Policy

FINANCIAL SERVICES SECTOR FINANCE RECEIVABLES

Our Financial Services sector finance receivables primarily relate to Ford Credit, but also include the Other Financial Services segment and certain intersector eliminations.

Our Financial Services sector segments our finance receivables into North America and International "consumer" and "non-consumer" portfolios. The receivables are generally secured by the vehicles, inventory, or other property being financed.

Finance receivables are recorded at the time of origination or purchase at fair value and are subsequently reported at amortized cost, net of any allowance for credit losses.

Consumer Portfolio. Receivables in this portfolio include products offered to individuals and businesses that finance the acquisition of Ford and Lincoln vehicles from dealers for personal or commercial use. Retail financing includes retail installment contracts for new and used vehicles and direct financing leases with retail customers, government entities, daily rental companies, and fleet customers.

Non-Consumer Portfolio. Receivables in this portfolio include products offered to automotive dealers. The products include:


•	Dealer financing – wholesale loans to dealers to finance the purchase of vehicle inventory, also known as floorplan financing, and loans to dealers to finance working capital and improvements to dealership facilities, finance the purchase of dealership real estate, and finance other dealer programs. Wholesale financing is approximately 95% of our dealer financing


•	Other financing – purchased receivables primarily related to the sale of parts and accessories to dealers

NOTE 6. FINANCIAL SERVICES SECTOR FINANCE RECEIVABLES (Continued)

Finance receivables, net were as follows (in millions):



	December 31, 2013									December 31, 2012
	North America			International			Total Finance Receivables			North America			International			Total Finance Receivables
Consumer
Retail financing, gross	$	40,902		$	10,797		$	51,699		$	39,504		$	10,460		$	49,964
Less: Unearned interest supplements	(1,255		)	(247		)	(1,502		)	(1,264		)	(287		)	(1,551		)
Consumer finance receivables	39,647			10,550			50,197			38,240			10,173			48,413
Non-Consumer
Dealer financing	22,072			7,833			29,905			19,429			7,242			26,671
Other	732			339			1,071			689			386			1,075
Non-Consumer finance receivables	22,804			8,172			30,976			20,118			7,628			27,746
Total recorded investment	$	62,451		$	18,722		$	81,173		$	58,358		$	17,801		$	76,159

Recorded investment in finance receivables	$	62,451		$	18,722		$	81,173		$	58,358		$	17,801		$	76,159
Less: Allowance for credit losses	(280		)	(77		)	(357		)	(309		)	(80		)	(389		)
Finance receivables, net (a)	$	62,171		$	18,645		$	80,816		$	58,049		$	17,721		$	75,770

Net finance receivables subject to fair value (b)							$	79,149								$	73,618
Fair value							80,838									75,618

__________

(a)

At December 31, 2013 and 2012, Finance receivables, net on the consolidated balance sheet were $77.5 billion and $71 billion, respectively. The balance is comprised of Financial Services sector finance receivables of $80.8 billion and $75.8 billion, respectively, net of $3.3 billion and $4.8 billion, respectively, of receivables purchased by Financial Services sector from Automotive sector, which are reclassified to Other receivables, net.


(b)	At December 31, 2013 and 2012, excludes $1.7 billion and $2.2 billion, respectively, of certain receivables (primarily direct financing leases) that are not subject to fair value disclosure requirements.

Excluded from finance receivables at December 31, 2013 and 2012, was $196 million and $183 million, respectively, of accrued uncollected interest, which we report in Other assets on the balance sheet.

Included in the recorded investment in finance receivables at December 31, 2013 and 2012 were North America consumer receivables of $21.8 billion and $23 billion and non-consumer receivables of $18.9 billion and $17.1 billion, respectively, and International consumer receivables of $5.9 billion and $6.6 billion and non-consumer receivables of $5 billion and $4.5 billion, respectively, that secure certain debt obligations. The receivables are available only for payment of the debt issued by, and other obligations of, the securitization entities that are parties to those securitization transactions; they are not available to pay the other obligations of our Financial Services sector or the claims of Ford Credit’s other creditors. Ford Credit holds the right to receive the excess cash flows not needed to pay the debt issued by, and other obligations of, the securitization entities that are parties to those securitization transactions (see Notes 11 and 15).

NOTE 6. FINANCIAL SERVICES SECTOR FINANCE RECEIVABLES (Continued)

Contractual maturities of total finance receivables outstanding at December 31, 2013 reflect contractual repayments due from customers or borrowers as follows (in millions):



	Due in Year Ending December 31,
	2014		2015		2016		Thereafter		Total
North America
Consumer
Retail financing, gross	$	11,808	$	10,134	$	8,487	$	10,473	$	40,902
Non-Consumer
Dealer financing	20,375		581		152		964		22,072
Other	729		2		1		—		732
Total North America	$	32,912	$	10,717	$	8,640	$	11,437	$	63,706

International
Consumer
Retail financing, gross	$	3,842	$	3,363	$	2,207	$	1,385	$	10,797
Non-Consumer
Dealer financing	6,962		809		44		18		7,833
Other	339		—		—		—		339
Total International	$	11,143	$	4,172	$	2,251	$	1,403	$	18,969

Our finance receivables are pre-payable without penalty, so prepayments may cause actual maturities to differ from contractual maturities. The above table, therefore, is not to be regarded as a forecast of future cash collections. For wholesale receivables, which are included in dealer financing, maturities stated above are estimated based on historical trends, as maturities on outstanding amounts are scheduled upon the sale of the underlying vehicle by the dealer.

Investment in direct financing leases, which are included in consumer receivables, were as follows (in millions):



	December 31, 2013									December 31, 2012
	North America			International			Total Direct Financing Leases			North America			International			Total Direct Financing Leases
Total minimum lease rentals to be received	$	216		$	1,468		$	1,684		$	58		$	1,466		$	1,524
Initial direct costs	4			15			19			1			16			17
Estimated residual values	—			143			143			—			851			851
Less: Unearned income	(22		)	(116		)	(138		)	(7		)	(152		)	(159		)
Less: Unearned interest supplements	—			(40		)	(40		)	—			(82		)	(82		)
Recorded investment in direct financing leases	198			1,470			1,668			52			2,099			2,151
Less: Allowance for credit losses	(2		)	(5		)	(7		)	(1		)	(8		)	(9		)
Net investment in direct financing leases	$	196		$	1,465		$	1,661		$	51		$	2,091		$	2,142

Future minimum rental payments due from direct financing leases at December 31, 2013 were as follows (in millions):



	2014		2015		2016		2017		Thereafter
North America	$	73	$	52	$	50	$	28	$	13
International	568		459		272		139		30

Aging

For all finance receivables, we define “past due” as any payment, including principal and interest, that is at least 31 days past the contractual due date. The recorded investment of consumer receivables greater than 90 days past due and still accruing interest was $14 million and $13 million at December 31, 2013 and 2012, respectively. The recorded investment of non-consumer receivables greater than 90 days past due and still accruing interest was $21 million and $5 million at December 31, 2013 and 2012, respectively.

NOTE 6. FINANCIAL SERVICES SECTOR FINANCE RECEIVABLES (Continued)

The aging analysis of our finance receivables balances at December 31 were as follows (in millions):



	2013						2012
	North America		International		Total		North America		International		Total
Consumer
31-60 days past due	$	715	$	39	$	754	$	783	$	50	$	833
61-90 days past due	88		17		105		97		18		115
91-120 days past due	18		9		27		21		9		30
Greater than 120 days past due	37		26		63		52		29		81
Total past due	858		91		949		953		106		1,059
Current	38,789		10,459		49,248		37,287		10,067		47,354
Consumer finance receivables	39,647		10,550		50,197		38,240		10,173		48,413

Non-Consumer
Total past due	49		40		89		29		11		40
Current	22,755		8,132		30,887		20,089		7,617		27,706
Non-Consumer finance receivables	22,804		8,172		30,976		20,118		7,628		27,746
Total recorded investment	$	62,451	$	18,722	$	81,173	$	58,358	$	17,801	$	76,159

Credit Quality

Consumer Portfolio. When originating all classes of consumer receivables, we use a proprietary scoring system that measures 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. In addition to our proprietary scoring system, we consider other individual consumer factors, such as employment history, financial stability, and capacity to pay.

Subsequent to origination, we review the credit quality of retail financing based on customer payment activity. As each customer develops a payment history, we use an internally-developed behavioral scoring model to assist in determining the best collection strategies which allows us to focus collection activity on higher-risk accounts. These models are used to refine our risk-based staffing model to ensure collection resources are aligned with portfolio risk. Based on data from this scoring model, contracts are categorized by collection risk. Our collection models evaluate several factors, including origination characteristics, updated credit bureau data, and payment patterns.

Credit quality ratings for consumer receivables are based on aging. Refer to the aging table above.

Consumer receivables credit quality ratings are as follows:


•	Pass – current to 60 days past due


•	Special Mention – 61 to 120 days past due and in intensified collection status


•	Substandard – greater than 120 days past due and for which the uncollectible portion of the receivables has already been charged-off, as measured using the fair value of collateral

Non-Consumer Portfolio. We extend credit to dealers primarily in the form of lines of credit to purchase new Ford and Lincoln vehicles as well as used vehicles. Payment is required when the dealer has sold the vehicle. Each non-consumer lending request is evaluated by taking into consideration the borrower’s financial condition and the underlying collateral securing the loan. We use a proprietary model to assign each dealer a risk rating. This model uses historical dealer performance data to identify key factors about a dealer that we consider most significant in predicting a dealer’s ability to meet its financial obligations. We also consider numerous other financial and qualitative factors of the dealer’s operations including capitalization and leverage, liquidity and cash flow, profitability, and credit history with ourselves and other creditors. A dealer’s risk rating does not reflect any guarantees or a dealer owner’s net worth.

NOTE 6. FINANCIAL SERVICES SECTOR FINANCE RECEIVABLES (Continued)

Dealers are assigned to one of four groups according to risk ratings as follows:


•	Group I – strong to superior financial metrics


•	Group II – fair to favorable financial metrics


•	Group III – marginal to weak financial metrics


•	Group IV – poor financial metrics, including dealers classified as uncollectible

We suspend credit lines and extend no further funding to dealers classified in Group IV.

We regularly review our model to confirm the continued business significance and statistical predictability of the factors and update the model to incorporate new factors or other information that improves its statistical predictability. In addition, we regularly audit dealer inventory and dealer sales records to verify that the dealer is in possession of the financed vehicles and is promptly paying each receivable following the sale of the financed vehicle. The frequency of on-site vehicle inventory audits depends on the dealer’s risk rating. Under our policies, on-site vehicle inventory audits of low-risk dealers are conducted only as circumstances warrant in North America and at least annually internationally, and audits of higher-risk dealers are conducted with increased frequency based on risk ratings worldwide. We perform a credit review of each dealer at least annually and adjust the dealer’s risk rating, if necessary.

The credit quality of non-consumer receivables is evaluated based on our internal dealer risk rating analysis. A dealer has the same risk rating for its entire dealer financing regardless of the type of financing.

The credit quality analysis of our dealer financing receivables at December 31 was as follows (in millions):



	2013						2012
	North America		International		Total		North America		International		Total
Dealer Financing
Group I	$	18,357	$	5,051	$	23,408	$	16,526	$	4,551	$	21,077
Group II	3,289		2,092		5,381		2,608		1,405		4,013
Group III	424		649		1,073		277		1,279		1,556
Group IV	2		41		43		18		7		25
Total recorded investment	$	22,072	$	7,833	$	29,905	$	19,429	$	7,242	$	26,671

Impaired Receivables. Impaired consumer receivables include accounts that have been rewritten or modified in reorganization proceedings pursuant to the U.S. Bankruptcy Code that are considered to be troubled debt restructurings (“TDRs”), as well as all accounts greater than 120 days past due. Impaired non-consumer receivables represent accounts with dealers that have weak or poor financial metrics or dealer financing that has been modified in TDRs. The recorded investment of consumer receivables that were impaired at December 31, 2013 and 2012 was $435 million, or 0.9% of consumer receivables, and $422 million, or 0.9% of consumer receivables, respectively. The recorded investment of non-consumer receivables that were impaired at December 31, 2013 and 2012 was $71 million, or 0.2% of non-consumer receivables, and $47 million, or 0.2% of the non-consumer receivables, respectively. Impaired finance receivables are evaluated both collectively and specifically. See Note 8 for additional information related to the development of our allowance for credit losses.

Non-Accrual Receivables. The accrual of revenue is discontinued at the earlier of the time a receivable is determined to be uncollectible, at bankruptcy status notification, or greater than 120 days past due. Accounts may be restored to accrual status only when a customer settles all past-due deficiency balances and future payments are reasonably assured. For receivables in non-accrual status, subsequent financing revenue is recognized only to the extent a payment is received. Payments are generally applied first to outstanding interest and then to the unpaid principal balance.

The recorded investment of consumer receivables in non-accrual status was $238 million, or 0.5% of our consumer receivables at December 31, 2013, and $304 million, or 0.6% of consumer receivables at December 31, 2012. The recorded investment of non-consumer receivables in non-accrual status was $41 million, or 0.1% of our non-consumer receivables at December 31, 2013, and $29 million, or 0.1% of non-consumer receivables at December 31, 2012.

NOTE 6. FINANCIAL SERVICES SECTOR FINANCE RECEIVABLES (Continued)

Troubled Debt Restructurings. A restructuring of debt constitutes a TDR if we grant a concession to a borrower for economic or legal reasons related to the debtor’s financial difficulties that we otherwise would not consider. Consumer and non-consumer receivables that have a modified interest rate below market rate or that were modified in reorganization proceedings pursuant to the U.S. Bankruptcy Code, except non-consumer receivables that are current with minimal risk of loss, are considered to be TDRs. We do not grant concessions on the principal balance of our receivables. If a receivable is modified in a reorganization proceeding, all payment requirements of the reorganization plan need to be met before remaining balances are forgiven. The outstanding recorded investment at time of modification for consumer receivables that are considered to be TDRs was $233 million, or 0.5% of consumer receivables and $249 million, or 0.5% of consumer receivables during the years ended December 31, 2013 and 2012, respectively. The annual subsequent default rate of TDRs that were previously modified in TDRs within the last twelve months and resulted in repossession for consumer receivable was 5.8% and 5.8% of TDRs at December 31, 2013 and 2012, respectively. There were no non-consumer receivables involved in TDRs during the year ended December 31, 2013 and the outstanding recorded investment of non-consumer receivables involved in TDRs was de minimis during the year ended December 31, 2012.

Finance receivables involved in TDRs are specifically assessed for impairment. An impairment charge is recorded as part of the provision to the allowance for credit losses for the amount that the recorded investment of the receivable exceeds its estimated fair value. Estimated fair value is based on either the present value of the expected future cash flows of the receivable discounted at the contract’s original effective interest rate, or, for receivables where foreclosure is probable, the fair value of the collateral adjusted for estimated costs to sell. The allowance for credit losses related to all active consumer TDRs was $23 million and $19 million at December 31, 2013 and 2012, respectively. The allowance for credit losses related to all active non-consumer TDRs was de minimis at December 31, 2013 and 2012.

FORD MOTOR CO | 2013 | FY |

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