Finance Receivables



	December 31, 2016			December 31, 2015
Retail finance receivables
Retail finance receivables, collectively evaluated for impairment, net of fees^(a)	$	30,989		$	27,512
Retail finance receivables, individually evaluated for impairment, net of fees	1,921			1,612
Total retail finance receivables^(b)	32,910			29,124
Less: allowance for loan losses - collective	(517		)	(515		)
Less: allowance for loan losses - specific	(276		)	(220		)
Total retail finance receivables, net	32,117			28,389
Commercial finance receivables
Commercial finance receivables, collectively evaluated for impairment, net of fees	11,053			8,357
Commercial finance receivables, individually evaluated for impairment, net of fees	70			82
Total commercial finance receivables	11,123			8,439
Less: allowance for loan losses - collective	(43		)	(38		)
Less: allowance for loan losses - specific	(7		)	(9		)
Total commercial finance receivables, net	11,073			8,392
Total finance receivables, net	$	43,190		$	36,781
Fair value of finance receivables	$	43,140		$	36,937

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


(b)	Net of unearned income, unamortized premiums and discounts, and deferred fees and costs of $191 million and $179 million at December 31, 2016 and 2015.

We estimate the fair value of retail finance receivables using observable and unobservable Level 3 inputs within a cash flow model. The inputs reflect assumptions regarding expected prepayments, deferrals, delinquencies, recoveries and charge-offs of the loans within the portfolio. The cash flow model produces an estimated amortization schedule of the finance receivables. The projected cash flows are then discounted to derive the fair value of the portfolio. Macroeconomic factors could affect the credit performance of the portfolio and, therefore, could potentially affect the assumptions used in our cash flow model. A substantial majority of our commercial finance receivables have variable interest rates and maturities of one year or less. Therefore, the carrying amount, a Level 2 input, is considered to be a reasonable estimate of fair value.



Retail Finance Receivables	Years ended December 31,
	2016			2015			2014
Retail finance receivables beginning balance	$	29,124		$	25,623		$	23,130
Purchases of retail finance receivables	18,054			17,537			15,085
Principal collections and other	(12,633		)	(10,968		)	(10,234		)
Charge-offs	(1,171		)	(996		)	(914		)
Foreign currency translation	(464		)	(2,072		)	(1,444		)
Retail finance receivables ending balance	$	32,910		$	29,124		$	25,623

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



	Years ended December 31,
	2016			2015			2014
Allowance for retail loan losses beginning balance	$	735		$	655		$	497
Provision for loan losses	666			612			613
Charge-offs	(1,171		)	(996		)	(914		)
Recoveries	559			486			470
Foreign currency translation	4			(22		)	(11		)
Allowance for retail loan losses ending balance	$	793		$	735		$	655

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 Segment 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:



	December 31, 2016				December 31, 2015
	Amount		Percent		Amount		Percent
Prime - FICO Score 680 and greater	$	7,923	36.4	%	$	4,418	24.4	%
Near-prime - FICO Score 620 to 679	3,468		15.9	%	2,890		15.9	%
Sub-prime - FICO Score less than 620	10,395		47.7	%	10,840		59.7	%
Balance at end of period	$	21,786	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 delinquent retail finance receivables, which is not significantly different than the recorded investment for such receivables.



	December 31, 2016				December 31, 2015
	Amount		Percent of Contractual Amount Due		Amount		Percent of Contractual Amount Due
31 - 60 days	$	1,235	3.7	%	$	1,237	4.2	%
Greater than 60 days	542		1.7		481		1.6
Total finance receivables more than 30 days delinquent	1,777		5.4		1,718		5.8
In repossession	51		0.1		46		0.2
Total finance receivables more than 30 days delinquent or in repossession	$	1,828	5.5	%	$	1,764	6.0	%

At December 31, 2016 and 2015, the accrual of finance charge income had been suspended on retail finance receivables with contractual amounts due of $807 million and $778 million.

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 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, 2016 and 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:



	December 31, 2016			December 31, 2015
Outstanding recorded investment	$	1,920		$	1,612
Less: allowance for loan losses	(276		)	(220		)
Outstanding recorded investment, net of allowance	$	1,644		$	1,392
Unpaid principal balance	$	1,967		$	1,642

Additional information about loans classified as TDRs is presented below:



	Years Ended December 31,
	2016		2015		2014
Average outstanding recorded investment	$	1,766	$	1,455	$	996
Finance charge income recognized	$	205	$	164	$	123
Number of loans classified as TDRs during the period	66,926		58,012		49,490
Recorded investment of loans classified as TDRs during the period	$	1,148	$	982	$	794

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 were $26 million, $20 million and $25 million for 2016, 2015 and 2014.



Commercial Finance Receivables	Years Ended December 31,
	2016			2015			2014
Commercial finance receivables beginning balance	$	8,439		$	8,072		$	6,700
Net funding	3,017			984			1,889
Charge-offs	(2		)	(3		)	—
Foreign currency translation	(331		)	(614		)	(517		)
Commercial finance receivables ending balance	$	11,123		$	8,439		$	8,072

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 dealers (i.e., Groups III, IV, V and VI). 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 risk rating of the commercial finance receivables is as follows:



			December 31, 2016				December 31, 2015
			Amount		Percent		Amount		Percent
Group I	-	Dealers with superior financial metrics	$	1,596	14.3	%	$	1,299	15.4	%
Group II	-	Dealers with strong financial metrics	3,445		31.0		2,648		31.4
Group III	-	Dealers with fair financial metrics	4,039		36.3		2,703		32.0
Group IV	-	Dealers with weak financial metrics	1,231		11.1		1,100		13.0
Group V	-	Dealers warranting special mention due to potential weaknesses	642		5.8		505		6.0
Group VI	-	Dealers with loans classified as substandard, doubtful or impaired	170		1.5		184		2.2
Balance at end of period			$	11,123	100.0	%	$	8,439	100.0	%

At December 31, 2016 and 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 2016, 2015 and 2014.