Finance Receivables

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



	June 30, 2016			December 31, 2015
Retail
Retail finance receivables, collectively evaluated for impairment, net of fees^(a)	$	29,128		$	27,512
Retail finance receivables, individually evaluated for impairment, net of fees	1,733			1,612
Total retail finance receivables^(b)	30,861			29,124
Less: allowance for loan losses - collective	(570		)	(515		)
Less: allowance for loan losses - specific	(244		)	(220		)
Total retail finance receivables, net	30,047			28,389
Commercial
Commercial finance receivables, collectively evaluated for impairment, net of fees	9,318			8,357
Commercial finance receivables, individually evaluated for impairment, net of fees	115			82
Total commercial finance receivables	9,433			8,439
Less: allowance for loan losses - collective	(41		)	(38		)
Less: allowance for loan losses - specific	(9		)	(9		)
Total commercial finance receivables, net	9,383			8,392
Total finance receivables, net	$	39,430		$	36,781

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(a) Includes $1.3 billion and $1.1 billion of direct-financing leases at June 30, 2016 and December 31, 2015.

(b) Net of unearned income, unamortized premiums and discounts, and deferred fees and costs of $190 million and $179 million at June 30, 2016 and December 31, 2015.

Retail Finance Receivables

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



	Six Months Ended June 30,
	2016			2015
Beginning balance	$	29,124		$	25,623
Purchases	8,339			8,366
Principal collections and other	(6,248		)	(5,294		)
Charge-offs	(559		)	(454		)
Foreign currency translation	205			(911		)
Ending balance	$	30,861		$	27,330

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



	Three Months Ended June 30,						Six Months Ended June 30,
	2016			2015			2016			2015
Beginning balance	$	796		$	692		$	735		$	655
Provision for loan losses	148			139			345			296
Charge-offs	(266		)	(220		)	(559		)	(454		)
Recoveries	133			111			283			233
Foreign currency translation	3			(1		)	10			(9		)
Ending balance	$	814		$	721		$	814		$	721

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 have expanded 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):



	June 30, 2016				December 31, 2015
	Amount		Percent		Amount		Percent
Prime - FICO Score 680 and greater	$	5,650	29.1	%	$	4,418	24.4	%
Near-prime - FICO Score 620 to 679	3,116		16.0	%	2,890		15.9	%
Sub-prime - FICO Score less than 620	10,663		54.9	%	10,840		59.7	%
Balance at end of period	$	19,429	100.0	%	$	18,148	100.0	%

In addition, we review the credit quality 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 consolidated 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):



	June 30, 2016				June 30, 2015
	Total		Percent of Contractual Amount Due		Total		Percent of Contractual Amount Due
31 - 60 days	$	1,070	3.4	%	$	1,062	3.6	%
Greater than 60 days	465		1.5		452		1.6
Total finance receivables more than 30 days delinquent	1,535		4.9		1,514		5.2
In repossession	51		0.2		46		0.2
Total finance receivables more than 30 days delinquent or in repossession	$	1,586	5.1	%	$	1,560	5.4	%

The accrual of finance charge income has been suspended on $758 million and $778 million of retail finance receivables (based on contractual amount due) at June 30, 2016 and December 31, 2015.

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 June 30, 2016 and December 31, 2015, 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):



	June 30, 2016			December 31, 2015
Outstanding recorded investment	$	1,733		$	1,612
Less: allowance for loan losses	(244		)	(220		)
Outstanding recorded investment, net of allowance	$	1,489		$	1,392
Unpaid principal balance	$	1,777		$	1,642

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



	Three Months Ended June 30,				Six Months Ended June 30,
	2016		2015		2016		2015
Average outstanding recorded investment	$	1,696	$	1,347	$	1,673	$	1,309
Finance charge income recognized	$	50	$	41	$	101	$	81
Number of loans classified as TDRs during the period	16,133		14,397		30,779		26,124
Recorded investment of loans classified as TDRs during the period	$	277	$	245	$	531	$	446

A redefault is when an account meets the requirements for evaluation under our charge-off policy. 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 was insignificant for the three and six months ended June 30, 2016 and 2015.

Commercial Finance Receivables

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



	Six Months Ended June 30,
	2016			2015
Beginning balance	$	8,439		$	8,072
Net funding	1,032			29
Charge-offs	—			—
Foreign currency translation	(38		)	(286		)
Ending balance	$	9,433		$	7,815

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. Dealers in Group VI are subject to additional funding restrictions including suspension of lines of credit and liquidation of assets.

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):



			June 30, 2016		December 31, 2015
Group I	-	Dealers with superior financial metrics	$	1,277	$	1,299
Group II	-	Dealers with strong financial metrics	3,105		2,648
Group III	-	Dealers with fair financial metrics	3,087		2,703
Group IV	-	Dealers with weak financial metrics	1,162		1,100
Group V	-	Dealers warranting special mention due to potential weaknesses	609		505
Group VI	-	Dealers with loans classified as substandard, doubtful or impaired	193		184
Ending balance			$	9,433	$	8,439

At June 30, 2016 and December 31, 2015 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 three and six months ended June 30, 2016 and 2015.