Upon adoption of ASU 2016-13 on April 1, 2020, the incurred loss impairment method was replaced with a new impairment model that reflects lifetime expected losses. Management develops and documents the allowance for credit losses on finance receivables based on two portfolio segments. The determination of portfolio segments is based primarily on the qualitative consideration of the nature of our business operations and the characteristics of the underlying finance receivables, as follows:

Management’s estimate of lifetime expected credit losses is based on an evaluation of relevant information about past events, current conditions, and reasonable and supportable forecasts that affect the future collectability of the finance receivables. Management’s evaluation takes into consideration the risks in the retail loan portfolio and dealer products portfolio, past loss experience, delinquency trends, underwriting and collection practices, changes in portfolio composition, economic forecasts and other relevant factors.

The allowance for credit losses is measured on a collective basis when loans have similar risk characteristics. Loans that do not share similar risk characteristics are evaluated on an individual basis. We generally use a discounted cash flow approach for determining allowance for credit losses for finance receivables modified as a troubled debt restructuring that are granted with interest rate concessions, and a non-discounted cash flow approach for other loans.

We measure expected losses of all components of finance receivables on an amortized cost basis, excluding accrued interest, and off-balance-sheet lending commitments that are not unconditionally cancellable by TMCC. Estimated expected credit losses for off-balance-sheet lending commitments within our dealer products portfolio is included in Other liabilities in the Consolidated Balance Sheets. We have elected to exclude accrued interest from the measurement of expected credit losses as we apply policies and procedures that result in the timely write-offs of accrued interest.

The level of credit risk in our retail loan portfolio segment is influenced by various factors such as economic conditions, the used vehicle market, credit quality, contract structure, and collection strategies and practices. We use statistical models to estimate lifetime expected credit losses of our retail loan portfolio segment by applying probability of default and loss given default to the exposure at default on a loan level basis. Probability of default models are developed from internal risk scoring models which consider variables such as delinquency status and other credit quality indicators, as well as historical default frequency. Other credit quality indicators include (but are not limited to): loan-to-value ratio, book payment-to-income ratio, FICO score (at origination), collateral type (new or used, Lexus, Toyota, or Mazda), and term count. Loss given default models forecast the extent of losses given that a default has occurred and considers variables such as collateral, trends in recoveries and other contract structure variables, as well as historical loss severity. Exposure at default represents the expected outstanding principal balance, including the effects of expected prepayment when applicable. The lifetime expected credit losses incorporate the probability-weighted forward-looking macroeconomic forecasts for baseline, favorable, and adverse scenarios. The loan lifetime is regarded by management as the reasonable and supportable period. We use macroeconomic forecasts from a third party and update such forecasts quarterly. On an ongoing basis, we review our models, including macroeconomic factors, the selection of macroeconomic scenarios and their weighting to ensure they reflect the risk of the portfolio.

If management does not believe the models reflect lifetime expected credit losses, an adjustment is made to reflect management judgment regarding observable changes in recent or expected economic trends and conditions, portfolio composition, and other relevant factors. While management uses the best information available to make such evaluations, future adjustments to the allowance for credit losses may be necessary if conditions differ substantially from the assumptions used in making the evaluations.

The level of credit risk in our dealer products portfolio segment is influenced primarily by the financial strength of dealers within our portfolio, dealer concentration, collateral quality, and other economic factors. The financial strength of dealers within our portfolio is influenced by, among other factors, general economic conditions, the overall demand for new and used vehicles and the financial condition of automotive manufacturers. The allowance for credit losses is established for both outstanding dealer finance receivables and certain unfunded off-balance sheet lending commitments. We measure lifetime expected credit losses of our dealer products portfolio segment by applying probability of default and loss given default to the exposure at default on a loan level basis. Probability of default is primarily established based on internal risk assessments. The probability of default model also considers qualitative factors related to macroeconomic outlooks. Loss given default is established based on the nature and market value of the collateral, loan-to-value ratios and other credit quality indicators. Exposure at default represents the expected outstanding principal balance. The lifetime of the loan or lending commitment is regarded by management as the reasonable and supportable period. On an ongoing basis, we review our models to ensure they reflect the risk of the portfolio.

The following tables provide information related to our allowance for credit losses for finance receivables and certain off-balance sheet lending commitments by portfolio segment:

	Three months ended September 30, 2020
	Retail loan			Dealer products			Total
Beginning balance, July 1, 2020	$	933		$	210		$	1,143
Charge-offs		(46	)		-			(46	)
Recoveries		12			-			12
Provision for credit losses		121			(56	)		65
Ending balance, September 30, 2020 ²	$	1,020		$	154		$	1,174

	Six months ended September 30, 2020
	Retail loan			Dealer products			Total
Beginning balance, April 1, 2020	$	486		$	241		$	727
Adoption of ASU 2016-13 ¹		281			11			292
Charge-offs		(115	)		-			(115	)
Recoveries		21			1			22
Provision for credit losses		347			(99	)		248
Ending balance, September 30, 2020 ²	$	1,020		$	154		$	1,174

Finance receivables for the dealer products portfolio segment as of September 30, 2020 includes $995 million in finance receivables that are guaranteed by Toyota Motor North America, Inc. (“TMNA”), and $145 million in finance receivables that are guaranteed by third party private Toyota distributors. These finance receivables are related to certain Toyota and Lexus dealers and other third parties to whom we provided financing at the request of TMNA and third party private Toyota distributors.

During the first half of fiscal 2021, the allowance for credit losses increased $447 million, reflecting an increase to the allowance for credit losses of $292 million related to the adoption of ASU 2016-13 in fiscal 2021, and an increase of $155 million primarily due to the increase in expected credit losses for the retail loan portfolio driven by economic conditions caused by the COVID-19 pandemic and the restrictions designed to slow the spread of COVID-19, including stay-at-home orders, increased unemployment, and decreased consumer spending. In addition to the initial adoption impact, ASU 2016-13 has led to an increase in the provision of credit losses with the growth of our retail loan portfolio as this standard replaces the incurred loss impairment model with a model that reflects expected credit losses over the expected life of the finance receivables and certain off-balance sheet lending commitment.

	Three months ended September 30, 2019 ¹
Allowance for Credit Losses for Finance Receivables:	Retail Loan			Dealer Products			Total
Beginning balance, July 1, 2019	$	327		$	177		$	504
Charge-offs		(80	)		-			(80	)
Recoveries		13			-			13
Provision for credit losses		57			11			68
Ending balance, September 30, 2019	$	317		$	188		$	505


	Six months ended September 30, 2019 ¹
Allowance for Credit Losses for Finance Receivables:	Retail loan			Dealer products			Total
Beginning balance, April 1, 2019	$	304		$	195		$	499
Charge-offs		(152	)		-			(152	)
Recoveries		27			-			27
Provision for credit losses		138			(7	)		131
Ending balance, September 30, 2019	$	317		$	188		$	505

¹ The comparative period’s information continues to be reported under the relevant accounting presentation in effect for that period.

Finance receivables for the dealer products portfolio segment as of September 30, 2019 includes $1,052 million in finance receivables that are guaranteed by TMNA, and $131 million in finance receivables that are guaranteed by third party private Toyota distributors. These finance receivables are related to certain Toyota and Lexus dealers and other third parties to whom we provided financing at the request of TMNA and third party private Toyota distributors.