Finance Receivables

Our pre-acquisition and post-acquisition retail finance portfolios are now reported on a combined basis, due to the diminished size of the pre-acquisition portfolio, which was $145 million at December 31, 2015 and $459 million at December 31, 2014.

The finance receivables portfolio consists of the following (in millions):



	December 31, 2015									December 31, 2014
	North America			International			Total			North America			International			Total
Retail
Retail finance receivables, collectively evaluated for impairment, net of fees^(a)	$	16,536		$	10,976		$	27,512		$	12,127		$	12,262		$	24,389
Retail finance receivables, individually evaluated for impairment, net of fees	1,612			—			1,612			1,234			—			1,234
Total retail finance receivables^(b)	18,148			10,976			29,124			13,361			12,262			25,623
Less: allowance for loan losses - collective	(398		)	(117		)	(515		)	(405		)	(78		)	(483		)
Less: allowance for loan losses - specific	(220		)				(220		)	(172		)	—			(172		)
Total retail finance receivables, net	17,530			10,859			28,389			12,784			12,184			24,968
Commercial
Commercial finance receivables, collectively evaluated for impairment, net of fees	4,043			4,314			8,357			3,180			4,803			7,983
Commercial finance receivables, individually evaluated for impairment, net of fees	8			74			82			—			89			89
Total commercial finance receivables	4,051			4,388			8,439			3,180			4,892			8,072
Less: allowance for loan losses - collective	(23		)	(15		)	(38		)	(21		)	(14		)	(35		)
Less: allowance for loan losses - specific	—			(9		)	(9		)	—			(5		)	(5		)
Total commercial finance receivables, net	4,028			4,364			8,392			3,159			4,873			8,032
Total finance receivables, net	$	21,558		$	15,223		$	36,781		$	15,943		$	17,057		$	33,000

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(a)	Amounts reported in the International Segment include $1.1 billion and $1.0 billion of direct-financing leases at December 31, 2015 and 2014.


(b)	Net of unamortized premiums and discounts, and deferred fees and costs of $179 million and $245 million at December 31, 2015 and 2014.

Retail Finance Receivables

Following is a summary of activity in our retail finance receivables portfolio (in millions):



	Years ended December 31,
	2015									2014									2013
	North America			International			Total			North America			International			Total			North America			International			Total
Beginning balance	$	13,361		$	12,262		$	25,623		$	11,388		$	11,742		$	23,130		$	10,789		$	—		$	10,789
Acquisition	—			—			—			—			—			—			—			10,310			10,310
Purchases	10,931			6,606			17,537			6,808			8,277			15,085			5,126			4,471			9,597
Principal collections and other	(5,272		)	(5,696		)	(10,968		)	(4,054		)	(6,180		)	(10,234		)	(3,943		)	(3,086		)	(7,029		)
Charge-offs	(859		)	(137		)	(996		)	(776		)	(138		)	(914		)	(584		)	(54		)	(638		)
Foreign currency translation	(13		)	(2,059		)	(2,072		)	(5		)	(1,439		)	(1,444		)	—			101			101
Ending balance	$	18,148		$	10,976		$	29,124		$	13,361		$	12,262		$	25,623		$	11,388		$	11,742		$	23,130

A summary of the activity in the allowance for retail loan losses is as follows (in millions):



	Years ended December 31,
	2015									2014									2013
	North America			International			Total			North America			International			Total			North America			International			Total
Beginning balance	$	577		$	78		$	655		$	468		$	29		$	497		$	345		$	—		$	345
Provision for loan losses	461			151			612			468			145			613			380			52			432
Charge-offs	(859		)	(137		)	(996		)	(776		)	(138		)	(914		)	(584		)	(54		)	(638		)
Recoveries	439			47			486			417			53			470			327			29			356
Foreign currency translation	—			(22		)	(22		)	—			(11		)	(11		)	—			2			2
Ending balance	$	618		$	117		$	735		$	577		$	78		$	655		$	468		$	29		$	497

Retail Credit Quality

We use proprietary scoring systems in the underwriting process that measure the credit quality of the receivables using several factors, such as credit bureau information, consumer credit risk scores (e.g. FICO score), and contract characteristics. We also consider other factors, such as employment history, financial stability and capacity to pay. At the time of loan origination, substantially all of our international customers have the equivalent of prime credit scores. In the North America Segment, while we historically focused on consumers with lower than prime credit scores, we are expanding our prime lending programs. A summary of the credit risk profile by FICO score band or equivalent scores, determined at origination, of the retail finance receivables in the North America Segment is as follows (dollars in millions):



	December 31, 2015				December 31, 2014
	Amount		Percent		Amount		Percent
Prime - FICO Score 680 and greater	$	4,418	24.4	%	$	596	4.4	%
Near-prime - FICO Score 620 to 679	2,890		15.9	%	1,691		12.7	%
Sub-prime - FICO Score less than 620	10,840		59.7	%	11,074		82.9	%
Balance at end of period	$	18,148	100.0	%	$	13,361	100.0	%

In addition, we review the credit quality of all of our retail finance receivables based on customer payment activity. A retail account is considered delinquent if a substantial portion of a scheduled payment has not been received by the date such payment was contractually due. Retail finance receivables are collateralized by vehicle titles and, subject to local laws, we generally have the right to repossess the vehicle in the event the customer defaults on the payment terms of the contract. The following is a summary of the contractual amounts of retail finance receivables, which is not significantly different than recorded investment, that are (i) more than 30 days delinquent, but not yet in repossession, and (ii) in repossession, but not yet charged off (dollars in millions):



	December 31, 2015								December 31, 2014
	North America		International		Total		Percent of Contractual Amount Due		North America		International		Total		Percent of Contractual Amount Due
31 - 60 days	$	1,150	$	87	$	1,237	4.2	%	$	994	$	89	$	1,083	4.2	%
Greater than 60 days	389		92		481		1.6		328		104		432		1.7
	1,539		179		1,718		5.8		1,322		193		1,515		5.9
In repossession	42		4		46		0.2		36		4		40		0.2
	$	1,581	$	183	$	1,764	6.0	%	$	1,358	$	197	$	1,555	6.1	%

The accrual of finance charge income had been suspended on $778 million and $682 million of retail finance receivables (based on contractual amount due) at December 31, 2015 and December 31, 2014.

Impaired Retail Finance Receivables - TDRs

Retail finance receivables that become classified as troubled debt restructurings ("TDRs") are separately assessed for impairment. A specific allowance is estimated based on the present value of the expected future cash flows of the receivable discounted at the loan's original effective interest rate. Accounts that become classified as TDRs because of a payment deferral still accrue interest at the contractual rate and an additional fee is collected (where permitted) at each time of deferral and recorded as a reduction of accrued interest. No interest or fees are forgiven on a payment deferral to a customer; therefore, there are no additional financial effects of deferred loans becoming classified as TDRs. Accounts in the U.S. in Chapter 13 bankruptcy would have already been placed on non-accrual; therefore, there are no additional financial effects from these loans becoming classified as TDRs. Finance charge income from loans classified as TDRs is accounted for in the same manner as other accruing loans. Cash collections on these loans are allocated according to the same payment hierarchy methodology applied to loans that are not classified as TDRs.

At December 31, 2015 and 2014, the outstanding balance of retail finance receivables in the International Segment determined to be TDRs was insignificant; therefore, the following information is presented with regard to the TDRs in the North America Segment only.

The outstanding recorded investment for retail finance receivables that are considered to be TDRs and the related allowance is presented below (in millions):



	December 31, 2015			December 31, 2014
Outstanding recorded investment	$	1,612		$	1,234
Less: allowance for loan losses	(220		)	(172		)
Outstanding recorded investment, net of allowance	$	1,392		$	1,062
Unpaid principal balance	$	1,642		$	1,255

Additional information about loans classified as TDRs is presented below (in millions, except for number of loans):



	Years Ended December 31,
	2015		2014		2013
Average outstanding recorded investment	$	1,455	$	996	$	487
Finance income recognized	$	164	$	123	$	70
Number of loans classified as TDRs during the period	58,012		49,490		38,196
Recorded investment of loans classified as TDRs during the period	$	982	$	794	$	643

A redefault is when an account meets the requirements for evaluation under our charge-off policy (See Note 1 - "Summary of Significant Accounting Policies" for additional information). The unpaid principal balance, net of recoveries, of loans that redefaulted during the reporting period and were within 12 months of being modified as a TDR were $20 million, $25 million and $22 million for the years ended December 31, 2015, 2014 and 2013.

Commercial Finance Receivables

Following is a summary of activity in our commercial finance receivables portfolio (in millions):



	Years ended December 31,
	2015									2014									2013
	North America			International			Total			North America			International			Total			North America			International			Total
Beginning balance	$	3,180		$	4,892		$	8,072		$	1,975		$	4,725		$	6,700		$	560		$	—		$	560
Acquisition	—			—			—			—			—			—			—			4,834			4,834
Net funding (collections)	933			51			984			1,228			661			1,889			1,424			(246		)	1,178
Charge-offs	(2		)	(1		)	(3		)	—			—			—			(2		)	(3		)	(5		)
Foreign currency translation	(60		)	(554		)	(614		)	(23		)	(494		)	(517		)	(7		)	140			133
Ending balance	$	4,051		$	4,388		$	8,439		$	3,180		$	4,892		$	8,072		$	1,975		$	4,725		$	6,700

Commercial Credit Quality

We extend wholesale credit to dealers primarily in the form of approved lines of credit to purchase new vehicles as well as used vehicles. Each commercial lending request is evaluated, taking into consideration the borrower's financial condition and the underlying collateral for the loan. We use proprietary models to assign each dealer a risk rating. These models use historical performance data to identify key factors about a dealer that we consider significant in predicting a dealer's ability to meet its financial obligations. We also consider numerous other financial and qualitative factors including, but not limited to, capitalization and leverage, liquidity and cash flow, profitability and credit history.

We regularly review our models to confirm the continued business significance and statistical predictability of the factors and update the models to incorporate new factors or other information that improves statistical predictability. In addition, we verify the existence of the assets collateralizing the receivables by physical audits of vehicle inventories, which are performed with increased frequency for higher risk (i.e., Groups III, IV, V and VI) dealers. We perform a credit review of each dealer at least annually and adjust the dealer's risk rating, if necessary. The credit lines for Group VI dealers are typically suspended and no further funding is extended to these dealers.

Performance of our commercial finance receivables is evaluated based on our internal dealer risk rating analysis, as payment for wholesale receivables is generally not required until the dealer has sold or leased the vehicle inventory. All receivables from the same dealer customer share the same risk rating.

A summary of the credit risk profile by dealer grouping of the commercial finance receivables is as follows (in millions):



			December 31, 2015		December 31, 2014
Group I	-	Dealers with superior financial metrics	$	1,299	$	1,062
Group II	-	Dealers with strong financial metrics	2,648		2,090
Group III	-	Dealers with fair financial metrics	2,703		2,856
Group IV	-	Dealers with weak financial metrics	1,100		1,250
Group V	-	Dealers warranting special mention due to potential weaknesses	505		559
Group VI	-	Dealers with loans classified as substandard, doubtful or impaired	184		255
Balance at end of period			$	8,439	$	8,072

At December 31, 2015 and 2014, substantially all of our commercial finance receivables were current with respect to payment status and none were classified as TDRs. Activity in the allowance for commercial loan losses was insignificant for the years ended December 31, 2015, 2014 and 2013.