance	$	563		$	46		$	609		$	64		$	673

	First Half 2011
	Finance Receivables									Net Investment in
	Consumer			Non-Consumer			Total			Operating Leases			Total Allowance
Allowance for credit losses
Beginning balance	$	701		$	66		$	767		$	87		$	854
Charge-offs	(204		)	(6		)	(210		)	(55		)	(265		)
Recoveries	109			2			111			50			161
Provision for credit losses	(52		)	(18		)	(70		)	(19		)	(89		)
Other (a)	9			2			11			1			12
Ending balance	$	563		$	46		$	609		$	64		$	673


Analysis of ending balance of allowance for credit losses
Collective impairment allowance	$	563		$	36		$	599		$	64		$	663
Specific impairment allowance	0			10			10			—			10
Ending balance	$	563		$	46		$	609		$	64		$	673

Analysis of ending balance of finance receivables and net investment in operating leases
Collectively evaluated for impairment	$	47,298		$	27,005		$	74,303		$	10,248
Specifically evaluated for impairment	0			108			108			—
Recorded investment (b)	$	47,298		$	27,113		$	74,411		$	10,248

Ending balance, net of allowance for credit losses	$	46,735		$	27,067		$	73,802		$	10,184


(a)	Represents principally amounts related to translation adjustments.


(b)	Finance receivables and net investment in operating leases before allowance for credit losses.