Ford 2014 Annual Report Download - page 128

FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
NOTE 5. FINANCIAL SERVICES SECTOR FINANCE RECEIVABLES (Continued)
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
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.
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 generally 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 factors such as the dealer’s risk rating and our security position. Under our
policies, on-site vehicle inventory audits of low-risk dealers are conducted only as circumstances warrant. Audits of
higher-risk dealers are conducted with increased frequency based on risk ratings and our security position. We perform a
credit review of each dealer at least annually and adjust the dealer’s risk rating, if necessary.
The credit quality of dealer financing 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.
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