Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. x☒ Yes ¨☐ No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ¨☐ Yes x☒ No

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x☒ Yes ¨☐ No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x☒ Yes ¨☐ No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment of this Form 10-K. x☒

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” ~~and~~ “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨☐ Yes x☒ No

As of May 31, ~~2016,~~2018, the number of outstanding shares of common stock of the registrant was 13,660,000 all of which shares were held by American Honda Motor Co., Inc. None of the shares are publicly traded.

American Honda Finance Corporation, a wholly-owned subsidiary of American Honda Motor Co., Inc., which in turn is a wholly-owned subsidiary of Honda Motor Co., Ltd., meets the requirements set forth in General Instruction I(1)(a) and (b) of Form 10-K and is therefore filing this Form with the reduced disclosure format.

Certain statements included herein constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 that involve a number of risks and uncertainties. Certain such forward-looking statements can be identified by the use of forward-looking terminology such as “believes,” “expects,” “may,” “will,” “should,” “seeks,” “scheduled,” or “anticipates” or similar expressions or the negative thereof or other variations thereof or comparable terminology, or by discussions of strategy, plans, or intentions. In addition, all information included herein with respect to projected or future results of operations, cash flows, financial condition, financial performance, or other financial or statistical matters constitute forward-looking statements. Such forward-looking statements are necessarily dependent on assumptions, data, or methods that may be incorrect or imprecise and that may be incapable of being realized. The following factors, among others, could cause actual results and other matters to differ materially from those in such forward-looking statements:

Additional information regarding these and other risks and uncertainties to which our business is subject is set forth in “Part I, Item 1A. Risk Factors” in this Annual Report on Form 10-K, as such risks and uncertainties may be amended, supplemented or superseded from time to time by other reports we file with the Securities and Exchange Commission, including subsequent Annual Reports on Form 10-K and Quarterly Reports on Form 10-Q. We do not intend, and undertake no obligation to, update any forward-looking information to reflect actual results or future events or circumstances, except as required by applicable law.

American Honda Finance Corporation (AHFC) is a California corporation that was incorporated on February 6, 1980. Unless otherwise indicated by the context, all references to the “Company”, “we”, “us”, and “our” in this report include AHFC and its consolidated subsidiaries, and references to “AHFC” refer solely to American Honda Finance Corporation (excluding its subsidiaries). AHFC is a wholly-owned subsidiary of American Honda Motor Co., Inc. (AHM). Honda Canada Finance Inc. (HCFI) is a majority-owned subsidiary of AHFC. Noncontrolling interest in HCFI is held by Honda Canada Inc. (HCI), an affiliate. AHM is a wholly-owned subsidiary and HCI is an indirect wholly-owned subsidiary of Honda Motor Co., Ltd. (HMC). AHM and HCI are the sole authorized distributors of Honda and Acura products, including motor vehicles, parts, and accessories in the United States and Canada. AHFC’s principal executive offices are located at 20800 Madrona Avenue, Torrance, California 90503.

We provide various forms of financing in the United States and Canada to purchasers and lessees of Honda and Acura products and authorized independent dealers of Honda and Acura products. Our primary focus, in collaboration with AHM and HCI, is to provide support for the sale of Honda and Acura products in the United States and Canada and maintain customer and dealer satisfaction and loyalty. Our business is substantially dependent upon the sale of those Honda and Acura products in the United States and Canada and the percentage of those sales financed by us.

We acquire retail loans, primarily installment sale contracts, and leases made to retail customers of Honda and Acura products and we offer wholesale flooring and commercial loans to ~~authorized~~ dealers of Honda and Acura products. ~~A small portion of our business also consists of acquiring financings of non-Honda and non-Acura used automobiles and providing wholesale loans to non-Honda and non-Acura dealerships.~~

We acquire and offer, as applicable, substantially similar products and services throughout many different regions, provinces, and territories, subject to local legal restrictions and market conditions. We divide our business segments between our business in the United States and in Canada. For additional financial information regarding our operations by business segment, see Note 15—Segment Information of Notes to Consolidated Financial Statements and “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Overview.” In the United States and Canada, we provide our financing products under the brand names Honda Financial Services and Acura Financial Services.

This report contains translations of certain foreign currency amounts into U.S. dollars at the rates specified below solely for your convenience. These translations should not be construed as representations that the foreign currency amounts actually represent such U.S. dollar amounts or that they could be converted into U.S. dollars at the rates indicated. U.S. dollar equivalents for “C$” (Canadian dollar), “€” (Euro) and “£” (Sterling) amounts are calculated based on the exchange rates on March 31, 2016 of 1.3004, 0.8781 and 0.6958, respectively, per U.S. dollar.

Our filings with the Securities and Exchange Commission (SEC) may be found by accessing the SEC website at www.sec.gov under “Company Filings”. The SEC website contains reports, registration statements, and other information regarding issuers that file ~~electronically~~ with the SEC. The public may obtain additional information by calling the “SEC Toll-Free Investor Information Service” line at 1-800-SEC-0330 (1-800-732-0330). A direct link to the SEC website and certain of our filings is contained on our website located at www.hondafinancialservices.com under “Investor Relations, SEC Filings”. Additionally, we have made available on our website, without charge, electronic copies of our periodic and current reports that have been filed with the SEC.

Investors and others should note that we announce material financial information using the ~~investor relations~~Investor Relations, SEC Filings section of our corporate website (http://www.hondafinancialservices.com). We use our website and press releases to communicate with our investors, customers and the general public about our company, our services and other matters. While not all of the information that we post on our website is of a material nature, some information could be material. Therefore, we encourage investors, the media, and others interested in our company to review the information we post on the ~~investor relations~~Investor Relations, SEC Filings section of our website. Currently, we do not use any social media channels for purposes of communicating such information to the public. Any changes to our communication channels will be posted on the ~~investor relations~~Investor Relations, SEC Filings section of our website. We are not incorporating any of the information set forth on our website into this filing on Form 10‑K.

We provide indirect financing to retail customers of Honda and Acura products by acquiring retail loans originated by ~~authorized~~ Honda and Acura dealers. Retail loans are acquired in accordance with our underwriting standards. See “—Underwriting and Pricing of Consumer Financing” below for a description of our underwriting process. The products that we finance consist primarily of new and used Honda and Acura automobiles and Honda motorcycles, power equipment, and marine engines. ~~On a limited basis, we also finance customer purchases of non-Honda and non-Acura used automobiles.~~ Retail loans may also include the financing of insurance products or vehicle service contracts. See “—~~Consumer Assurance Products and~~Vehicle Service Contract Administration” below for more information. The terms of retail loans originated in the United States generally range from 24 to 72 months while the terms of retail loans originated in Canada generally range from 24 to 84 months.

We service all of the retail loans we acquire. We generally hold a security interest in the products purchased through our retail loans. As a result, if our collection efforts fail to bring a delinquent customer’s payments current, we generally can repossess the customer’s vehicle, after satisfying local legal requirements, and sell it at auction. We may waive late payment fees and other fees assessed in the ordinary course of servicing the retail loans and allow payment deferrals by extending the loan’s term. See “—Servicing of Consumer Financing” below for more information.

We require customers that purchase Honda and Acura products through retail loans acquired by us to obtain adequate physical damage, comprehensive and collision insurance.

We acquire closed-end vehicle lease contracts between ~~authorized~~ Honda and Acura dealers and their customers primarily for leases of new Honda and Acura automobiles. ~~On a limited basis, we also acquire contracts for leases of used Honda and Acura automobiles and Honda motorcycles.~~ In the case of leases originating in the United States, upon our acquisition of such leases, the dealer assigns all of its rights, title, and interest in the lease and the automobile to either our wholly-owned subsidiary, Honda Lease Trust (HLT) or its trustee, HVT, Inc., depending on the applicable state. HLT is a trust established to take assignments of and serve as holder of legal title to leased automobiles. In the case of leases originating in Canada, upon our acquisition of such leases, the dealer assigns all of its rights, title, and interest in the lease and the vehicle to our majority owned subsidiary HCFI.

Leases are acquired in accordance with our underwriting standards. See “—Underwriting and Pricing of Consumer Financing” below for a description of our underwriting process. Terms of the leases generally range from 24 to 60 months. We service the leases we acquire. We may waive late payment fees and other fees assessed in the ordinary course of servicing the leases, extend the lease term, or offer end-of-lease incentives. See “—Servicing of Consumer Financing” below for more information.

We require the lessee to obtain insurance with adequate public liability and physical damage coverage for the entire lease term.

Dealers submit customer credit applications electronically through our online system. In addition, AHFC customers are able to submit their own credit applications for pre-approval directly through our website. If our requirements are met, an application received from a dealer is approved automatically. Our system is programmed to review application information for purchase policy and legal compliance. Applications that are not automatically approved are routed to credit buyers located in our regional offices, who will evaluate and make purchase decisions within the framework of our purchase policy and legal requirements.

We utilize our proprietary credit scoring system to evaluate the credit risk of applicants. Factors used by our credit scoring system to develop a customer’s credit grade include the term of the contract, the loan or lease-to-value ratio, the customer’s debt ratios, and credit bureau attributes, number of trade lines, utilization ratio, and number of credit inquiries. A customer’s credit grade is determined only at the time of origination and is not reassessed during the life of the contract. We utilize different scorecards depending on the type of product we finance and we regularly review and analyze our ~~consumer financing~~consumer-financing portfolio to ~~evaluate~~ensure the effectiveness of our underwriting guidelines, purchasing criteria and scorecard predictability of our customers.

In the United States, AHFC utilizes a tiered pricing structure based on customer Fair Isaac Corporation/FICO scores. In Canada, HCFI has a single tiered pricing structure.

We have eight regional offices in the United States that are responsible for the acquisition, servicing, collection, and customer service activities related to our automobile retail loans and leases. These offices are located in California, Texas, Massachusetts, Illinois, North Carolina, Delaware, and Georgia. We also have one office in Georgia that is responsible for the underwriting of motorcycle, power equipment, and marine engine loans, customer service related to those contracts and collection efforts for past due accounts on a national basis.

In addition to our servicing regions, we have centralized certain operational functions in the United States relating to our automobile retail loans and leases at the National Service Center located in Texas, which contains our National Processing Center, Lease Maturity Center, Remarketing Center, and Recovery and Bankruptcy Center, which are described below:

In Canada, we have two regional offices that are responsible for acquisition, servicing, collection, and customer service activities related to our retail loans and leases. These offices are located in Quebec and Ontario. Similar to our United States operations, in addition to our servicing regions, we have centralized certain operational functions for our Canadian retail loans and leases. These centralized functions are located in Ontario and include our ~~Lease Maturity~~Customer Retention Centre, Recovery Centre, Collections Centre, Customer Service Centre, and Auctions/Remarketing Centre. The services provided by these centralized functions are comparable to the services provided by our National Service Center in the United States.

We use an account servicing system and an automated dialer system that prioritize collection efforts, generate past due notices, and signal our collections personnel to make telephone contact with delinquent customers. For the purpose of determining whether a retail loan or lease is delinquent, payment is generally considered to have been made upon receipt of 90% of the sum of the current monthly payment due plus any overdue monthly payments.

If necessary, repossession action is taken ~~through the use of~~using bonded and licensed repossession agencies. Subject to a state’s recording, filing, and notice requirements, or other laws, we are generally permitted by applicable state law to repossess automobiles or motorcycles upon default by the related customer. We typically decide whether or not to repossess a vehicle when the account is 45 to 60 or more days past due, subject to the laws and regulations governing repossession in the state where the automobile or motorcycle is located.

AHM and HCI sponsor ~~incentive financing~~incentive-financing programs in the United States and Canada, respectively. These programs offer promotional rates on retail loans and leases to purchasers and lessees of Honda and Acura products. AHM or HCI, as applicable, ~~pays~~pay us ~~a subsidy~~subsidies that ~~enables~~enable us to realize a market yield on any financing contract we indirectly finance under these programs. Market yield is based on, among other things, the credit quality of the customer and the length of the contract. Subsidy payments received on retail loans and leases are deferred and recognized as revenue over the term of the related contracts. The volume of incentive financing programs sponsored by AHM and HCI and the allocation of those programs between retail loans and leases may vary from fiscal period to fiscal period depending upon the respective marketing strategies of AHM and HCI. AHM and HCI’s marketing strategies are based in part on their business planning and control, in which we do not participate. Therefore, we cannot predict the level of incentive financing programs AHM and HCI may sponsor in the future. See “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Overview.”

Honda Aviation Finance Company LLC, a wholly-owned subsidiary of AHFC, provides financing and account servicing for customers of Honda Aircraft Company LLC, a subsidiary of AHM, in the United States. Customers submit a credit application and if our underwriting policies and legal requirements are met, the retail loan is approved.

We provide wholesale flooring loans to dealers of Honda and Acura automobiles and Honda motorcycles, power equipment, and marine engines through our Dealer Financial Services (DFS) business unit. In the United States, wholesale flooring loans are also provided on a limited basis to non-Honda and non-Acura automobile dealerships whose ownership is directly affiliated with a Honda and/or Acura dealership or to multi-brand dealer organizations.

Wholesale flooring financing is available primarily through revolving lines of credit and may only be used by dealers to finance the purchase of inventory. AHFC will finance new automobiles and motorcycles up to 100% of the dealer invoice price and used automobiles and motorcycles up to 80% of the applicable market value determined in accordance with industry pricing guides in the United States. HCFI will finance new automobiles and motorcycles up to 100% of the dealer invoice price and used automobiles and motorcycles up to the current market value determined in accordance with industry pricing guides in Canada. Dealers pay a variable interest rate on wholesale flooring loans. Wholesale flooring loans must be prepaid at specified intervals and increments and generally must be paid in full upon the sale of the product, although a grace period of three to seven days for payment may be provided to dealers. AHM and HCI sponsor ~~incentive financing~~incentive-financing programs in the United States and Canada, respectively, to Honda and Acura ~~authorized~~ dealers approved for wholesale flooring loans.

In establishing a wholesale flooring loan, we conduct a comprehensive review of the dealership, including a review of its business operations and management, any credit reports, financial statements, tax returns, bank references, and/or other available historical credit information and a review of the personal financial statements of the dealership’s individual owner(s). This data is organized into an electronic scorecard which supports our determination of whether we will provide a wholesale flooring loan and, if so, the amount of the loan and the interest rate. Once a wholesale flooring loan has been approved, we maintain an ongoing review process of the dealerships we finance. Dealers of Honda and Acura automobiles are required to submit financial statements on a monthly basis and dealers of Honda motorcycles, power equipment, and marine engines are required to submit financial statements annually. We ~~typically~~ use a third party to perform random periodic on-site physical inspections of financed dealership inventory at a frequency determined by the dealership’s scorecard and financial performance. Monitoring activities are performed more frequently for dealerships with higher levels of credit risk.

We seek to retain a purchase money security interest in all products that are financed pursuant to wholesale flooring loan agreements we enter into with dealers. In addition, we generally secure wholesale flooring loans with liens on the dealership’s other assets and obtain a personal guarantee from dealership owners, as well as corporate guarantees from, or on behalf of, dealership owner(s)’ other dealerships. 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 require dealerships to maintain insurance on all inventory, including peril coverage for flood, hail, wind, false pretense, liability, earthquake, vandalism, and other risks.

In the event of a default on a wholesale flooring loan, we may repossess the financed product, ~~and~~ sell the repossessed assets, and seek other available legal remedies pursuant to the related wholesale flooring loan agreement and related guarantees consistent with commercially accepted practices and applicable laws. After the sale of a financed product to consumers in the ordinary course of business, we have no right to recover the product and are limited to the remedies under our wholesale flooring loan agreement with the dealer. Additionally, we have ~~entered into~~ agreements with AHM and HCI that provide for their repurchase ~~at the outstanding financed amount,~~ of new, unused, undamaged, and unregistered vehicle or equipment that have been repossessed from dealers who defaulted under the terms of its wholesale flooring agreement.

A wholesale flooring loan is considered delinquent when any payment is contractually past due. Depending on a dealer’s level of credit risk, a dealer may be given a grace period of three to seven days to make payments. Collection efforts are initiated ~~through the use of~~using our staff. We file replevin actions, send past due notices, enter into forbearance agreements, and renegotiate contracts with delinquent dealers. If we determine a dealer cannot meet the obligations under its wholesale flooring loan agreement, legal action may commence. Subject to recording, filing and notice requirements of state, provincial or other laws we are generally permitted by the applicable laws to repossess the underlying collateral that have not been sold to a buyer in the ordinary course of business.

In the United States, wholesale flooring loans are ~~approved through our headquarters in Torrance, California, and~~ serviced ~~through our~~at AHFC’s regional offices in California, Texas, Massachusetts, Illinois, North Carolina, Delaware, and Georgia. ~~Wholesale~~In Canada, wholesale flooring loans ~~for Honda and Acura dealerships in Canada~~ are ~~approved and~~ serviced at HCFI’s headquarters in Ontario.

We provide commercial loans to Honda and Acura automobile dealers through our DFS business unit. This commercial financing is available primarily through term loans and are used primarily for financing dealership property, equipment, construction, facility improvements, and working capital. Dealers generally pay a variable interest rate on commercial loans in the United States. In Canada, dealers pay both fixed rates and variable rates on commercial loans.

In establishing a commercial loan, we conduct a comprehensive review of the dealership, including a review of its business operations and management, appraisals of dealership property, credit reports, financial statements, tax returns, bank references, and/or other available historical credit information and a review of the personal financial statements of the dealership’s individual owner(s). Once the loan has been approved, we maintain an ongoing review process of the dealership we finance, which we believe is consistent with industry practices.

Commercial loans are generally secured by the associated properties, inventory, and other dealership assets. In addition, we generally obtain a personal guarantee from dealership owners, as well as corporate guarantees from, or on behalf of, dealership individual owner(s)’ other dealerships. Although our commercial loans are typically collateralized or guaranteed, the value of the underlying collateral or guarantees may not be sufficient to cover our exposure. Commercial loans are considered delinquent when any payment is contractually past due.

~~Commercial~~In the United States, commercial loans are ~~originated through our~~serviced at AHFC’s headquarters in ~~California and serviced through our regional offices in California, Texas, Massachusetts, Illinois, North Carolina, Delaware, and Georgia.~~California. In Canada, commercial loans are ~~originated and administered~~serviced at HCFI’s headquarters in ~~Ontario and serviced through a proprietary standalone system.~~Ontario.

The automobile financing ~~industry~~industries in the United States and Canada isare very competitive. Providers of vehicle and similar product financing have traditionally competed based on ~~the basis of~~ interest rates charged, the quality of credit accepted, the flexibility of loan terms offered, the quality of service provided to dealers and customers, and the strength of dealer relationships.

National and regional commercial banks, credit unions, savings and loan associations, finance companies, and other captive finance companies provide consumer financing for new and used Honda and Acura ~~automobiles and parts and accessories and Honda motorcycles, power equipment, and marine engines.~~products. Commercial banks, finance companies, and captive finance companies of other manufacturers also provide inventory financing for Honda and Acura dealers. Our primary competition in the wholesale motorcycle, power equipment, and marine engine financing business tends to be local banks and specialty finance firms that are familiar with the particular characteristics of these businesses.

In Canada, commercial banks ~~have become stronger~~are strong competitors in the automobile consumer financing business.

The following is a description of certain relationships with HMC and other affiliates.

HMC and AHFC are parties to a keep well agreement (the HMC-AHFC Agreement), which became effective on September 9, 2005.

The HMC-AHFC Agreement is not a guarantee by HMC of any Debt or other obligation, indebtedness, or liability of any kind of AHFC.

The HMC-AHFC Agreement includes AHFC’s agreement that it will use any funds made available to it by HMC thereunder solely for fulfilling AHFC’s payment obligations in respect of Debt. Any claims of HMC arising from any provisions of funds to AHFC by HMC shall be subordinated to the claims of all holders of Debt with respect to such Debt, whether or not such claims exist at the time such funds are made available to AHFC, and HMC will not demand payment of such claims from AHFC unless and until all outstanding Debt has been paid in full.

HMC or AHFC may each terminate the HMC-AHFC Agreement upon giving to the other party 30 days’ prior written notice and the HMC-AHFC Agreement may be modified or amended only by the written agreement of HMC and AHFC and upon 30 days’ prior written notice to each rating agency rating any covered Debt. However, such termination, modification, or amendment will not be effective with respect to any Debt outstanding at the time of such termination, modification, or amendment unless: (i) such termination, modification, or amendment is permitted under the documentation governing such Debt, (ii) all affected holders of such Debt (or, in the case of Debt incurred pursuant to documentation that permits the HMC-AHFC Agreement to be terminated, modified, or amended with the consent of less than all of the holders of such Debt, the requisite holders of such Debt) otherwise consent in writing, or (iii) with respect to Debt that is rated by one or more rating agencies at the request of HMC or AHFC, each such rating agency confirms in writing that the rating assigned to such Debt will not be withdrawn or reduced because of the proposed action.

An amendment, modification, or termination of the HMC-AHFC Agreement (except as permitted by its terms) would constitute an event of default under certain of AHFC’s Debt and failure by HMC to meet its obligations under the HMC-AHFC Agreement would constitute an event of default under such Debt if the failure continued for 30 days and was continuing at the time the default was declared.

Under its terms, the HMC-AHFC Agreement is not enforceable against HMC by anyone other than: (i) AHFC or (ii) if any case is commenced under the United States Bankruptcy Code (11 USC §§101 et seq.), or any successor statutory provisions, or the Bankruptcy Code, in respect of AHFC, the debtor in possession or trustee appointed by the court having jurisdiction over such proceeding. In the event of (1) a breach by HMC in performing a provision of the HMC-AHFC Agreement and (2) the commencement of such a case under the Bankruptcy Code in respect of AHFC while any Debt is outstanding, the remedies of a holder of Debt shall include the right, if no proceeding in respect of AHFC has already been commenced in such case, to file a petition in respect of AHFC thereunder with a view to the debtor in possession, or the trustee appointed by the court having jurisdiction over such proceeding, pursuing AHFC’s rights under the HMC-AHFC Agreement against HMC. However, all holders of outstanding Debt may (i) demand in writing that AHFC enforce its rights under the HMC-AHFC Agreement and (ii) proceed directly against HMC to enforce compliance by HMC with its obligations under the HMC-AHFC Agreement if AHFC fails or refuses to take action to enforce its rights under that agreement within 30 days following AHFC’s receipt of demand for such enforcement by such holder.

The HMC-AHFC Agreement is governed by and construed in accordance with the laws of the State of New York.

HMC and HCFI are parties to a keep well agreement (the HMC-HCFI Agreement), which became effective on September 26, 2005.

The HMC-HCFI Agreement is not a guarantee by HMC of any Debt or other obligation, indebtedness, or liability of any kind of HCFI.

The HMC-HCFI Agreement includes HCFI’s agreement that it will use any funds made available to it by HMC thereunder solely for the purposes of fulfilling HCFI’s payment obligations in respect of Debt. Any claims of HMC arising from any provisions of funds to HCFI by HMC shall be subordinated to the claims of all holders of Debt with respect to such Debt, whether or not such claims exist at the time such funds are made available to HCFI, and HMC will not demand payment of such claims from HCFI unless and until all outstanding Debt has been paid in full.

HMC or HCFI may each terminate the HMC-HCFI Agreement upon giving to the other party 30 days’ prior written notice and the HMC-HCFI Agreement may be modified or amended only by the written agreement of HMC and HCFI and upon 30 days’ prior written notice to each rating agency rating any covered Debt. However, such termination, modification, or amendment will not be effective with respect to any Debt outstanding at the time of such termination, modification, or amendment unless: (i) such termination, modification, or amendment is permitted under the documentation governing such Debt, (ii) all affected holders of such Debt (or, in the case of Debt incurred pursuant to documentation that permits the HMC-HCFI Agreement to be terminated, modified, or amended with the consent of less than all of the holders of such Debt, the requisite holders of such Debt) otherwise consent in writing, or (iii) with respect to Debt that is rated by one or more rating agencies at the request of HMC or HCFI, each such rating agency confirms in writing that the rating assigned to such Debt will not be withdrawn or reduced because of the proposed action.

An amendment, modification, or termination of the HMC-HCFI Agreement (except as permitted by its terms) would constitute an event of default under certain of HCFI’s Debt and failure by HMC to meet its obligations under the HMC-HCFI Agreement would constitute an event of default under such Debt if the failure continued for 30 days and was continuing at the time the default was declared.

Under its terms, the HMC-HCFI Agreement is not enforceable against HMC by anyone other than: (i) HCFI or (ii) if any case is commenced under the Canadian Bankruptcy and Insolvency Act, the Canadian Companies’ Creditors Arrangement Act, or the Canadian Winding Up and Restructuring Act by or against HCFI, the debtor in possession or trustee or receiver appointed by the court having jurisdiction over such proceeding. In the event of (1) a breach by HMC in performing a provision of the HMC-HCFI Agreement and (2) the insolvency of HCFI while any Debt is outstanding, the remedies of a holder of Debt shall include the right, if no proceeding in respect of HCFI has already been commenced in such proceeding, to file an application in respect of HCFI for the appointment of a trustee or receiver by the court having jurisdiction over such proceeding in order to pursue HFCI’s rights under the HMC-HCFI Agreement against HMC. However, all holders of outstanding Debt may (i) demand in writing that HCFI enforce its rights under the HMC-HCFI Agreement and (ii) proceed directly against HMC to enforce compliance by HMC with its obligations under the HMC-HCFI Agreement if HCFI fails or refuses to take action to enforce its rights under that agreement within 30 days following HCFI’s receipt of demand for such enforcement by such holder.

The HMC-HCFI Agreement is governed by and construed in accordance with the laws of the State of New York.

AHM and HCI sponsor ~~incentive financing~~incentive-financing programs in the United States and Canada, respectively. These programs offer promotional rates on loans and leases to purchasers, lessees, and ~~authorized~~ dealers of Honda and Acura products. AHM or HCI, as applicable, ~~pays~~pay us ~~a subsidy~~subsidies that ~~enables~~enable us to realize a market yield on any financing contract we indirectly or directly finance under these programs. These subsidy payments supplement the revenues on our financing products offered under our incentive financing programs. See “—Consumer Financing—Incentive Financing Programs for Retail Loans and Leases” above for more information.

AHFC no longer issues fixed rate short-term notes to AHM to fund AHFC’s general corporate operations. As of March 31, 2018, AHFC had no outstanding notes to AHM. HCFI issues fixed rate short-term notes to HCI to fund HCFI’s general corporate operations. See Note 4—Debt of Notes to Consolidated Financial Statements for further information regarding our related party debt.

Our Consumer Assurance Products and Service Group is responsible for the administration of vehicle service contracts issued by AHM, ~~and~~ American Honda Protection Products Corporation (AHPPC) and American Honda Service Contracts Corporation (AHSCC), a wholly-owned ~~subsidiary~~subsidiaries of AHM. HCFI performs marketing services for vehicle service contracts issued by HCI. We receive fees to perform administrative and marketing services for AHM, AHPPC, AHSCC or HCI, as applicable.

A vehicle service contract is a contractual agreement between the dealer, manufacturer or an independent third party, and the dealer’s customer. The contract provides for certain repairs, mechanical breakdown coverage, roadside assistance, and/or oil changes for the customer’s new or used automobile. A vehicle service contract can be obtained on both Honda and Acura automobiles.

As the administrator, we approve claims and provide customer service to purchasers of vehicle service contracts. We do not provide the maintenance or roadside assistance provided by the vehicle service contracts.

Honda North America, Inc. (HNA), a wholly-owned subsidiary of HMC, provides services to Honda’s North American operations. HNA provides us with information technology, legal, internal ~~auditing,~~audit, and other services pursuant to a shared services agreement. HNA is paid a compensation fee for these services.

WeIn Canada, we also share certain common expenditures with HCI, including professional services, data processing services, insurance policies, software development and facilities.

Our employees participate in various employee benefit plans that are sponsored by AHM and HCI, respectively. Refer to Note 8—Benefit Plans of Notes to Consolidated Financial Statements for additional information about employee benefit plans.

AHFC and its United States subsidiaries are included in the consolidated United States federal income tax returns of AHM and many consolidated or combined state and local income tax returns of AHM. In some cases AHFC and its United States subsidiaries file tax returns separately as required by certain state and local jurisdictions. AHFC and its United States subsidiaries pay for their share of the consolidated or combined income tax on a modified separate return basis pursuant to an intercompany tax allocation agreement with AHM. AHFC and its applicable United States subsidiaries file a separate California return based on California’s worldwide income and apportionment rules. To the extent AHFC and its United States subsidiaries have taxable losses in AHM’s consolidated federal and consolidated or combined state and local tax returns, AHM reimburses AHFC and its United States subsidiaries, as applicable, to the extent the losses are utilized by AHM or another member of the consolidated or combined group under the terms of the intercompany tax allocation agreement. All but an insignificant amount of the federal and state taxes payable or receivable shown on the consolidated balance sheets are due to or from AHM, pursuant to the intercompany tax allocation agreement.

Our Canadian subsidiary, HCFI, files Canadian federal and provincial income tax returns based on the separate legal entity financial statements. HCFI does not file federal, state or local income tax returns in the United States. Consequently, HCFI does not participate in the intercompany tax allocation agreement that AHFC and its United States subsidiaries have with AHM.

Refer to Note 7—Income Taxes of Notes to Consolidated Financial Statements for additional information about income taxes.

We have ~~entered into~~ agreements with AHM and HCI that provide for their repurchase ~~at the outstanding financed amount,~~ of new, unused, undamaged, and unregistered vehicles or equipment that have been repossessed from dealers who defaulted under the terms of its wholesale flooring agreement.

As of March 31, ~~2016,~~2018, for the outstanding retail loans and leases we acquired in the United States, approximately ~~17%~~18% and 10% were from customers residing in California and New York, respectively. Any material adverse changes to the economies or applicable laws in a given state could have a material adverse effect on our financial condition and results of operations.

We are subject to seasonal variations in credit losses, which are historically higher in the first and fourth quarters of the calendar year. This seasonality does not have a significant impact on our results of operations.

At March 31, ~~2016,~~2018, we had ~~1,378~~1,477 employees. We consider our employee relations to be satisfactory. We are not subject to any collective bargaining agreements with our employees.

Our consumer financing and dealer financing operations are subject to regulation, supervision, and licensing under various United States, Canadian, state, provincial, and local statutes, ordinances and regulations. In recent years, regulators have increased their focus on the regulation of the financial services industry and consumer financing in particular. As a result, there have been and may continue to be proposals for laws and regulations that could increase the scope and nature of laws and regulations that are currently applicable to us. We actively monitor proposed changes to relevant legal and regulatory requirements in order to maintain our compliance. The cost of our ongoing compliance efforts in our consumer financing and dealer financing operations has not had a material adverse effect on our results of operations, cash flows, or financial condition to date, although future compliance efforts may have such an effect.

Our consumer financing operations in the United States are regulated under both federal and state laws, including consumer protection statutes and related regulations. Management believes that AHFC is in compliance in all material respects, with the applicable federal and state laws, including consumer protection statutes and related regulations.

We are subject to extensive federal regulation, including the regulations discussed below. These laws, in part, require us to provide certain disclosures prior to and throughout the duration of consumer retail and lease financing transactions and prohibit certain credit and collection practices.

The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), which was enacted in 2010, has broad implications for the financial services industries, including automotive financing, securitizations and derivatives, and requires the development, adoption, and implementation of many regulations which will impact the offering, marketing, and regulation of consumer financial products and services offered by financial institutions. Agencies have issued rules establishing a comprehensive framework for the regulation of derivatives, providing for the regulation of non-bank financial institutions that pose systemic risk, and requiring sponsors of asset-backed securities to retain an ownership stake in securitization transactions. Although we have analyzed these and other rulemakings, the absence of final rules in some cases and the complexity of some of the proposed rules make it difficult for us to estimate the financial, compliance and operational impacts.

The Dodd-Frank Act created the Consumer Financial Protection Bureau (CFPB), which has broad rule-making, examination and enforcement authority with respect to the laws and regulations that apply to consumer financial products and services. The CFPB has supervisory, examination and enforcement authority over certain non-depository institutions, including those entities that are larger participants of a market for consumer financial products or services, as defined by rule. ~~As of August 31, 2015, we became~~We are subject to the CFPB’s supervisory authority with respect to our compliance with applicable consumer protection laws.

We ~~are also subject~~provide indirect financing to laws and regulations that vary among the states. A majority of states have enacted legislation establishing licensing requirements to conduct consumer financing activities. We are also periodically subject to state audits and inquiries which monitor our compliance with consumer and other regulations.

State rules and regulations generally include requirements as to the form and content of finance contracts and limitations on the maximum rate of consumer finance charges, including interest rate. In periods of high interest rates, interest rate limitations could have an adverse effect on our operations if we are unable to pass on our increased costs to ourretail customers ~~or dealers. State rules and regulations also restrict collection practices and creditor’s rights regarding our consumer accounts.~~

The consumer financing and dealer financing operations of HCFI are regulated under both Canadian federal and provincial law. Management believes that HCFI is in compliance with the applicable statutes and regulations of the federal government of Canada, its jurisdiction of incorporation, as well as applicable provincial statutes and regulations.

We are exposed to certain risks and uncertainties that could have a material adverse effect on our business, results of operations, cash flows, financial condition, or on our ability to service our indebtedness. There may be additional risks and uncertainties (either currently unknown or not currently believed to be material) that could have a material adverse effect on our business, results of operations, cash flows, financial condition, or on our ability to service our indebtedness.

~~Our results of operations, cash flows, and financial condition are substantially dependent upon HMC and the sale~~ of Honda and Acura products by acquiring retail loans originated by Honda and ~~any decline~~Acura dealers. Retail loans are acquired in accordance with our underwriting standards. See “—Underwriting and Pricing of Consumer Financing” below for a description of our underwriting process. The products that we finance consist primarily of new and used Honda and Acura automobiles and Honda motorcycles, power equipment, and marine engines. Retail loans may also include the financing of insurance products or vehicle service contracts. See “—Vehicle Service Contract Administration” below for more information. The terms of retail loans originated in the ~~financial condition~~United States generally range from 24 to 72 months while the terms of ~~HMC or~~retail loans originated in Canada generally range from 24 to 84 months.

We service all of the ~~sales~~retail loans we acquire. We generally hold a security interest in the products purchased through our retail loans. As a result, if our collection efforts fail to bring a delinquent customer’s payments current, we generally can repossess the customer’s vehicle, after satisfying local legal requirements, and sell it at auction. We may waive late payment fees and other fees assessed in the ordinary course of servicing the retail loans and allow payment deferrals by extending the loan’s term. See “—Servicing of Consumer Financing” below for more information.

We require customers that purchase Honda and Acura products ~~could have a materially unfavorable impact on our financial condition, cash flows,~~through retail loans acquired by us to obtain adequate physical damage, comprehensive and ~~results of operations.~~collision insurance.

~~Our results of operations, cash flows, and financial condition are substantially dependent upon the sale of~~Retail Leases

We acquire closed-end vehicle lease contracts between Honda and Acura ~~products~~dealers and their customers primarily for leases of new Honda and Acura automobiles. In the case of leases originating in the United States, upon our acquisition of such leases, the dealer assigns all of its rights, title, and ~~Canada. Any prolonged reduction or suspension of HMC’s production or sales of Honda or Acura products~~interest in the ~~United States~~lease and the automobile to either our wholly-owned subsidiary, Honda Lease Trust (HLT) or its trustee, HVT, Inc., depending on the applicable state. HLT is a trust established to take assignments of and serve as holder of legal title to leased automobiles. In the case of leases originating in Canada, ~~resulting from a decline in demand, a change in consumer preferences, a decline~~upon our acquisition of such leases, the dealer assigns all of its rights, title, and interest in the ~~actual or perceived quality, safety, or reliability~~lease and the vehicle to our majority owned subsidiary HCFI.

Leases are acquired in accordance with our underwriting standards. See “—Underwriting and Pricing of ~~Honda and Acura products,~~Consumer Financing” below for a ~~reduction~~description of incentive financing programs, volatility in fuel prices, sustained economic stagnation or the occurrence of a recession, a financial crisis, a work stoppage, governmental action, including a change in regulation, adverse publicity, a recall, a war, a use of force by foreign countries, a terrorist attack, a multinational conflict, a natural disaster, an epidemic, or similar events could have a substantially unfavorable effect on us.

The production and sale of HMC’s products will depend significantly on HMC’s ability to continue its capital expenditure and product development programs and to market its vehicles successfully. This ability is subject to several risks, including:

~~Additionally,~~ our ~~credit ratings depend, in large part, on the existence~~underwriting process. Terms of the ~~keep well agreements with HMC and on~~leases generally range from 24 to 60 months. We service the financial condition and results of operations of HMC. If these arrangements (or replacement arrangements acceptable to the rating agencies, if any) become unavailable to us, or if a credit rating of HMC is lowered, our credit ratings will also likely be adversely impacted, leading to higher borrowing costs.

~~Because our operations are heavily dependent on retail sales of motor vehicles~~leases we acquire. We may waive late payment fees and other ~~retail products, a decline in general business and economic conditions can have a significant adverse impact on our results of operations, cash flows, and financial condition.~~

Because our operations are heavily dependent on retail sales of motor vehicles and other retail products, general business and economic conditions have a significant impact on our operations. In particular, changesfees assessed in the ~~following events can adversely affect~~ordinary course of servicing the leases, extend the lease term, or offer end-of-lease incentives. See “—Servicing of Consumer Financing” below for more information.

~~Elevated levels of market disruption and volatility could adversely affect our ability to access~~own historical experience. Lease customers have the ~~global capital markets in a similar manner and~~option at ~~a similar cost as we have had in~~ the past. These market conditions could also have an adverse effect on our results of operations, cash flows, and financial condition by diminishing the value of financial assets. If, as a result, we increase the rates we charge to our customers and dealers, our competitive position could be negatively affected.

Additionally, the United States and Canada have experienced periods of economic slowdown and a recession. These periods have been accompanied by decreases in consumer demand for automobiles and other products. High unemployment, decreases in home values, and lack of availability of credit may lead to increased default rates. Significant increases in the inventory of used automobiles during periods of economic recession may also depress the prices at which returned or repossessed automobiles may be sold or delay the timing of these sales. Dealers may also be affected by an economic slowdown or recession, which in turn may increase the risk of default of certain dealers within our wholesale flooring and commercial financing portfolios.

~~Fluctuations in interest rates could have an adverse impact on our results of operations, cash flows, and financial condition.~~

Our results of operations, cash flows, and financial condition could be adversely affected during any period of changing interest rates, possibly to a material degree. Interest rate risks arise from the mismatch between assets and the related liabilities used for funding. We have entered into contracts to provide consumer financing, dealer financing, incentive financing, originations and servicing, all of which are exposed, in varying degrees, to changes in value due to movements in interest rates. Further, an increase in interest rates could increase our costs of providing dealer and consumer financing originations, which could, in turn, adversely affect our financing volumes because financing can be less attractive to our dealers and customers and qualifying for financing may be more difficult.

We monitor the interest rate environment and enter into various financial instruments, including interest rate and basis swaps, to manage our exposure to the risk of interest rate fluctuations. However, our hedging strategies may not fully mitigate the impact of changes in interest rates. Further, these instruments contain an element of risk in the event the counterparties are unable to meet the termsend of the ~~agreements. See “—The failure or commercial soundness of our counterparties and other financial institutions may have an adverse effect on our results of operations, cash flows, or financial condition”~~ ~~below.~~

~~Our results of operations, cash flows, and financial condition may be adversely affected because of currency risk.~~

Currency risk or exchange rate risk refers to potential changes of value of financial assets, including Canadian dollar denominated finance receivables, foreign currency denominated debt or derivatives used to manage exposure on foreign currency denominated debt in response to fluctuations in exchange rates of various currencies. Changes in exchange rates can have adverse effects on our results of operations, cash flows, and financial condition.

We monitor the exchange rate environment and enter into various financial instruments, including currency swap agreements, to manage our exposure to the risk of exchange rate fluctuations. However, our hedging strategies may not fully mitigate the impact of changes in exchange rates. Further, these instruments contain an element of risk in the event the counterparties are unable to meet the terms of the agreements. See “—~~The failure or commercial soundness of our counterparties and other financial institutions may have an adverse effect on our results of operations, cash flows, or financial condition”~~ ~~below.~~

We need substantial capital to finance our operations and a disruption in our funding sources and access to the capital markets would have an adverse effect on our results of operations, cash flows, and financial condition.

~~We depend on a significant amount of financing to operate our business. Our business strategies utilize diverse sources to fund our operations, including the issuance of commercial paper and medium~~lease term ~~notes, asset-backed securities and bank loans and borrowings from AHM and HCI, as applicable.~~

The availability of these financing sources at the prices we desire may depend on factors outside of our control, including our credit ratings, disruptions to the capital markets, the fiscal and monetary policies of government, and government regulations. In the event that we are unable to raise the funds we require at reasonable rates, we may curtail our various loan origination activities or incur the effects of increased costs of operation. Reducing loan origination activities or increasing the rates we charge consumers and dealers to accommodate increased costs of operation may adversely affect our ability to remain a preferred source of financing for consumers and dealers for Honda and Acura products and will have an adverse effect on our results of operations, cash flows, and financial condition.

~~Our borrowing costs and access to the debt capital markets depend significantly on our credit ratings, the credit ratings of HMC and the keep well agreements.~~

The cost and availability of financing is influenced by credit ratings, which are intended to be an indicator of the creditworthiness of a particular company, security, or obligation. Our credit ratings depend, in large part, on the existence of the keep well agreements with HMC and on the financial condition and results of operations of HMC. If these arrangements (or replacement arrangements acceptable to the rating agencies, if any) become unavailable to us, or if a credit rating of HMC is lowered, our credit ratings will also likely be adversely impacted, leading to higher borrowing costs.

Credit rating agencies that rate the credit of HMC and its affiliates, including AHFC, may qualify, alter, or terminate their ratings at any time. Global economic conditions and other geopolitical factors may directly or indirectly affect such ratings. Any downgrade in the sovereign credit ratings of the United States, Japan, or Canada may directly or indirectly have a negative effect on the ratings of HMC and AHFC. Downgrades, the change to a negative outlook, or placement on review for possible downgrades of such ratings could result in an increase in our borrowing costs as well as reduced access to global debt capital markets. These factors would have a negative impact on our business, including our competitive position, results of operations, cash flows and financial condition.

~~We are subject to consumer and dealer credit risk, which could adversely impact our results of operations, cash flows, and financial condition.~~

Credit risk is the risk of loss arising from the failure of a consumer or dealer to meet the terms of any contract with us or otherwise fail to perform as agreed. Credit losses are an expected cost of extending credit. The majority of our credit risk is with consumer financing, and to a lesser extent, with dealer financing. Our level of credit risk on our consumer financing portfolios is influenced primarily by two factors: the total number of contracts that default, and the amount of loss per occurrence, net of recoveries, which in turn are influenced by various factors, such as the used vehicle market, our purchase quality mix, contract term lengths, operational changes, and certain economic factors such as unemployment rates, levels of consumer debt service burden and personal income growth rates. Our level of credit risk on our dealer financing portfolio is influenced primarily by the financial strength of dealers within the portfolio, the concentration of dealers demonstrating financial strength, the quality of the collateral securing the financing within the portfolio and economic factors. An increase in credit risk would increase our provision for credit losses and early termination losses on operating lease assets, which would have a negative impact on our results of operations, cash flows, and financial condition.

We manage credit risk by managing the credit quality of our consumer financing and dealer financing portfolios, pricing contracts for expected losses and focusing collection efforts to minimize losses. However, our monitoring of credit risk and our efforts to mitigate credit risk may not be sufficient to prevent a material adverse effect on our results of operations, cash flows, and financial condition.

In addition, we maintain an allowance for credit losses for management’s estimate of probable losses incurred on our finance receivables. We also maintain an estimate for early termination losses on operating lease assets due to lessee defaults and an allowance for credit losses on past due operating lease rental payments. Our allowance for credit losses and early termination losses on operating leases requires significant judgment about inherently uncertain factors. Actual losses may differ from the original estimates due to actual results varying from those assumed in our estimates which may have a negative impact on our results of operations and financial condition. Refer to “~~Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies—Credit Losses”~~ ~~for additional information regarding our estimates.~~

~~Customers of leased vehicles typically have an option~~ to return the vehicle to the dealer ~~at the end of the lease term~~ or to buy the vehicle ~~for~~at the contractual residual value (or if purchased prior to lease maturity, for the outstanding contractual balance). Returned lease vehicles can be purchased by the grounding dealer ~~for~~at the contractual residual value (or if purchased prior to lease maturity, for the outstanding contractual balance) or a market based price. Returned lease vehicles that are not purchased by the grounding dealer are sold through online and physical auctions. ~~Residual value~~See “—Servicing of Consumer Financing—Remarketing Center” below.

We require the lessee to obtain insurance with adequate public liability and physical damage coverage for the entire lease term.

We utilize our proprietary credit scoring system to evaluate the credit risk of applicants. Factors used by our credit scoring system to develop a customer’s credit grade include the term of the contract, the loan or lease-to-value ratio, the customer’s debt ratios, and credit bureau attributes, number of trade lines, utilization ratio, and number of credit inquiries. A customer’s credit grade is determined only at the ~~risk~~time of origination and is not reassessed during the life of the contract. We utilize different scorecards depending on the type of product we finance and we regularly review and analyze our consumer-financing portfolio to ensure the effectiveness of our underwriting guidelines, purchasing criteria and scorecard predictability of our customers.

In the United States, AHFC utilizes a tiered pricing structure based on customer Fair Isaac Corporation/FICO scores. In Canada, HCFI has a single tiered pricing structure.

We have eight regional offices in the United States that are responsible for the ~~contractual residual value determined~~acquisition, servicing, collection, and customer service activities related to our automobile retail loans and leases. These offices are located in California, Texas, Massachusetts, Illinois, North Carolina, Delaware, and Georgia. We also have one office in Georgia that is responsible for the underwriting of motorcycle, power equipment, and marine engine loans, customer service related to those contracts and collection efforts for past due accounts on a national basis.

In addition to our servicing regions, we have centralized certain operational functions in the United States relating to our automobile retail loans and leases at ~~lease inception will not~~the National Service Center located in Texas, which contains our National Processing Center, Lease Maturity Center, Remarketing Center, and Recovery and Bankruptcy Center, which are described below:

In Canada, we have two regional offices that are responsible for acquisition, servicing, collection, and customer service activities related to our retail loans and leases. These offices are located in Quebec and Ontario. Similar to our United States operations, in addition to our servicing regions, we have centralized certain operational functions for our Canadian retail loans and leases. These centralized functions are located in Ontario and include our Customer Retention Centre, Recovery Centre, Collections Centre, Customer Service Centre, and Auctions/Remarketing Centre. The services provided by these centralized functions are comparable to the services provided by our National Service Center in the United States.

We ~~maintain projections for expected residual values~~use an account servicing system and ~~return volumes~~an automated dialer system that prioritize collection efforts, generate past due notices, and signal our collections personnel to make telephone contact with delinquent customers. For the purpose of determining whether a retail loan or lease is delinquent, payment is generally considered to have been made upon receipt of 90% of the ~~vehicles we lease. Actual proceeds realized by us upon sales of returned leased vehicles at lease termination may be lower than the amount projected, which would reduce the profitability~~sum of the ~~lease transaction~~current monthly payment due plus any overdue monthly payments.

If necessary, repossession action is taken using bonded and ~~could have~~licensed repossession agencies. Subject to a state’s recording, filing, and notice requirements, or other laws, we are generally permitted by applicable state law to repossess automobiles or motorcycles upon default by the ~~potential~~related customer. We typically decide whether or not to ~~adversely affect our gain~~repossess a vehicle when the account is 45 to 60 or ~~loss on~~more days past due, subject to the ~~disposition of lease vehicles~~laws and ~~our results of operations. Refer to “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies—Determination of Lease Residual Values”~~ ~~for additional information regarding our estimates.~~

~~The failure or commercial soundness of our counterparties and other financial institutions may have an adverse effect on our results of operations, cash flows, or financial condition.~~

~~We have exposure to many different financial institutions, and we routinely execute transactions with counterparties~~regulations governing repossession in the ~~financial industry. Our debt, derivative~~state where the automobile or motorcycle is located.

Incentive Financing Programs for Retail Loans and ~~investment transactions,~~Leases

AHM and our ability to borrow under committed and uncommitted credit facilities, could be adversely affected by the creditworthiness, actions, and commercial soundness of these financial institutions. Deterioration of social, political, labor, or economic conditions in a specific country or region may also adversely affect the ability of financial institutions, including our derivative counterparties and lenders, to perform their contractual obligations. Financial institutions are interrelated as a result of trading, clearing, lending, and other relationships, and as a result, financial and political difficulties in one country or region may adversely affect financial institutions in other jurisdictions, including those with which we have relationships. The failure of any financial institutions and other counterparties to which we have exposure, directly or indirectly, to perform their contractual obligations, and any losses resulting from that failure, could have a material adverse effect on our results of operations, cash flows, or financial condition.

If we are unable to compete successfully or if competition continues to increase in the businesses in which we operate, our results of operations, cash flows, and financial condition could be materially and adversely affected.

~~The finance industries~~HCI sponsor incentive-financing programs in the United States and Canada, ~~are highly competitive. We compete with national~~respectively. These programs offer promotional rates on retail loans and ~~regional commercial banks, credit unions, savings~~leases to purchasers and loan associations, finance companies, and other captive finance companies that provide consumer financing for new and used Honda and Acura automobiles and parts and accessories and Honda motorcycles, power equipment, and marine engines. Additionally, Canadian commercial banks have become stronger competitors in the automobile consumer financing markets. Commercial banks, finance companies, and captive finance companies of other manufacturers also provide wholesale flooring financing for Honda and Acura dealers. Our primary competition in the wholesale motorcycle, power equipment, and marine engine financing business tends to be local banks and specialty finance firms that are familiar with the particular characteristics of these businesses. Our inability to compete successfully, as well as increases in competitive pressures, could have an adverse impact on our contract volume, market share, revenues, and margins and have a material adverse effect on us. Providers of vehicle financing have traditionally competed on the basis of interest rates charged, the quality of credit accepted, the flexibility of loan terms offered, the quality of service provided to dealers and customers, and strong dealer relationships.

~~Our results of operations may be adversely affected by the prepayment of our financing contracts.~~

Our financing contracts may be repaid by borrowers at any time at their option. Early repayment of contracts will limit the amount of earnings we would have otherwise generated under those contracts and we may not be able to reinvest the portions repaid early immediately into new loans or loans with similar pricing.

~~Changes in laws and regulations, or the application thereof, may adversely affect our business, results of operations, cash flows, and financial condition.~~

Our operations are subject to regulation, supervision, and licensing under various United States, Canadian, state, provincial, and local statutes, ordinances, and regulations. A failure to comply with applicable regulatory, supervisory, or licensing requirements may adversely affect our business, results of operations, cash flows, and financial condition. Due to events in the global financial markets, regulators have increased their focus on the regulation of the financial services industry. As a result, there have been and may continue to be proposals for laws and regulations that could increase the scope and nature of laws and regulations that are currently applicable to us. Any change in such laws and regulations, whether in the form of new or amended laws or regulations, regulatory policies, supervisory action, or the application of any of the above, may adversely affect our business, results of operations, cash flows, and financial condition by increasing our costs to comply with the new laws, prohibiting or limiting the amount of certain revenues we currently receive, or constraining certain collection or collateral recovery action which are currently available to us.

~~Financial or consumer regulations may adversely impact our business, results of operations, cash flows and financial condition.~~

~~The Dodd-Frank Act is extensive and significant legislation that, among other things:~~

The scope of the Dodd-Frank Act has broad implications for the financial services industry, including us, and requires the implementation of numerous rules and regulations. The Dodd-Frank Act impacts the offering, marketing, and regulation of consumer financial products and services offered by financial institutions. The potential impact of the Dodd-Frank Act and its rules and regulations may include supervision and examination, limitations on our ability to expand product and service offerings and new or modified disclosure requirements.

The CFPB has supervisory, examination and enforcement authority over certain non-depository institutions, including those entities that are larger participants of a market for consumer financial products or services, as defined by rule. As of August 31, 2015, we became subject to the CFPB’s supervisory authority with respect to our compliance with applicable consumer protection laws. Over the past few years, the CFPB has become active in investigating the products, services and operations of credit providers. We expect the CFPB’s investigations of, and initiation of enforcement actions against, credit providers, whether on its own initiative or jointly with other agencies and regulators, will continue for the foreseeable future. Among other priorities, the CFPB has indicated that they intend to focus on certain initiatives including rulemaking in the areas of debt collection and consumer credit reporting.

We are also subject to state laws and regulations that vary among the states. A majority of states have enacted legislation establishing licensing requirements to conduct consumer financing activities. We are also periodically subject to state audits and inquiries which monitor our compliance with consumer and other regulations. We expect state regulators to also increase their supervision and regulation of financial products and services within their jurisdictions.

As previously disclosed, in July 2015 we reached a settlement with the CFPB and the U.S. Department of Justice and entered into consent orders with each of the agencies related to their investigation of, and allegations regarding pricing practices by dealers originating automobile retail installment sales contracts that we purchased. Also as previously disclosed, we received a subpoena from the New York Department of Financial Services requesting information relating to its fair lending laws. Refer to Note 9—Commitments and Contingencies of ~~Notes to Consolidated Financial Statements~~ ~~for additional information.~~

Compliance with the regulations under the Dodd-Frank Act or the oversight of the SEC, CFPB, state regulators or other governmental entities and enforcement actions, if any, may impose costs on, create operational constraints for, or place limits on pricing with respect to, finance companies such as us. Such compliance and enforcement actions may result in monetary penalties, increase our compliance costs, require changes in our business practices, affect our competitiveness, reduce our profitability, affect our reputation, or otherwise adversely affect our business.

~~Adverse economic conditions or changes in laws in states in which we have customer concentrations may negatively affect our results of operations, cash flows, and financial condition.~~

We are exposed to geographic concentration risk in our consumer financing operations. Factors adversely affecting the economy and applicable laws in various states where we have concentration risk could have an adverse effect on our results of operations, cash flows, and financial condition.

~~A failure or interruption in our operations could adversely affect our results of operations 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, cybersecurity breaches, or natural disasters. Operational risk can occur in many forms including, but not limited to, errors, business interruptions, failure of controls, 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. These events can potentially result in financial losses, regulatory inquiries or other damage to us, including damage to our reputation.

We rely on internal and external information and technological systems to help us manage and maintain 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 these systems could disrupt our normal operating procedures and have an adverse effect on our results of operations, cash flows, and financial condition.

We collect and store certain personal and financial information from customers, related parties, and employees. We also store confidential business and technical information. Security breaches could expose us to a risk of loss of this information, regulatory scrutiny, claims for damages, actions, and penalties, litigation, reputational harm, and a loss of confidence that could potentially have an adverse impact on future business with current and potential customers. In addition, any upgrade or replacement of our major legacy transaction systems, including our planned replacement of our electronic originations systems, could have a significant impact on our ability to conduct our core business operations and increase our risk of loss resulting from disruptions of normal operating processes and procedures that may occur during and after the implementation of new information and transaction systems. These factors could have an adverse effect on our results of operations, cash flows, and financial condition.

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 adverse effect on us.

~~A security breach or a cyber attack may adversely affect our business, results of operations and financial condition.~~

A security breach or cyber attack of our systems could interrupt, damage or harm our operations or result in the slow performance or unavailability of our information systems for some customers. We collect, analyze and retain certain types of personally identifiable and other information pertaining to our customers and employees through our information and technology systems. A breach or cyber attack of these systems due to the actions of third parties, employee error, malfeasance or otherwise, could expose us to a risk of loss of this information, regulatory scrutiny, claims for damages, penalties, litigation, reputational harm, and a loss of confidence that could potentially have an adverse impact on future business with current and potential customers. Information security risks have increased recently because of new technologies, the use of the internet and telecommunications technologies (including mobile devices) to conduct financial and other business transactions, and the increased sophistication and activities of organized crime, perpetrators of fraud, hackers, terrorists, and others. We may not be able to anticipate or implement effective preventative measures against all security breaches of these types, especially because the techniques used change frequently and because attacks can originate from a wide variety of sources. The occurrence of any of these events could have a material adverse effect on our business.

We are subject to various privacy, data protection and information security laws, including requirements concerning security breach notification. Compliance with current or future privacy, data protection and information security laws affecting customer or employee data to which we are subject could result in higher compliance and technology costs and could materially and adversely affect our profitability. Our failure to comply with privacy, data protection and information security laws could result in potentially significant regulatory and/or governmental investigations and/or actions, litigation, fines, sanctions and damage to our reputation.

~~Our pension costs and the pension costs of AHM and HCI may affect our financial condition, cash flows, and results of operations.~~

Our employees may participate in either AHM’s and HCI’s pension plans. HMC also has a pension plan but a great majority of our employees do not participate in that plan. The amount of pension benefits and lump-sum payments provided in those plans are primarily based on the combination of years of service and compensation. AHM and HCI each determine and make periodic contributions to their respective benefit plans pursuant to applicable regulations and we are allocated our share of pension plan costs due to the participation of our employees. Since benefit obligations and pension costs are based on many assumptions, including, but not limited to, participant mortality, discount rate, rate of salary increase, expected long-term rate of return on plan assets, differences in actual expenses and costs or changes in those assumptions could affect AHM’s, HCI’s, and our cash contributions and liquidity. Under the Employee Retirement Income Security Act of 1974 (ERISA), we are jointly and severally liable for the obligations under AHM’s plans that are subject to ERISA, even for participants in the plans that are not our employees.

From time to time, AHM and/or HCI may recall, suspend sales and production of, or initiate market actions on certain Honda or Acura products to address performance, customer satisfaction, compliance or safety-related issues. Because our business is substantially dependent upon the salelessees of Honda and Acura ~~products such actions may negatively impact our business. A decrease in~~products. AHM or HCI, as applicable, pay us subsidies that enable us to realize a market yield on any financing contract we indirectly finance under these programs. Market yield is based on, among other things, the level of vehicle sales would negatively impact our financing volume. Additionally, recalls may affect the demand for used recalled vehicles, or impact our timely disposal of repossessed and returned lease vehicles, which may affect the sales proceeds of those vehicles.

Our headquarters are located in Torrance, California. Our United States operations have regional offices and national servicing centers located in California, Georgia, Texas, Massachusetts, Illinois, North Carolina, and Delaware. HCFI’s headquarters are located in Markham, Ontario, Canada and our Canadian operations have regional offices and national servicing centers located in Quebec and Ontario. All premises are occupied pursuant to lease agreements.

~~We believe that our properties are suitable to meet the requirements of our business.~~

~~For information on our legal proceedings, see Note 9—Commitments and Contingencies—Legal Proceedings and Regulatory Matters of~~ ~~Notes to Consolidated Financial Statements, which is incorporated by reference herein.~~

~~Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities~~

~~All~~credit quality of the ~~outstanding common stock of AHFC is owned by AHM. Accordingly, shares of our common stock are not listed on any national securities exchange~~customer and ~~there is no established public trading market for AHFC’s common stock and there is no intention to create a public market or list~~ the ~~common stock on any securities exchange. As~~length of the date of this annual report, there are no shares of AHFC common stock that are subject to outstanding options or warrants to purchase, or securities convertible into, AHFC common stock. No shares of AHFC common stock can be sold pursuant to Rule 144 under the Securities Act.

~~Dividends are declared and paid by AHFC if, when, and as determined by its Board of Directors. In fiscal years 2016 and 2015 AHFC did not declare or pay dividends.~~

~~On August 27, 2013, AHFC’s Registration Statement~~contract. Subsidy payments received on Form 10 with respect to the registration of its common stock became effective. On September 6, 2013, AHFC filed an automatic shelf on Form S-3 that became effective upon its filing. On September 25, 2013, AHFC established a public medium term note program that registered the offer and sale of up to $5.0 billion in an aggregate principal amount of Medium Term Notes, Series A with the SEC (refer to Commission File Number 333-191021). On August 10, 2015, AHFC increased the maximum aggregate principal amount of Public Medium Term Notes authorized for issuance and sale to $30.0 billion. The aggregate principal amount of Public Medium Term Notes offered under this program may be increased from time to time. During the fiscal year ended March 31, 2016, AHFC issued $6.2 billion aggregate principal amount of Public Medium Term Notes and the aggregate underwriting discounts and commissions, finders’ fees, and other related costs paid was approximately $23 million. AHFC has used the net proceeds received from the sale of these Public Medium Term Notes to repay other existing indebtedness, acquire retail loans ~~and/or~~and leases ~~provide wholesale flooring~~are deferred and ~~commercial loans and for other general corporate purposes. The following institutions served~~recognized as ~~managing underwriters for~~revenue over the offering and sale of these AHFC’s Public Medium Term Notes: Merrill Lynch, Pierce, Fenner & Smith Incorporated, Barclays Bank PLC, Barclays Capital Inc., BNP Paribas, Citigroup Global Markets Inc., Deutsche Bank AG, London Branch, Deutsche Bank Securities Inc., J.P. Morgan Securities LLC, Mitsubishi UFJ Securities International plc, Mizuho Securities USA Inc., SG Americas Securities, LLC, SMBC Nikko Securities America, Inc., and Wells Fargo Securities, LLC.

~~The following information is a historical summary only and should be read in conjunction with, and is qualified in its entirety by reference to, the information contained in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation” and our consolidated financial statements and related notes included elsewhere in this annual report.~~

We derived the consolidated balance sheet data as of March 31, 2016 and 2015 and the consolidated statements of income data for the fiscal years ended March 31, 2016, 2015 and 2014 from our audited consolidated financial statements included elsewhere in this annual report. We derived the consolidated balance sheet data as of March 31, 2014 from our audited consolidated financial statements that are not included in this annual report. Our historical results are not necessarily indicativeterm of the ~~results to be expected in any future period.~~

Years ended March 31,

2016

2015

2014

(U.S. dollars in millions)

Consolidated Statement of Income Data

Revenues:

Retail loans and direct financing leases
$
1,257

$
1,401

$
1,556

Dealer loans

122

118

116

Operating leases

5,523

4,842

4,314

Total revenues

6,902

6,361

5,986

Depreciation on operating lease

4,421

3,838

3,408

Interest expense

592

580

637

Net revenues

1,889

1,943

1,941

Gain on disposition of lease vehicles

51

37

37

Other income

97

98

116

Total net revenues

2,037

2,078

2,094

Expenses:

General and administrative expenses

403

398

387

Provision for credit losses

150

114

139

Early termination loss on operating leases

46

37

33

Impairment loss on operating leases

8

-

-

Loss on lease residual values

13

4

4

(Gain)/Loss on derivative instruments

(101
)

326

(25
)
(Gain)/Loss on foreign currency revaluation of debt

60

(353
)

111

Total expenses

579

526

649

Income before income taxes

1,458

1,552

1,445

Income tax expense

548

560

489

Net income

910

992

956

Less: Net income attributable to noncontrolling interest

54

50

72

Net income attributable to American Honda Finance Corporation
$
856

$
942

$
884

~~Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations~~

Our primary focus, in collaboration with AHM and HCI, is to provide support for the sale of Honda and Acura products and maintain customer and dealer satisfaction and loyalty. To deliver this support effectively, we seek to maintain competitive cost of funds, efficient operations, and effective risk and compliance management.related contracts. The ~~primary factors influencing our results of operations, cash flows, and financial condition include the~~ volume of ~~Honda and Acura sales and the portion of those sales that we finance, our cost of funds, competition from other financial institutions, consumer credit defaults, and used motor vehicle prices.~~

~~A substantial portion of our consumer financing business is acquired through~~ incentive financing programs sponsored by AHM and ~~HCI. The volume of incentive financing programs~~HCI and the allocation of those programs between retail loans and leases may vary from fiscal period to fiscal period depending upon the respective marketing strategies of AHM and HCI. AHM and HCI’s marketing strategies are based in part on their business planning and control, in which we do not participate. Therefore, we cannot predict the level of incentive financing programs AHM and HCI may sponsor in the future. ~~Our consumer~~See “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Overview.”

Honda Aviation Finance Company LLC, a wholly-owned subsidiary of AHFC, provides financing ~~acquisition volumes~~and account servicing for customers of Honda Aircraft Company LLC, a subsidiary of AHM, in the United States. Customers submit a credit application and if our underwriting policies and legal requirements are ~~substantially dependent~~met, the retail loan is approved.

We provide wholesale flooring loans to dealers of Honda and Acura automobiles and Honda motorcycles, power equipment, and marine engines through our Dealer Financial Services (DFS) business unit.

Wholesale flooring financing is available primarily through revolving lines of credit and may only be used by dealers to finance the purchase of inventory. AHFC will finance new automobiles and motorcycles up to 100% of the dealer invoice price and used automobiles and motorcycles up to 80% of the applicable market value determined in accordance with industry pricing guides in the United States. HCFI will finance new automobiles and motorcycles up to 100% of the dealer invoice price and used automobiles and motorcycles up to the current market value determined in accordance with industry pricing guides in Canada. Dealers pay a variable interest rate on wholesale flooring loans. Wholesale flooring loans must be prepaid at specified intervals and increments and generally must be paid in full upon the ~~extent~~sale of the product, although a grace period of three to which incentive financing programs are offered. Increases in incentive financing programs generally increase our financing penetration rates, which typically results in increased financing acquisition volumesseven days for ~~us. The amount of subsidy payments we receive from~~payment may be provided to dealers. AHM and HCI sponsor incentive-financing programs in the United States and Canada, respectively, to Honda and Acura dealers approved for wholesale flooring loans.

In establishing a wholesale flooring loan, we conduct a comprehensive review of the dealership, including a review of its business operations and management, any credit reports, financial statements, tax returns, bank references, and/or other available historical credit information and a review of the personal financial statements of the dealership’s individual owner(s). This data is ~~dependent~~organized into an electronic scorecard which supports our determination of whether we will provide a wholesale flooring loan and, if so, the amount of the loan and the interest rate. Once a wholesale flooring loan has been approved, we maintain an ongoing review process of the dealerships we finance. We use a third party to perform random periodic on-site physical inspections of financed dealership inventory at a frequency determined by the dealership’s scorecard and financial performance. Monitoring activities are performed more frequently for dealerships with higher levels of credit risk.

In the event of a default on a wholesale flooring loan, we may repossess the financed product, sell the repossessed assets, and seek other available legal remedies pursuant to the related wholesale flooring loan agreement and related guarantees consistent with commercially accepted practices and applicable laws. After the sale of a financed product to consumers in the ordinary course of business, we have no right to recover the product and are limited to the remedies under our wholesale flooring loan agreement with the dealer. Additionally, we have agreements with AHM and HCI that provide for their repurchase of new, unused, undamaged, and unregistered vehicle or equipment that have been repossessed from dealers who defaulted under the terms of its wholesale flooring agreement.

A wholesale flooring loan is considered delinquent when any payment is contractually past due. Depending on a dealer’s level of credit risk, a dealer may be given a grace period of three to seven days to make payments. Collection efforts are initiated using our staff. We file replevin actions, send past due notices, enter into forbearance agreements, and renegotiate contracts with delinquent dealers. If we determine a dealer cannot meet the obligations under its wholesale flooring loan agreement, legal action may commence. Subject to recording, filing and notice requirements of state, provincial or other laws we are generally permitted by the applicable laws to repossess the underlying collateral that have not been sold to a buyer in the ordinary course of business.

In the United States, wholesale flooring loans are serviced at AHFC’s regional offices in California, Texas, Massachusetts, Illinois, North Carolina, Delaware, and Georgia. In Canada, wholesale flooring loans are serviced at HCFI’s headquarters in Ontario.

In the United States, commercial loans are serviced at AHFC’s headquarters in California. In Canada, commercial loans are serviced at HCFI’s headquarters in Ontario.

The automobile financing industries in the United States and Canada are very competitive. Providers of vehicle and similar product financing have traditionally competed based on interest rates charged, the quality of credit accepted, the flexibility of loan terms offered, the quality of service provided to dealers and customers, and the strength of dealer relationships.

National and regional commercial banks, credit unions, savings and loan associations, finance companies, and other captive finance companies provide consumer financing for new and used Honda and Acura products. Commercial banks, finance companies, and captive finance companies of other manufacturers also provide inventory financing for Honda and Acura dealers. Our primary competition in the wholesale motorcycle, power equipment, and marine engine financing business tends to be local banks and specialty finance firms that are familiar with the particular characteristics of these businesses. In Canada, commercial banks are strong competitors in the automobile consumer financing business.

The following is a description of certain relationships with HMC and other affiliates.

HMC and AHFC are parties to a keep well agreement (the HMC-AHFC Agreement), which became effective on September 9, 2005.

Under the terms of the ~~incentive financing programs~~HMC-AHFC Agreement, HMC has agreed to:

The HMC-AHFC Agreement is not a guarantee by HMC of any Debt or other obligation, indebtedness, or liability of any kind of AHFC.

HMC or AHFC may each terminate the HMC-AHFC Agreement upon giving to the other party 30 days’ prior written notice and the ~~interest rate environment. Subsidy payments are received~~HMC-AHFC Agreement may be modified or amended only by the written agreement of HMC and AHFC and upon ~~acquisition and recognized~~30 days’ prior written notice to each rating agency rating any covered Debt. However, such termination, modification, or amendment will not be effective with respect to any Debt outstanding at the time of such termination, modification, or amendment unless: (i) such termination, modification, or amendment is permitted under the documentation governing such Debt, (ii) all affected holders of such Debt (or, in ~~revenue throughout~~ the ~~life~~case of Debt incurred pursuant to documentation that permits the HMC-AHFC Agreement to be terminated, modified, or amended with the consent of less than all of the ~~loan~~holders of such Debt, the requisite holders of such Debt) otherwise consent in writing, or ~~lease; therefore a significant change~~(iii) with respect to Debt that is rated by one or more rating agencies at the request of HMC or AHFC, each such rating agency confirms in writing that the ~~level of incentive financing programs in a fiscal period often may~~rating assigned to such Debt will not be ~~reflected in our results~~withdrawn or reduced because of ~~operations~~the proposed action.

An amendment, modification, or termination of the HMC-AHFC Agreement (except as permitted by its terms) would constitute an event of default under certain of AHFC’s Debt and failure by HMC to meet its obligations under the HMC-AHFC Agreement would constitute an event of default under such Debt if the failure continued for ~~that period. The amount of subsidy income we recognize in a fiscal period~~30 days and was continuing at the time the default was declared.

Under its terms, the HMC-AHFC Agreement is ~~dependent on the cumulative level of subsidized contracts outstanding that were acquired through incentive financing programs.~~

We seek to maintain high quality consumer and dealer account portfolios, which we support with strong underwriting standards, risk-based pricing, and effective collection capabilities. Our cost of fundsnot enforceable against HMC by anyone other than: (i) AHFC or (ii) if any case is facilitated by the diversity of our funding sources, and effective interest rate and foreign currency exchange risk management. We manage expenses to increase our profitability, including adjusting staffing needs based upon our business volumes and centralizing support functions. Additionally, we use risk and compliance management practices to optimize credit and residual value risk levels and maintain compliance with our pricing, underwriting and servicing policies atcommenced under the United States Bankruptcy Code (11 USC §§101 et seq.), or any successor statutory provisions, or the Bankruptcy Code, in respect of AHFC, the debtor in possession or trustee appointed by the court having jurisdiction over such proceeding. In the event of (1) a breach by HMC in performing a provision of the HMC-AHFC Agreement and (2) the commencement of such a case under the Bankruptcy Code in respect of AHFC while any Debt is outstanding, the remedies of a holder of Debt shall include the right, if no proceeding in respect of AHFC has already been commenced in such case, to file a petition in respect of AHFC thereunder with a view to the debtor in possession, or the trustee appointed by the court having jurisdiction over such proceeding, pursuing AHFC’s rights under the HMC-AHFC Agreement against HMC. However, all holders of outstanding Debt may (i) demand in writing that AHFC enforce its rights under the HMC-AHFC Agreement and (ii) proceed directly against HMC to enforce compliance by HMC with its obligations under the HMC-AHFC Agreement if AHFC fails or refuses to take action to enforce its rights under that agreement within 30 days following AHFC’s receipt of demand for such enforcement by such holder.

The HMC-AHFC Agreement is governed by and construed in accordance with the laws of the State of New York.

HMC and HCFI are parties to a keep well agreement (the HMC-HCFI Agreement), which became effective on September 26, 2005.

The HMC-HCFI Agreement is not a guarantee by HMC of any Debt or other obligation, indebtedness, or liability of any kind of HCFI.

Under its terms, the HMC-HCFI Agreement is not enforceable against HMC by anyone other than: (i) HCFI or (ii) if any case is commenced under the Canadian ~~state~~Bankruptcy and ~~provincial levels.~~Insolvency Act, the Canadian Companies’ Creditors Arrangement Act, or the Canadian Winding Up and Restructuring Act by or against HCFI, the debtor in possession or trustee or receiver appointed by the court having jurisdiction over such proceeding. In the event of (1) a breach by HMC in performing a provision of the HMC-HCFI Agreement and (2) the insolvency of HCFI while any Debt is outstanding, the remedies of a holder of Debt shall include the right, if no proceeding in respect of HCFI has already been commenced in such proceeding, to file an application in respect of HCFI for the appointment of a trustee or receiver by the court having jurisdiction over such proceeding in order to pursue HFCI’s rights under the HMC-HCFI Agreement against HMC. However, all holders of outstanding Debt may (i) demand in writing that HCFI enforce its rights under the HMC-HCFI Agreement and (ii) proceed directly against HMC to enforce compliance by HMC with its obligations under the HMC-HCFI Agreement if HCFI fails or refuses to take action to enforce its rights under that agreement within 30 days following HCFI’s receipt of demand for such enforcement by such holder.

~~In our business operations, we incur costs related to funding, credit loss, residual value loss,~~The HMC-HCFI Agreement is governed by and ~~general~~construed in accordance with the laws of the State of New York.

~~We analyze our operations~~HCI sponsor incentive-financing programs in ~~two business segments defined by geography:~~ the United States and ~~Canada. We measure~~Canada, respectively. These programs offer promotional rates on loans and leases to purchasers, lessees, and dealers of Honda and Acura products. AHM or HCI, as applicable, pay us subsidies that enable us to realize a market yield on any financing contract we indirectly or directly finance under these programs. These subsidy payments supplement the ~~performance~~revenues on our financing products offered under our incentive financing programs. See “—Consumer Financing—Incentive Financing Programs for Retail Loans and Leases” above for more information.

AHFC no longer issues fixed rate short-term notes to AHM to fund AHFC’s general corporate operations. As of our United States and Canada segments on a pre-tax basis before the effect of valuation adjustments on derivative instruments and revaluations of foreign currency denominated debt. For additional information regarding our segments, seeMarch 31, 2018, AHFC had no outstanding notes to AHM. HCFI issues fixed rate short-term notes to HCI to fund HCFI’s general corporate operations. See Note ~~15—Segment Information~~4—Debt of Notes to Consolidated Financial Statements~~. The following tables~~for further information regarding our related party debt.

Our Consumer Assurance Products and Service Group is responsible for the administration of vehicle service contracts issued by AHM, American Honda Protection Products Corporation (AHPPC) and American Honda Service Contracts Corporation (AHSCC), wholly-owned subsidiaries of AHM. HCFI performs marketing services for vehicle service contracts issued by HCI. We receive fees to perform administrative and marketing services for AHM, AHPPC, AHSCC or HCI, as applicable.

A vehicle service contract is a contractual agreement between the dealer, manufacturer or an independent third party, and the ~~related discussion are presented based~~dealer’s customer. The contract provides for certain repairs, mechanical breakdown coverage, roadside assistance, and/or oil changes for the customer’s new or used automobile. A vehicle service contract can be obtained on ~~our geographically segmented consolidated financial statements.~~both Honda and Acura automobiles.

~~References in this report~~As the administrator, we approve claims and provide customer service to ~~our “fiscal year 2016”~~purchasers of vehicle service contracts. We do not provide the maintenance or roadside assistance provided by the vehicle service contracts.

Honda North America, Inc. (HNA), a wholly-owned subsidiary of HMC, provides services to Honda’s North American operations. HNA provides us with information technology, legal, internal audit, and ~~“fiscal year 2015” refer~~other services pursuant to ~~our fiscal years ended March 31, 2016~~a shared services agreement. HNA is paid a compensation fee for these services.

In Canada, we also share certain common expenditures with HCI, including professional services, data processing services, insurance policies, software development and ~~2015, respectively.~~facilities.

Our ~~consolidated income before income taxes was $1,458 million~~employees participate in fiscal year 2016 compared to $1,552 million in fiscal year 2015. This decrease of $94 million, or 6%, was primarily due to a loss on foreign currency revaluation of debt of $60 million during fiscal year 2016 compared to a gain of $353 million during fiscal year 2015, a decrease in retail loan revenues of $81 million, a decrease in direct financing lease revenues of $63 million, an increase in provision for credit losses of $36 million, an increase in interest expense of $12 million, an increase in early termination loss on operating leases of $9 million, an increase in loss on lease residual values of $9 million, and an incurrence of an impairment loss on operating leases of $8 million in fiscal year 2016, which did not occur in fiscal year 2015, partially offsetvarious employee benefit plans that are sponsored by a gain on derivative instruments of $101 million during fiscal year 2016 compared to a loss of $326 million during fiscal year 2015, an increase in operating lease revenue, net of depreciation, of $98 million and an increase in gain on disposition of lease vehicles of $14 million.

Our consolidated income before income taxes was $1,552 million in fiscal year 2015 compared to $1,445 million in fiscal year 2014. This increase of $107 million, or 7%, was primarily due to a gain on foreign currency revaluation of debt of $353 million during fiscal year 2015 compared to a loss of $111 million during fiscal year 2014, an increase in operating lease revenue, net of depreciation, of $98 million during fiscal year 2015, a decrease in interest expense of $57 million and a decrease in provision for credit losses of $25 million, partially offset by a loss on derivative instruments of $326 million during fiscal year 2015 compared to a gain of $25 million during fiscal year 2014, a decrease in retail loan revenues of $102 million, a decrease in direct financing lease revenues of $53 million, a decrease in other income of $18 million, an increase in general and administrative expenses of $11 million and an increase in early termination loss on operating leases of $4 million.

~~Results of operations for the United States segment and the Canada segment are summarized below:~~

United States Segment

Canada Segment

Consolidated

Years ended March 31,

Years ended March 31,

Years ended March 31,

2016

2015

2014

2016

2015

2014

2016

2015

2014

(U.S. dollars in millions)

Revenues:

Direct financing leases
$
-

$
-

$
-

$
72

$
135

$
188

$
72

$
135

$
188

Retail

1,041

1,104

1,192

144

162

176

1,185

1,266

1,368

Dealer

109

103

102

13

15

14

122

118

116

Operating leases

5,023

4,598

4,258

500

244

56

5,523

4,842

4,314

Total revenues

6,173

5,805

5,552

729

556

434

6,902

6,361

5,986

Depreciation on operating
     leases

4,012

3,637

3,363

409

201

45

4,421

3,838

3,408

Interest expense

518

485

530

74

95

107

592

580

637

Net revenues

1,643

1,683

1,659

246

260

282

1,889

1,943

1,941

Gain on disposition of lease
     vehicles

46

30

26

5

7

11

51

37

37

Other income

94

96

114

3

2

2

97

98

116

Total net revenues

1,783

1,809

1,799

254

269

295

2,037

2,078

2,094

Expenses:

General and administrative
     expenses

356

346

331

47

52

56

403

398

387

Provision for credit losses

134

103

128

16

11

11

150

114

139

Early termination loss on
     operating leases

41

35

32

5

2

1

46

37

33

Impairment loss on operating
     leases

6

-

-

2

-

-

8

-

-

Loss on lease residual
     values

-

-

-

13

4

4

13

4

4

(Gain)/Loss on derivative
     instruments

(116
)

269

(38
)

15

57

13

(101
)

326

(25
)
(Gain)/Loss on foreign
     currency revaluation of
          debt

60

(353
)

108

-

-

3

60

(353
)

111

Income before income
     taxes
$
1,302

$
1,409

$
1,238

$
156

$
143

$
207

$
1,458

$
1,552

$
1,445

Revenue from retail loans in the United States segment declined by $63 million, or 6%, during fiscal year 2016 compared to fiscal year 2015, due to lower average outstanding retail loans. Revenue from retail loans in the Canada segment declined by $18 million, or 11%, primarily due to the effect of foreign currency translation adjustments.

Operating lease revenue in the United States segment increased by $425 million, or 9%, during fiscal year 2016 compared to fiscal year 2015, due to higher average outstanding operating lease assets. Operating lease revenue in the Canada segment increased by $256 million due to the increase in operating lease assets.

Direct financing lease revenue, which is generated only in Canada, declined by $63 million, or 47%, during fiscal year 2016 compared to fiscal year 2015, primarily due to the continued decline in outstanding direct financing lease assets.

Revenue from dealer loans in the United States segment increased by $6 million, or 6%, during fiscal year 2016 compared to fiscal year 2015, due to an increase in average outstanding dealer loans and higher yields. Revenue from dealer loans in the Canada segment declined by $2 million primarily due to the effect of foreign currency translation adjustments.

~~Consolidated subsidy income from~~ AHM and HCI, ~~sponsored incentive programs increased by $11 million, or 1%,~~respectively. Refer to $1,076 million during fiscal year 2016 compared to $1,065 million during fiscal year 2015. This increase was attributable to higher outstanding incentive leases during fiscal year 2016 compared to fiscal year 2015, which was partially offset by lower outstanding incentive retail loans.

Depreciation on operating leases in the United States segment increased by $375 million, or 10%, during fiscal year 2016 compared to fiscal year 2015, primarily due to higher average outstanding operating lease assets. Depreciation on operating leases in the Canada segment increased by $208 million during fiscal year 2016 compared to fiscal year 2015, due to the increase in operating lease assets.

Operating lease revenue, net of depreciation, in the United States segment increased by $50 million, or 5%, during fiscal year 2016 compared to fiscal year 2015. This increase was attributable to the growth in our operating lease assets, which was partially offset by lower net revenue on more recently acquired operating leases. Operating lease revenue, net of depreciation, in the Canada segment increased by $48 million due to the increase in operating lease assets.

Interest expense in the United States segment increased by $33 million, or 7%, during fiscal year 2016 compared to fiscal year 2015. The increase was attributable to higher average cost of debt due to a change in the mix of short-term and long-term debt and higher interest rates, which was partially offset by lower average outstanding debt. Interest expense in the Canada segment declined by $21 million, or 22%, during fiscal year 2016 compared to fiscal year 2015, due to the effect of foreign currency translation adjustments and a decline in Canadian interest rates. See “—~~Liquidity and Capital Resources” below for more information.~~

The gain on disposition of lease vehicles in the United States segment increased by $16 million, or 53%, during fiscal year 2016 compared to fiscal year 2015. The increase in gains was primarily the result of more favorable vehicle return rates and disposition proceeds than the assumptions that were reflected in their depreciated values. The gain on disposition of lease vehicles in the Canada segment declined by $2 million, or 29%, during fiscal year 2016 compared to fiscal year 2015, primarily due to the effect of foreign currency translation adjustments.

The provision for credit losses in the United States segment increased by $31 million, or 30%, during fiscal year 2016 compared to fiscal year 2015. The increase in the provision was due to higher net charge-offs and increasing our allowance for credit losses to reflect the weaker credit loss performance of recent vintages of retail loans. The provision for credit losses in the Canada segment increased by $5 million, or 45%, during fiscal year 2016 compared to fiscal year 2015, due to higher charge-offs and the growth in retail loans. See “~~—Financial Condition—Credit Risk” below for more information.~~

Early termination loss on operating leases increased by $6 million, or 17%, in the United States segment and by $3 million, or 150%, in the Canada segment during fiscal year 2016 compared to fiscal year 2015. The increases in losses were primarily due to the growth in operating lease assets in both the United States and Canada segments. See “~~—Financial Condition—Credit Risk” below for more information.~~

Impairment losses on operating leases of $6 million were recognized in the United States segment and $2 million in the Canada segment during fiscal year 2016 due to the expected delay in disposition of lease vehicles affected by the recall in the fourth quarter of fiscal year 2016. No impairment losses due to declines in estimated residual values were recognized during the fiscal year 2015. See “—~~Financial Condition—Lease Residual Value Risk” below for more information.~~

Loss on lease residual values in the Canada segment increased by $9 million, or 225%, during fiscal year 2016 compared to fiscal year 2015, due to higher expected auction volumes and the expected delay in disposition of lease vehicles affected by the recall in the fourth quarter of fiscal year 2016. See “—~~Financial Condition—Lease Residual Value Risk” below for more information.~~

In the United States segment, we recognized a gain on derivative instruments of $116 million during fiscal year 2016 compared to a loss of $269 million during fiscal year 2015. The gain in fiscal year 2016 was attributable to gains on pay float interest rate swaps of $181 million and cross currency swaps of $109 million, which were partially offset by losses on pay fixed interest rate swaps of $174 million. The gains on pay float interest rate swaps and losses on pay fixed interest rate swaps during fiscal year 2016 were due to a decline in applicable swap rates and the decline in duration of the interest rate swaps. The gains on cross currency swaps during fiscal year 2016 were attributable to the U.S. dollar weakening against the Euro and declines in Euro and Sterling interest rates. In the Canada segment, the loss on derivative instruments declined by $42 million during fiscal year 2016 as compared to fiscal year 2015. The loss during fiscal year 2016 was due to the decline in Canadian interest rates. See “~~—Derivatives” below for more information.~~

In the United States segment, we recognized a loss on the revaluation of foreign currency denominated debt of $60 million during fiscal year 2016 compared to a gain of $353 million during fiscal year 2015. The loss during fiscal year 2016 was attributable to losses on Euro denominated debt as the U.S. dollar weakened against the Euro, which was partially offset by gains on Sterling and Yen denominated debt. The Canada segment did not have any foreign currency denominated debt outstanding during fiscal year 2016.

Our consolidated effective tax rate was 37.6% for fiscal year 2016 and 36.1% for fiscal year 2015. The increase in the effective tax rate for fiscal year 2016 was primarily due to a change in the estimated state tax rate. For additional information regarding income taxes, see Note ~~7—Income Taxes~~8—Benefit Plans of Notes to Consolidated Financial Statements.for additional information about employee benefit plans.

Refer to Note 7—Income Taxes of Notes to Consolidated Financial ~~Condition~~Statements for additional information about income taxes.

We have agreements with AHM and HCI that provide for their repurchase of new, unused, undamaged, and unregistered vehicles or equipment that have been repossessed from dealers who defaulted under the terms of its wholesale flooring agreement.

As of March 31, 2018, for the outstanding retail loans and leases we acquired in the United States, approximately 18% and 10% were from customers residing in California and New York, respectively. Any material adverse changes to the economies or applicable laws in a given state could have a material adverse effect on our financial condition and results of operations.

At March 31, 2018, we had 1,477 employees. We consider our employee relations to be satisfactory. We are not subject to any collective bargaining agreements with our employees.

The Dodd-Frank Act created the Consumer Financial Protection Bureau (CFPB), which has broad rule-making, examination and enforcement authority with respect to the laws and regulations that apply to consumer financial products and services. The CFPB has supervisory, examination and enforcement authority over certain non-depository institutions, including those entities that are larger participants of a market for consumer financial products or services, as defined by rule. We are subject to the CFPB’s supervisory authority with respect to our compliance with applicable consumer protection laws.

We provide indirect financing to retail customers of Honda and Acura products by acquiring retail loans originated by Honda and Acura dealers. Retail loans are acquired in accordance with our underwriting standards. See “—Underwriting and Pricing of Consumer Financing” below for a description of our underwriting process. The products that we finance consist primarily of new and used Honda and Acura automobiles and Honda motorcycles, power equipment, and marine engines. Retail loans may also include the financing of insurance products or vehicle service contracts. See “—Vehicle Service Contract Administration” below for more information. The terms of retail loans originated in the United States generally range from 24 to 72 months while the terms of retail loans originated in Canada generally range from 24 to 84 months.

We require customers that purchase Honda and Acura products through retail loans acquired by us to obtain adequate physical damage, comprehensive and collision insurance.

We acquire closed-end vehicle lease contracts between Honda and Acura dealers and their customers primarily for leases of new Honda and Acura automobiles. In the case of leases originating in the United States, upon our acquisition of such leases, the dealer assigns all of its rights, title, and interest in the lease and the automobile to either our wholly-owned subsidiary, Honda Lease Trust (HLT) or its trustee, HVT, Inc., depending on the applicable state. HLT is a trust established to take assignments of and serve as holder of legal title to leased automobiles. In the case of leases originating in Canada, upon our acquisition of such leases, the dealer assigns all of its rights, title, and interest in the lease and the vehicle to our majority owned subsidiary HCFI.

We require the lessee to obtain insurance with adequate public liability and physical damage coverage for the entire lease term.

We utilize our proprietary credit scoring system to evaluate the credit risk of applicants. Factors used by our credit scoring system to develop a customer’s credit grade include the term of the contract, the loan or lease-to-value ratio, the customer’s debt ratios, and credit bureau attributes, number of trade lines, utilization ratio, and number of credit inquiries. A customer’s credit grade is determined only at the time of origination and is not reassessed during the life of the contract. We utilize different scorecards depending on the type of product we finance and we regularly review and analyze our consumer-financing portfolio to ensure the effectiveness of our underwriting guidelines, purchasing criteria and scorecard predictability of our customers.

In the United States, AHFC utilizes a tiered pricing structure based on customer Fair Isaac Corporation/FICO scores. In Canada, HCFI has a single tiered pricing structure.

In Canada, we have two regional offices that are responsible for acquisition, servicing, collection, and customer service activities related to our retail loans and leases. These offices are located in Quebec and Ontario. Similar to our United States operations, in addition to our servicing regions, we have centralized certain operational functions for our Canadian retail loans and leases. These centralized functions are located in Ontario and include our Customer Retention Centre, Recovery Centre, Collections Centre, Customer Service Centre, and Auctions/Remarketing Centre. The services provided by these centralized functions are comparable to the services provided by our National Service Center in the United States.

If necessary, repossession action is taken using bonded and licensed repossession agencies. Subject to a state’s recording, filing, and notice requirements, or other laws, we are generally permitted by applicable state law to repossess automobiles or motorcycles upon default by the related customer. We typically decide whether or not to repossess a vehicle when the account is 45 to 60 or more days past due, subject to the laws and regulations governing repossession in the state where the automobile or motorcycle is located.

AHM and HCI sponsor incentive-financing programs in the United States and Canada, respectively. These programs offer promotional rates on retail loans and leases to purchasers and lessees of Honda and Acura products. AHM or HCI, as applicable, pay us subsidies that enable us to realize a market yield on any financing contract we indirectly finance under these programs. Market yield is based on, among other things, the credit quality of the customer and the length of the contract. Subsidy payments received on retail loans and leases are deferred and recognized as revenue over the term of the related contracts. The volume of incentive financing programs sponsored by AHM and HCI and the allocation of those programs between retail loans and leases may vary from fiscal period to fiscal period depending upon the respective marketing strategies of AHM and HCI. AHM and HCI’s marketing strategies are based in part on their business planning and control, in which we do not participate. Therefore, we cannot predict the level of incentive financing programs AHM and HCI may sponsor in the future. See “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Overview.”

We provide wholesale flooring loans to dealers of Honda and Acura automobiles and Honda motorcycles, power equipment, and marine engines through our Dealer Financial Services (DFS) business unit.

Wholesale flooring financing is available primarily through revolving lines of credit and may only be used by dealers to finance the purchase of inventory. AHFC will finance new automobiles and motorcycles up to 100% of the dealer invoice price and used automobiles and motorcycles up to 80% of the applicable market value determined in accordance with industry pricing guides in the United States. HCFI will finance new automobiles and motorcycles up to 100% of the dealer invoice price and used automobiles and motorcycles up to the current market value determined in accordance with industry pricing guides in Canada. Dealers pay a variable interest rate on wholesale flooring loans. Wholesale flooring loans must be prepaid at specified intervals and increments and generally must be paid in full upon the sale of the product, although a grace period of three to seven days for payment may be provided to dealers. AHM and HCI sponsor incentive-financing programs in the United States and Canada, respectively, to Honda and Acura dealers approved for wholesale flooring loans.

In establishing a wholesale flooring loan, we conduct a comprehensive review of the dealership, including a review of its business operations and management, any credit reports, financial statements, tax returns, bank references, and/or other available historical credit information and a review of the personal financial statements of the dealership’s individual owner(s). This data is organized into an electronic scorecard which supports our determination of whether we will provide a wholesale flooring loan and, if so, the amount of the loan and the interest rate. Once a wholesale flooring loan has been approved, we maintain an ongoing review process of the dealerships we finance. We use a third party to perform random periodic on-site physical inspections of financed dealership inventory at a frequency determined by the dealership’s scorecard and financial performance. Monitoring activities are performed more frequently for dealerships with higher levels of credit risk.