We acquire retail and lease contracts from, and provide financing and certain other financial products and services to authorized Toyota and Lexus vehicle dealers and, to a lesser extent, other domestic and import franchisedfranchise dealers and their customers in the U.S. and Puerto Rico.  We also offer financing for various industrial and commercial products such as forklifts and light and medium-duty trucks.  Revenues related to transactions with industrial equipment dealers contributed approximately 3 percent to total financing revenues in the fiscal years ended March 31, 2013 (“fiscal 2013”), 2012 (“fiscal 2012”) and 2011 (“fiscal 2011”).

We utilize a tiered pricing program for retail and lease contracts.  The program matches contract interest rates with customer risk as defined by credit bureau scores and other factors for a range of price and risk combinations.  Each application is assigned a credit tier.  Rates vary based on credit tier, term, loan-to-value and collateral, including whether a new or used vehicle is financed.  In addition, special rates may apply as a result of promotional activities.  We review and adjust interest rates based on competitive and economic factors and distribute the rates, by tier, to our dealers.

We acquire new and used vehicle and industrial equipment retail and lease contracts primarily from Toyota and Lexus vehicle dealers and industrial equipment dealers.  Dealers transmit customer credit applications electronically through our online system for contract acquisition.  The customer may submit a credit application directly to our website, in which case, the credit application is sent to the dealer of the customer’s choice or to a dealer that is near the customer’s residence.  In addition, through our website, customers are able to request a pre-qualification letter for presentation to the dealer specifying the maximum amount that may be financed.  Upon receipt of the credit application, our origination system automatically requests a credit bureau report from one of the major credit bureaus.  We use a proprietary credit scoring system to evaluate an applicant’s risk profile.  Factors used by the credit scoring system (based on the applicant’s credit history) include the terms of the contract, ability to pay, debt ratios, amount financed relative to the value of the vehicle, and credit bureau attributes such as number of trade lines, utilization ratio and number of credit inquiries.

Credit applications are subject to systematic evaluation.  Our origination system evaluates each credit application to determine if it qualifies for auto-decisioning.automatic approval (“auto-decisioning”) which approves only the applicant’s credit eligibility.  The origination system distinguishes this type of applicant by specific requirements and then approves the application without manual intervention.  The origination system is programmed to review application information for purchase policy and legal compliance.  Typically the highest quality credit applications are approved automatically.  The automated approval process approves only the applicant’s credit eligibility.

Credit analysts (located at the DSSOs) approve or reject all credit applications that are not auto-decisioned.  A credit analyst decisions applications based on an evaluation that considers an applicant’s creditworthiness and projected ability to meet the monthly payment obligation, which is derived, among other things, from the amount financed and the term.  Our proprietary scoring system assists the credit analyst in the credit review process.

Completion of the financing process is dependent upon whether the transaction is a retail or lease contract.  For a retail contract, transaction, we acquire the retail contract from vehicle dealersthe dealer and obtain a security interest in the vehicle or industrial equipment.vehicle.  For a lease contract, except as described below under “Servicing”, we acquire the lease contract and concurrently assume ownership of the leased vehicle or industrial equipment.vehicle.  We view our lease arrangements, including our operating leases, as financing transactions as we do not re-lease the vehicle or equipment upon default or lease termination.

We regularly review and analyze our retail and lease contractconsumer portfolio to evaluate the effectiveness of our underwriting guidelines and purchasing criteria.  If external economic factors, credit losslosses or delinquency experience, market conditions or other factors change, we may adjust our underwriting guidelines and purchasing criteria in order to change the asset quality of our portfolio.

In partnership with Toyota Motor Sales, U.S.A., Inc. (“TMS”), Toyota Material Handling, U.S.A., Inc. (“TMHU”), and Hino Motor Sales, U.S.A., Inc. (“HINO”),other third party distributors, we may offer special promotional rates, which we refer to as subvention programs.  TMHUTMS is the primary distributor of Toyota, forkliftsLexus and Scion vehicles in the U.S., and HINO is the exclusive U.S. distributor of commercial trucks manufactured by Hino Motors Ltd. (a TMC subsidiary).  These affiliates payUnited States.  TMS pays us the majority of the difference between our standard rate and the promotional rate.  Amounts received in connection with these programs allow us to maintain yields at levels consistent with standard program levels.  The level of subvention program activity varies based on our affiliates’the marketing strategies of TMS, economic conditions, and volume of vehicle sales.  The amount of subvention received varies based on the mix of Toyota, Lexus and Scion vehicles and industrial equipment included in the promotional rate programs and the timing of the programs.  Subvention payments are received at the beginning of the retail or lease contract.  We defer the payments and recognize them over the life of the contract as a yield adjustment for retail contracts and as rental income for lease contracts.  A large portion of our retail and lease contracts is subvened.

Our CSCs are responsible for servicing the vehicle retail and lease contracts.  A centralized department monitorsmanages vendor relationships responsible for the bankruptcy administration and post charge-off and recovery.  A centralized collection department manages the remediation (if applicable)recovery and liquidation of each retail installment sale and lease contract.   Our industrial equipment retail and lease contracts are serviced at a centralized facility.  

We use a behavioral-based collection strategy to minimize risk of loss and employ various collection methods.  When contracts are acquired, we perfect our security interests in the financed retail vehicles and industrial equipment through state department of motor vehicles (or equivalent) certificate of title filings or through Uniform Commercial Code (“UCC”) filings, as appropriate.  We have the right to repossess the assetsa vehicle if customers faila customer fails to meet contractual obligations and the right to enforcepursue collection actions against the obligors under the contracts.

We use an on-lineonline collection and auto dialer system that prioritizes collection efforts, generates past due notices, and signals our collections personnel to make telephone contact with delinquent customers.  Collection efforts are based on behavioral scoring models (which analyze borrowers’ past payment performance, vehicle valuation and credit scores to predict future payment behavior).  We generally determine whether to commence repossession efforts after an account is 60 days past due.  Repossessed vehicles are held in inventory to comply with statutory requirements and then sold at private auctions, unless public auctions are required by applicable law.  Any unpaid amounts remaining after sale or after full charge offcharge-off are pursued by us to the extent practical and legally permissible.  Any surplus amounts remaining after sale fees and expenses have been paid, and any reserve charge-backs and/or dealer guarantees, are refunded to the customers.  Collections of deficiencies and refunds of surplussurpluses are administered at a centralized facility.  From an operations perspective, we charge off a retail or lease contract in our servicing systems as soon as disposition of the vehicle has been completed and sales proceeds have been received, but we may in some circumstances charge off a retail or lease contract prior to repossession.  However, from an accounting perspective weWe charge off the amount we do not expect to collect when payments due are no longer expected to be received or the account is 120 days contractually delinquent, whichever occurs first, even when repossession and disposition of the collateral have not been completed.

We may, in accordance with our customary servicing procedures, offer rebates or waive any prepayment charge, late payment charge, or any other fees that may be collected in the ordinary course of servicing the retail installment sales and lease account.contracts.  In addition, we may defer a customer’s obligation to make a payment by extending the contract term.

Substantially all of our retail and lease contracts are non-recourse to the vehicle and industrial equipment dealers, which relieves the vehicle and industrial equipment dealers fromof financial responsibility in the event of repossession.

We may experience a higher risk of loss if customers fail to maintain required insurance coverage.  The terms of our retail contracts require customers to maintain physical damage insurance covering loss or damage to the financed vehicle or industrial equipment in an amount not less than the full value of the vehicle or equipment.vehicle.  The terms of each receivablecontract allow but do not require us to obtain any such coverage on behalf of the customer.  In accordance with our normalcustomary servicing procedures, we do not exercise our right to obtain insurance coverage on behalf of the customer.  Our vehicle lease contracts require lessees to maintain minimum liability insurance and physical damage insurance covering loss or damage to the leased vehicle in an amount not less than the full value of the vehicle.  We currently do not monitor ongoing maintenance of insurance as part of our customary servicing procedures for retail or lease accounts.

Toyota Lease Trust, a Delaware business trust (the “Titling Trust”), acts as lessor and holds title to certain leased vehicles in specified states.  This arrangement was established to facilitate lease securitization.securitizations.  We service lease contracts acquired by the Titling Trust from Toyota and Lexus vehicle dealers in the same manner as lease contracts owned directly by us.  We hold an undivided trust interest in lease contracts owned by the Titling Trust, and these lease contracts are included in our lease assets.

At the end of the lease term, the lessee may purchase the leased asset at the contractual residual value or return the leased asset to the vehicle or industrial equipment dealer.  If the leased asset is returned to the vehicle or industrial equipment dealer, the vehicle or industrial equipment dealer may purchase the leased asset or return it to us.

In order to minimize losses at lease maturity, we have developed remarketing strategies to maximize proceeds and minimize disposition costs on used vehicles and industrial equipment sold at lease termination.  We use various channels to sell vehicles returned at lease endlease-end and repossessed vehicles, including a dealer direct program (“Dealer Direct”) and physical auctions.

The goal of Dealer Direct is to increase vehicle dealer purchases of off-lease vehicles thereby reducing the disposition costs of such vehicles.  Through Dealer Direct, the vehicle dealer accepting return of the leased vehicle (the “grounding dealer”) has the option to purchase the vehicle at the contractual residual value, purchase the vehicle at an assessed market value, or return the vehicle to us.  Vehicles not purchased by the grounding dealer are made available to all Toyota and Lexus vehicle dealers through the Dealer Direct online auction.  Vehicles not purchased through Dealer Direct are sold at physical vehicle auction sites throughout the country.  Where deemed necessary, we recondition used vehicles prior to sale in order to enhance the vehicle values at auction.  Additionally, we redistribute vehicles geographically to minimize oversupply in any location.

Dealer financing is comprised of wholesale financing and other financing options designed to meet dealer business needs.

We provide wholesale financing to vehicle and industrial equipment dealers for inventories of new and used Toyota, Lexus, Scion and other domestic and import vehicles and industrial equipment.vehicles.  We acquire a security interest in vehicles financed at wholesale,the vehicle inventory, and/or other dealership assets, as appropriate, which we perfect through UCC filings, and these financingsfilings. Wholesale financing may also be backed by corporate or individual guarantees from, or on behalf of, participating vehicle and industrial equipmentaffiliated dealers, dealer groups, or dealer principals.  In the event of vehicle or industrial equipmenta dealer default under a wholesale loan arrangement, we have the right to liquidate assets in which we have a perfected security interest and to seek legal remedies pursuant to the wholesale loan agreement and any applicable guarantees.

TMCC and TMS are parties to an agreement pursuant to which TMS will arrange for the repurchase of new Toyota, Lexus and Scion vehicles at the aggregate cost financed by TMCC in the event of vehiclea dealer default under wholesale financing.  TMCC is also party to similar agreements with TMHU, HINO, and other domestic and import manufacturers.

We provide termfixed and variable rate working capital loans, revolving lines of credit, and real estate financing to vehicledealers and industrial equipment dealersvarious multi-franchise organizations referred to as dealer groups for facilities construction and refurbishment, working capital requirements, and real estate purchases.  Our credit facility pricing reflects market conditions, competitive environment, the level of support dealers provide our retail, leasepurchases, business acquisitions and insuranceother general business and the credit worthiness of each dealer.purposes.  These loans are typically secured with liens on real estate, vehicle inventory, and/or other dealership assets, as appropriate, and usually aremay be guaranteed by the personalindividual or corporate guarantees of the dealer principals or dealerships.  We also provide financing to various multi-franchise dealer organizations, referred to asaffiliated dealers, dealer groups, often as part of a lending consortium, for wholesale, working capital, real estate, and business acquisitions.  These loans are typically collateralized with liens on real estate, vehicle inventory, and/or other dealership assets, as appropriate.  We obtain a personal guarantee from the vehicle or industrial equipment dealer or corporate guarantee from the dealership when deemed prudent.principals.  Although the loans are typically collateralized or guaranteed, the value of the underlying collateral or guarantees may not be sufficient to cover our exposure under such agreements.  We priceOur pricing reflects market conditions, the competitive environment, the level of support dealers provide our retail, lease and insurance business and the credit facilities according to the risks assumed in entering into the credit facility and competitive factors.

Before establishing a wholesale lineloan or other dealer financing arrangement,agreement, we perform a credit analysis of the dealer. During this analysis, we:

On the basis of this analysis, we may approve the issuance of a credit lineloan or financing agreement and determine the appropriate size.

As part of our monitoring processes, we require all dealers to submit monthly financial statements.  We also perform periodic physical audits of vehicle inventory as well as monitor the timeliness of dealer inventory financing payoffs in accordance with the agreed uponagreed-upon terms to identify possible risks.

TMCC markets its insurance products through Toyota Motor Insurance Services, Inc. (“TMIS”), a wholly-owned subsidiary. TMIS and its insurance company subsidiaries’TMIS. The principal activities of TMIS include marketing, underwriting, and claims administration related to coveringfor products that cover certain risks of Toyota, Lexus, Scion and other domestic and import franchisedfranchise dealers and their customers in the U.S.  TMIS also provides other coverage and related administrative services to certain of our affiliates in the U.S.

Gross revenues from insurance operations on a consolidated basis comprised 97 percent of total gross revenues for fiscal 20132016, 8 percent for fiscal 2015 and 8 percent for both fiscal 2012 and 2011.

TMIS offers various products and services on Toyota, Lexus, Scion and other domestic and import vehicles, such as vehicle service agreements, guaranteed auto protection agreements, prepaid maintenance contracts, and excess wear and use agreements, and tire and wheel protection agreements.  Vehicle service agreements offer vehicle owners and lessees mechanical breakdown protection for new and used vehicles secondary to the manufacturer’s new vehicle warranty.  Guaranteed auto protection insurance orand debt cancellation agreements providesprovide coverage for a lease or retail contract deficiency balance in the event of a total loss or theft of the covered vehicle.  Prepaid maintenance contracts provide maintenance services at manufacturer recommended intervals.  Excess wear and use agreements are available on leases of Toyota, Lexus and Scion vehicles and protectsprotect against excess wear and use charges that may be assessed at lease termination.

Prior to March 1, 2014, Toyota, Lexus, and other domestic and import vehicle dealers’dealers who elected to participate in the inventory insurance program obtained coverage for inventory financed by TMCC.  TMIS obtains reinsurance onTMCC through TMIS.  Beginning March 1, 2014, Toyota, Lexus, and other domestic and import dealers who elect to participate in the inventory insurance policyprogram obtain coverage for eligible vehicle inventory through a third party who cedes 100 percent of the business to TMIS.  TMIS continues to purchase third party reinsurance covering the excess of certain dollar maximums per occurrence and in the aggregate.aggregate, the amount of which remains unchanged.  Through reinsurance, TMIS limits its exposure to losses by obtaining the right to reimbursement from the assuming company for the reinsured portion of losses.

TMIS obtains a portion of vehicle service contract business by providingprovides TMS contractual indemnity coverage on certified Toyota, Lexus and Scion pre-owned vehicles.  TMIS also provides umbrella liability insurance to TMS and affiliates covering certain dollar value layers of risk above various primary or self-insured retentions.  On all layers in which TMIS has providedprovides coverage, 99 percent of the risk has beenis ceded to various reinsurers.  In addition, TMIS provides property deductible reimbursement insurance to TMS and affiliates covering losses incurred under their primary policy.

Our business is substantially dependent upon the retail sale of Toyota, Lexus and Scion vehicles and our ability to offer competitive financing and insurance products in the U.S.  TMS is the primary distributor of Toyota, Lexus and Scion vehicles in the U.S.  Automobiles and light-duty trucks sold by TMS totaled 2.12.5 million units for fiscal 20132016 compared to 1.72.4 million units for fiscal 20122015 and 1.82.2 million units for fiscal 2011.2014.  Toyota, Lexus and Scion vehicles accounted for approximately 14 percent of all retail automobile and light-duty truck unit sales volume in the U.S. during fiscal 2013,2016, compared to 13 percent during fiscal 2012 and 15 percent during fiscal 2011.

TMS sponsors subvention programs on certain new and used Toyota, Lexus and Scion vehicles that result in reduced scheduled payments for qualified retail installment sales and lease customers.  Reduced scheduled payments on certain Toyota industrial equipment for qualified lease and retail installment sales customers are subvened by various affiliates.  The level of subvention program activity varies based on our affiliates’TMS marketing strategies, economic conditions, and volume of vehicle sales.

TMCC and TMS are parties to a Shared Services Agreementshared services agreement which covers certain technological and administrative services, such as information systems support, facilities, insurance coverage, and corporate services provided between the companies.  In addition, TMCC and TMS are parties to an agreement that provides thatpursuant to which TMS will arrange for the repurchase of new Toyota, Lexus and Scion vehicles at the aggregate cost financed by TMCC in the event of vehiclea dealer default under floorplanwholesale financing.  TMCC is also a partyIn addition, we provide other types of financing to similar agreements with TMHU, HINO,certain Toyota and Lexus dealers and other domesticthird parties, at the request of TMS or private Toyota distributors, and import manufacturers.

TMCC and Toyota Financial Savings Bank (“TFSB”), a Nevada industrial loanthrift company owned by TFSA, are parties to a master shared services agreement under which TMCC and TFSB provide certain services to each other.  TMCC and TFSB are also parties to an expense reimbursement agreement, which provides that TMCC will reimburse certain expenses incurred by TFSB in connection with providing certain financial products and services to TMCC’s customers and dealers in support of TMCC’s customer loyalty strategy and programs.

TMCC and TFSA are parties to an expense reimbursement agreement.  Under the terms of the agreement, TMCC will reimbursereimbursed certain expenses incurred by TFSA, the parent of TMCC and TFSB, with respect to costs related to TFSB’s credit card rewards program.

Prior to January 1, 2015, our employees arewere generally eligible to participate in the TMSToyota Motor Sales, U.S.A., Inc. Pension Plan sponsored by TMS.  Effective January 1, 2015, TMS-sponsored benefit pension plans were closed to employees first employed or reemployed on or after such date.  Employees meeting certain eligibility requirements may participate in the Toyota Motor Sales Savings Plan sponsored by TMS and various health, and life and other post-retirement benefits sponsored by TMS, as discussed further in Note 12 – Pension and Other Benefit Plans of the Notes to Consolidated Financial Statements.

Credit support agreements exist between TMCC and TFSC and between TFSC and TMC.  These agreements are further discussed in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, “Liquidity and Capital Resources”.

TMIS provides administrative services and various types of coverage to TMS and affiliates, including contractual indemnity coverage for TMS’ certified pre-owned vehicle program, umbrella liability insurance, and property deductible reimbursement insurance.  In addition, TMIS provided prepaid maintenance and vehicle service coverage to TMS in support of special sales and customer loyalty programs until the program was discontinued in fiscal 2011.

See Note 15 – Related Party Transactions of the Notes to Consolidated Financial Statements for further information.

Competition for the principal products and services provided through our insurance operations is primarily from national and regional independent service contract providers.  We compete primarily through service quality, our relationship with TMS and product benefits.  Our affiliation with TMS provides an advantage in selling our insurance products and services.

Our finance and insurance operations are regulated under both federal and state law. 

Federal Consumer Finance Regulation

Our finance operations are governed by, among other federal laws, the Equal Credit Opportunity Act, the Truth in Lending Act, the Truth in Leasing Act, the Fair Credit Reporting Act, the Servicemembers Civil Relief Act and the consumer data privacy and security provisions of the Gramm-Leach Bliley Act.  The Equal Credit Opportunity Act is designed to prevent credit discrimination on the basis of certain protected classes, requires the distribution of specified credit decision notices and limits the information that may be requested and considered in a credit transaction.  The Truth in Lending Act and the Truth in Leasing Act place disclosure and substantive transaction restrictions on consumer credit and leasing transactions.  The Fair Credit Reporting Act imposes restrictions and requirements regarding our use and sharing of credit reports, the reporting of data to credit reporting agencies, credit decision notices, the accuracy and integrity of information reported to the credit reporting agencies and identity theft prevention requirements.  We are also subject to theThe Servicemembers Civil Relief Act which requires us, in most circumstances, to reduce the interest rate charged to customers who have subsequently joined, enlisted, been inducted or called to active military duty.duty, and also requires us to allow eligible servicemembers to early terminate their lease agreements with us without penalty.  Federal privacy and data security laws place restrictions on our use and sharing of consumer data, impose privacy notice requirements, give consumers the right to opt out of certain uses and sharing of their data and impose safeguarding rules regarding the maintenance, storage, transmission and destruction of consumer data.  In addition, the dealers who originate our auto financeretail and lease contracts and leases also must comply with both state and federal credit and trade practice statutes and regulations.  Failure of the dealers to comply with these statutes and regulations could result in remedies that could have an adverse effect on us.

The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) became law.  The scope of the Dodd-Frank Act has, which was enacted in 2010, and its implementing regulations have had, and will likely continue to have, broad implications for the consumer financial services industry and requires the development, adoption and implementation of many regulations.  Among other things, the Dodd-Frank Act created theindustry. The Consumer Financial Protection Bureau (“CFPB”), which was created by the Dodd-Frank Act, has broad regulatory, supervisory and enforcement authority over entities offering consumer financial services or products, including non-bank companies, such as TMCC (“Covered Entities”).

In this capacity, the CFPB can examine Covered Entities for compliance with consumer financial protection laws and has authority to order remediation of violations in a number of ways, including imposing civil monetary penalties and requiring Covered Entities to provide customer restitution and to improve their compliance management systems. On August 31, 2015, we became subject to the CFPB’s supervisory authority when the CFPB’s final rule over “larger participants” in the auto finance industry took effect.  Such supervisory authority allows the CFPB to conduct comprehensive and rigorous examinations to assess compliance with consumer financial protection laws, which could result in enforcement actions, regulatory fines and mandated changes to our business products, policies and procedures.

In February 2016, the CFPB published a list of nine policy priorities it intends to focus its resources on over the next two years.  These priorities include, among others, initiation of the rulemaking process regarding debt collection practices that would apply to third-party collectors and first-party collectors, such as ourselves, and continued examination and enforcement powers overinvestigation of, and potential rulemaking regarding, consumer financial productscredit reporting practices.  The timing and services.  One of the primary purposes of the CFPB is to ensure that consumers receive clear and accurate disclosures regarding financial products and to protect consumers from discrimination and unfair, deceptive and abusive practices.  While the impact of the CFPBthese anticipated rules on our business remains uncertain,remain uncertain.

In addition, the CFPB has increased scrutiny of the sale of certain ancillary or add-on products, including products similar to those we finance or sell through TMIS.  The CFPB has questioned such products’ value and how such products are marketed and sold.

The CFPB also has enforcement authority under which it appearsis authorized to conduct investigations (which may include a joint investigation with other agencies and regulators) and initiate enforcement actions for violations of federal consumer financial protection laws. The CFPB has the authority to obtain cease and desist orders (which can include orders for restitution or rescission of contracts, as well as other kinds of affirmative relief), or other forms of remediation, and/or impose monetary penalties.  The CFPB and the Federal Trade Commission (“FTC”) have become more active in investigating the products, services and operations of credit providers, including banks and other finance companies engaged in auto finance activities.  Both the CFPB and FTC announced various enforcement actions against lenders in the past few years involving significant penalties, consent orders, cease and desist orders and similar remedies that, if applicable to auto finance providers and the bureau is increasingproducts, services and operations we offer, may require us to cease or alter certain business practices, which could have a material adverse effect on our financial condition, liquidity and results of operations.  We expect the CFPB’s investigation of, and initiation of enforcement actions against, credit providers, whether on its focus on auto loans.  own initiative or jointly with other agencies and regulators, will continue for the foreseeable future.  

CFPB regulation, inquiriessupervision and related enforcement action,actions, if any, may result in monetary penalties, increase our compliance costs, require changes in our business practices, affect our competitiveness, impair our profitability, harm our reputation or otherwise adversely affect our business.

The CFPB togetherhas focused on the area of auto finance, particularly with respect to indirect financing arrangements, dealer compensation and fair lending compliance.  In March 2013, the CFPB issued a bulletin stating that indirect auto lenders may be liable for violations under the Equal Credit Opportunity Act based on dealer-specific and portfolio-wide disparities on a prohibited basis.  According to the bulletin, these disparities result from allowing dealers to mark up the interest rate offered by the indirect auto lenders to the contract rate offered to consumers by the dealers.  In addition, the bulletin outlined steps that indirect auto lenders should take in order to comply with fair lending laws regarding dealer markup and compensation policies.

On February 2, 2016 (the “Effective Date”), we reached a settlement with the CFPB and the U.S. Department of Justice have contacted us,(collectively, the “Agencies”) related to the Agencies’ previously disclosed investigation of, and we believe other auto finance providers, to request information about the purchase of auto loans from dealers andallegations regarding, our discretionary pricingdealer compensation practices. We are voluntarily cooperatingentered into a consent order with each of the Agencies to reflect this settlement. Pursuant to the consent orders, we agreed to implement a new dealer compensation policy within 180 days of the Effective Date, which includes, among other things, decreased limits on dealer participation caps of 125 basis points (1.25 percent) for contracts with terms of 60 months or less and 100 basis points (1.00 percent) for contracts with longer terms. In connection with the request for information.  Although neither the CFPB nor the U.S. Departmentimplementation of Justice has alleged any wrongdoing on our part,such policy, we cannot predict the outcome of the inquiry.

State Consumer Finance Regulation

A majority of states (and Puerto Rico) have enacted legislation establishing licensing requirements to conduct financing activities. We must renew these licenses periodically.  Most states also impose limits on the maximum rate of finance charges.  In certain states, the margin between the present statutory maximum interest rates and borrowing costs is sufficiently narrow that, in periods of rapidly increasing or high interest rates, there could be an adverse effect on our operations in these states if we were unable to pass on increased interest costs to our customers.  Some state and federal laws impose rate and other restrictions on credit transactions with customers in active military status.

State laws also impose requirements and restrictions on us with respect to, among other matters, required credit application and finance and lease disclosures, late fees and other charges, the right to repossess a vehicle for failure to pay or other defaults under the retail or lease contract, other rights and remedies we may exercise in the event of a default under the retail or lease contract, privacy matters, and other consumer protection matters.

Our insurance operations are subject to state insurance regulations and licensing requirements.  State laws vary with respect to which products are regulated and what types of corporate licenses and filings are required to offer certain products and services.  SelectCertain products offered by TMIS are covered by federal and state privacy laws.  Insurance company subsidiaries must be appropriately licensed in certain states in which they conduct business, must maintain minimum capital requirements and file annual financial information as determined by their state of domicile and the National Association of Insurance Commissioners.  Failure to comply with these requirements could have an adverse effect on insurance operations in a particular state.  We actively monitor applicable laws and regulations in each state in order to maintain compliance.

The OTC derivatives provisions of the Dodd-Frank Act impose clearing, trading and margin requirements on certain contracts.  At present, we qualify for exceptions from these requirements for the swaps that we enter into to hedge our commercial risks.  However, if we were to fail to qualify for such exceptions, we could become subject to some or all of these requirements, which would increase our cost of entering into and maintaining such hedging positions.  Moreover, the application of the clearing, trading and margin requirements, and other related regulations, to our dealer counterparties may change the cost and availability of the OTC derivatives that we use for hedging.  Certain other requirements, such as reporting and recordkeeping, also apply to such instruments, but are not expected to have a material impact on us.

The full impact of the OTC derivatives provisions of the Dodd-Frank Act and related regulatory requirements upon our business will not be known until the regulations are fully implemented and the market for derivatives contracts has adjusted. The Dodd-Frank Act and regulations could significantly increase the cost of OTC derivative contracts, materially alter the terms of OTC derivative contracts, reduce the availability of OTC derivatives to protect against risks we encounter, or reduce our ability to monetize or restructure our existing OTC derivative contracts. If we reduce our use of OTC derivatives as a result of the Dodd-Frank Act and resulting regulations, our results of operations may become more volatile and our cash flows may be less predictable, which could adversely affect our ability to plan for and fund capital expenditures.

We continually review our operations for compliance with applicable laws.  Future administrative rulings, judicial decisions, legislation, regulations and regulatory guidance, and supervision and enforcement actions may result in monetary penalties, increase our compliance costs, require modification ofchanges in our business practices, affect our competitiveness, impair our profitability, harm our reputation or otherwise adversely affect our business.

See “Part 1, Item 1A. Risk Factors – The regulatory environment in which we operate could have a material adverse effect on our business and procedures.

At April 30, 2013,2016, we had approximately 3,2103,140 full-time employees.  We consider our employee relations to be satisfactory.  We are not subject to any collective bargaining agreements with our employees.

Additionally, while TMS conducts extensive market research before launching new or refreshed vehicles and introducing new services, many factors both within and outside TMS’s control affect the success of new or existing products and services in the marketplace.  Offering vehicles and services that customers want and value can mitigate the risks of increasing price competition and declining demand, but products and services that are perceived to be less desirable (whether in terms of price, quality, styling, safety, overall value, fuel efficiency, or other attributes) can negatively exacerbate these risks.  With increased consumer interconnectedness through the internet, social media, and other media, mere allegations relating to quality, safety, fuel efficiency, corporate social responsibility, or other key attributes can negatively impact TMS’s reputation or market acceptance of its products or services, even where such allegations prove to be inaccurate or unfounded.

A disruption in our funding sources and access to the capital markets would have an adverse effect on our liquidity.

Liquidity risk is the risk arising from our ability to meet obligations in a timely manner when they come due. Our liquidity strategy is to maintain the capacity to fund assets and repay liabilities in a timely and cost-effective manner even in adverse market conditions. An inability to meet obligations in a timely manner when they come due would have a negative impact on our ability to refinance maturing debt and fund new asset growth and would have an adverse effect on our operating results and financial condition.

Refer to Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources” for further discussion of liquidity risk.

Our allowance for credit losses may not be adequate to cover actual losses, which may adversely affect our financial condition and results of operations.

We maintain an allowance for credit losses to cover probable and estimable losses as of the balance sheet date resulting from the non-performance of our customers and dealers under their contractual obligations.  The determination of the allowance involves significant assumptions, complex analyses, and management judgment and requires us to make significant estimates of current credit risks using existing qualitative and quantitative information, any or all of which may change. For example, we review and analyze external factors, including changes in economic conditions, actual or perceived quality, safety and reliability of Toyota, Lexus and Scion vehicles, unemployment levels, the used vehicle market, and consumer behavior, among other factors.  In addition, internal factors, such as purchase quality mix and operational changes are also considered.  A change in any of these factors would cause a change in estimated probable losses.  As a result, our allowance for credit losses may not be adequate to cover our actual losses.  In addition, changes in accounting rules and related guidance, new information regarding existing portfolios, and other factors, both within and outside of our control, may require changes to the allowance for credit losses.  A material increase in our allowance for credit losses may adversely affect our financial condition and results of operations.

Refer to Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Estimates” for further discussion of the estimates involved in determining the allowance for credit losses and Note 1 – Summary of Significant Accounting Policies of the Notes to Consolidated Financial Statements for further discussion of the methodology used in determining the allowance for credit losses.

We use estimates and assumptions in determining the fair value of certain assets. If our estimates or assumptions prove to be incorrect, our financial condition and results of operations could be materially and adversely affected.

We use various estimates and assumptions in determining the fair value of many of our assets, including certain marketable securities and derivatives, which, in some cases, do not have an established market value or are not publicly traded. Our assumptions and estimates may be inaccurate for many reasons.  For example, assumptions and estimates often involve matters that are inherently difficult to predict and are beyond our control (for example, macro-economic conditions and their impact on our dealers).  In addition, they often involve complex interactions between a number of dependent and independent variables, factors, and other assumptions. As a result, our actual experience may differ materially from these estimates and assumptions. A material difference between our estimates and assumptions and our actual experience may adversely affect our financial condition and results of operations.

Fluctuations in valuation of investment securities or significant fluctuations in investment market prices could negatively affect our revenues and results of operations.

Investment market prices, in general, are subject to fluctuation. Consequently, the amount realized in the subsequent sale of an investment may significantly differ from the reported market value and could negatively affect our revenues. Additionally, negative fluctuations in the value of available-for-sale investment securities could result in unrealized losses recorded in Other comprehensive income or in other-than-temporary impairment within our results of operations. Fluctuation in the market price of a security may result from perceived changes in the underlying economic characteristics of the investment, the relative price of alternative investments, national and international events, or general market conditions.

Changes in accounting standards issued by the Financial Accounting Standards Board (“FASB”) could adversely affect our financial condition and results of operations.

Our accounting and financial reporting policies conform to accounting principles generally accepted in the United States of America, which are periodically revised and/or expanded. The application of accounting principles is also subject to varying interpretations over time. Accordingly, we are required to adopt new or revised accounting standards or comply with revised interpretations that are issued from time to time by various parties, including accounting standard setters and those who interpret the standards, such as the FASB and the SEC and our independent registered public accounting firm. Those changes could adversely affect our financial condition and results of operations.

The FASB has recently proposed new financial accounting standards, and has many active projects underway which include potential for significant changes in the accounting for financial instruments, including the allowance for credit losses, among others. It is possible that any changes, if enacted, could adversely affect our financial condition and results of operations.

A decrease in the residual values of our off-lease vehicles and a higher number of returned lease assets could negatively affect our operating results and financial condition.

We are exposed to risk of loss on the disposition of leased vehicles and industrial equipment to the extent thatif sales proceeds realized upon the sale of returned lease assets are not sufficient to cover the residual value that was estimated at lease inception.inception and if the number of returned lease assets is higher than anticipated.  To the extent the estimated end-of-term market value of a leased vehicle is lower than the residual value established at lease inception, the residual value of the leased vehicle is adjusted downward so that the carrying value at lease endlease-end will approximate the estimated end-of-term market value.  Among other factors, local, regional and national economic conditions, new vehicle pricing, new vehicle incentive programs, new vehicle sales, the actual or perceived quality, safety or reliability of vehicles, future plans for new Toyota, Lexus and Scion product introductions, competitive actions and behavior, product attributes of popular vehicles, the mix of used vehicle supply, the level of current used vehicle values and inventory levels, and fuel prices heavily influence used vehicle prices and thus the actual residual value of off-lease vehicles.  Differences between the actual residual values realized on leased vehicles and our estimates of such values at lease inception could have a negative impact on our operating results and financial condition, due to our recognitionthe impact of higher-than-anticipated losses recorded as depreciation expenseDepreciation on operating leases in theour Consolidated Statement of Income.

Credit risk is the risk of loss arising from the failure of a customer or dealer to meet the terms of any retail or lease contract with us or otherwise fail to perform as agreed.  The level of credit risk in our retail installment sales and lease portfoliosconsumer portfolio is influenced primarily by two factors: the total number of contracts that experience default (“default frequency”) and the amount of loss per occurrence (“loss severity”), which in turn are influenced by various economic factors, the used vehicle market, purchase quality mix, contract term length, and operational changes as discussed below.

The level of credit risk in our dealer financing portfolio 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 general macroeconomic conditions, the overall demand for new and used vehicles, and the financial condition of automotive manufacturers, among other factors.  An increase in credit risk would increase our provision for credit losses, which would have a negative impact on our operating results and financial condition.

Economic slowdown and recession in the United States, natural disasters and other factors increase the risk that a customer or dealer may not meet the terms of a financeretail or lease contract with us or may otherwise fail to perform as agreed.  A weak economic environment evidenced by, among other things, unemployment, underemployment, and consumer bankruptcy filings, may affect some of our customers’ ability to make their scheduled payments. There can be no assurance that our monitoring of credit risk and our efforts to mitigate credit risk are or will be sufficient to prevent an adverse effect on our operating results and financial condition.

Market risk is the risk that changes in market interest rates and foreign currency exchange rates cause volatility in our operating results, financial condition and cash flow.  The effect of anAn increase in market interest rates on our cost of capital could have an adverse effect on our business, financial condition and operating results by increasing our cost of capital and the rates we charge to our customers and dealers, thereby affecting our competitive position.  Market risk also includes the risk that the value of our investment portfolio could decline.  We use various derivative instruments to manage our market risk.  However, changes in interest rates, foreign currency exchange rates and market prices cannot always be predicted or hedged.  Changes in interest rates or foreign currency exchange rates could affect the value of our derivatives, which could result in volatility in our operating results and financial condition.

Operational risk is the risk of loss resulting from, among other factors, inadequate or failed processes, systems or internal controls, theft, fraud or natural disasters including earthquakes.  Operational risk can occur in many forms including, but not limited to, errors, business interruptions, failure of controls, failure of systems or other technology, deficiencies in our insurance risk management program, inappropriate behavior or misconduct by our employees or those contracted to perform services for us, and vendors that do not perform in accordance with their contractual agreements.  Our corporate headquarters areis located in the Los Angeles, California area, which is near major earthquake faults.  We have established business recovery plans to address interruptions in our operations, but we can give no assurance that these plans will be adequate to remediate all events that we may face.  A catastrophic event that results in the destruction or disruption of any of our critical business or information technology systems could harm our ability to conduct normal business operations.  These events can potentially result in financial losses or other damage to us, including damage to our reputation.

We also rely on a framework of internal controls designed to provide a sound and well-controlled operating environment.  Due to the complexity of our business and the challenges inherent in implementing control structures across large organizations, control issues could be identified in the future that could have a material effect on our operations.

We rely on internal and externalthird party information and technological systems to manage our operations and are exposed to risk of loss resulting from breaches in the security or other failures of these systems.  Any failure or interruption of our information systems or the third party information systems on which we rely as a result of inadequate or failed processes or systems, human errors, employee misconduct, catastrophic events, external or internal security breaches, acts of vandalism, computer viruses, malware, misplaced or lost data, or other events could disrupt our normal operating procedures and have an adverse effect on our business, operating results and financial condition.

We collect and store certain personal and financial information from employees, customers and employees.other third parties.  Security breaches or cyber-attacks involving our systems or facilities, or the systems or facilities of our service providers, could expose us to a risk of loss of thispersonally identifiable information of customers, employees and third parties or other proprietary or competitively sensitive information, business interruptions, regulatory scrutiny, actions and penalties, litigation, reputational harm, and a loss of confidence, thatall of which could potentially have an adverse impact on future business with current and potential customers.

We rely on encryption and authentication technologyother information security technologies licensed from third parties to provide the security and authenticationcontrols necessary to effect securehelp in securing online transmission of confidential information frompertaining to customers and employees.  Advances in computerinformation system capabilities, new discoveries in the field of cryptography or other events or developments may result in a compromise or breach of the algorithmstechnology that we use to protect sensitive customer transaction data.  A party who is able to circumvent our security measures by methods such as hacking, fraud, trickery or other forms of deception could misappropriate proprietary information or cause interruption in our operations.  We may be required to expend capital and other resources to protect against such security breaches or cyber attackscyber-attacks or to alleviateremediate problems caused by such breaches or attacks.  Our security measures are designed to protect against security breaches and cyber attacks,cyber-attacks, but our failure to prevent such security breaches and cyber attackscyber-attacks could subject us to liability, decrease our profitability and damage our reputation.