GE 2010 Annual Report Download - page 123

GE 2010 ANNUAL REPORT 121
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collection efforts to mitigate the potential risk of loss in these
portfolios and we have experienced an improvement in nonearn-
ing assets.
CONSUMER—OTHER
Secured lending in Consumer—Other comprises loans to small and
medium-sized enterprises predominantly secured by auto and
equipment, inventory finance, and cash flow loans. We develop our
internal risk ratings for this portfolio in a manner consistent with
the process used to develop our Commercial credit quality indica-
tors, described above. We use the borrower’s credit quality and
underlying collateral strength to determine the potential risk of
loss from these activities.
At December 31, 2010, Consumer—Other financing receivables
of $6,417 million, $822 million and $1,067 million were rated A, B,
and C, respectively.
Note 24.
Variable Interest Entities
We securitize financial assets and arrange other forms of asset-
backed financing in the ordinary course of business. These
transactions are similar to those used by many financial institu-
tions. Beyond improving returns, these transactions serve as
alternative funding sources for a variety of diversified lending
and securities transactions. Historically, we have used both
GE-supported and third-party VIEs to execute off-balance sheet
securitization transactions funded in the commercial paper and
term markets. The largest group of VIEs that we are involved
with are former QSPEs, which under guidance in effect through
December 31, 2009 were excluded from the scope of consolida-
tion standards based on their characteristics. Except as noted
below, investors in these entities only have recourse to the assets
owned by the entity and not to our general credit. We do not have
implicit support arrangements with any VIE. We did not provide
non-contractual support for previously transferred financing
receivables to any VIE in 2010 or 2009.
On January 1, 2010, we adopted ASU 2009-16 & 17, which
amended ASC 860, Transfers and Servicing, and ASC 810,
Consolidation, respectively. These amendments eliminated the
scope exception for QSPEs and required that all such entities be
evaluated for consolidation as VIEs, which resulted in the consoli-
dation of all of our sponsored QSPEs. Among other changes, the
amendments to ASC 810 replaced the existing quantitative
approach for identifying the party that should consolidate a VIE,
which was based on exposure to a majority of the risks and
rewards, with a qualitative approach, based on determination of
which party has the power to direct the most economically sig-
nificant activities of the entity. The revised guidance will
sometimes change the composition of entities that meet the
definition of a VIE and the determination about which party
should consolidate a VIE, as well as requiring the latter to be
evaluated continuously.
In evaluating whether we have the power to direct, as defined
in the standard, we consider the purpose for which the VIE was
created, the importance of each of the activities in which it is
engaged and our decision-making role, if any, in those activities
NON-U.S. RESIDENTIAL MORTGAGES
For our secured non-U.S. residential mortgage book, we assess
the overall credit quality of the portfolio through loan-to-value
ratios (the ratio of the outstanding debt on a property to the value
of that property at origination). In the event of default and repos-
session of the underlying collateral, we have the ability to remarket
and sell the properties to eliminate or mitigate the potential risk of
loss. The table below provides additional information about our
non-U.S. residential mortgages based on loan-to-value ratios.
Loan-to-value ratio
80% or Greater than Greater than
December 31, 2010 (In millions) less 80% to 90% 90%
Non-U.S. residential mortgages $25,393 $7,515 $12,628
The majority of these financing receivables are in our U.K. and
France portfolios and have re-indexed loan-to-value ratios of 83%
and 60%, respectively. We have third-party mortgage insurance
for approximately 73% of the balance of Consumer non-U.S.
residential mortgage loans with loan-to-value ratios greater than
90% at December 31, 2010. Such loans were primarily originated
in the U.K. and France.
INSTALLMENT AND REVOLVING CREDIT
For our unsecured lending products, including the non-U.S. and
U.S. installment and revolving credit and non-U.S. auto portfolios,
we assess overall credit quality using internal and external credit
scores. Our internal credit scores imply a probability of default,
which we consistently translate into three approximate credit
bureau equivalent credit score categories, including (a) 681 or
higher, which are considered the strongest credits; (b) 615 to 680,
considered moderate credit risk; and (c) 614 or less, which are
considered weaker credits.
Internal ratings translated to
approximate credit bureau equivalent score
681 or 615 to 614 or
December 31, 2010 (In millions) higher 680 less
Non-U.S. installment and
revolving credit $10,298 $5,859 $4,211
U.S. installment and
revolving credit 25,940 8,846 9,188
Non-U.S. auto 6,397 1,551 929
Of those financing receivable accounts with credit bureau equiva-
lent scores of 614 or less at December 31, 2010, 94% and 6%
relate to installment and revolving credit accounts and non-U.S.
auto accounts, respectively. These smaller-balance accounts have
an average outstanding balance less than one thousand U.S. dol-
lars and are primarily concentrated in our retail card and sales
finance receivables in the U.S. (which are often subject to profit
and loss sharing arrangements), and closed-end loans outside the
U.S., which minimizes the potential for loss in the event of default.
For lower credit scores, we adequately price for the incremental
risk at origination and monitor credit migration through our risk
ratings process. We continuously adjust our credit line underwrit-
ing management and collection strategies based on customer
behavior and risk profile changes. During 2008 through 2010, we
strengthened our underwriting processes by actively reducing
credit lines and approval rates, along with increasing our