F446 Chapter 3: Finance Companies

First finance company? When? Who?

GE Electric Capital Corp. during the Depression

Interest on mortgages secured by residential real estate

IS tax deductible

Who are the largest issuers of short-term commercial paper?

finance companies

securitization of mortgages

involves the pooling of a group of similar mortgages, the removal of these mortgages from the balance sheet, and the subsequent sale of interests in the pool to secondary market investors

Primary function of finance companies?

make loans to BOTH individuals and corporations

Which is the major type of consumer loan?

motor vehicle loans and leases

which financial institutions do finance companies operate most like?

non-financial, non-regulated companies

Lack of regulatory oversight allows Finance Companies to?

offer a wide scope of "bank-like" services and avoid the expense of regulatory compliance

Major role of a captive finance company?

provide financing for the purpose of products manufactured by the parent - parent company is a major source of debt finance for them

Business credit institutions

provide financing to corporations through leasing and factoring

how are finance companies regulated?

regulated as to the extent to which they can collect on delinquent loans

How do finance companies finance asset growth?

rely primarily on short-term commercial paper and other debt

personal credit institutions

specialize in making installment and other loans to customers make loans to riskier, low income, bad debt customers compensate by charging higher rates and accepting collateral

Sales finance institutions

specialize in making loans to the customers of a particular retailer or manufacturer process loans faster and more frequently

Because finance companies do not accept deposits

they are not subject to federal or state regulators

Since finance companies are not subject to extensive regulation,

they are willing to issue mortgages to riskier borrowers than commercial banks for higher interest rates and fees

Are finance companies subject to state imposed usury ceilings?

yes

Finance companies vs. banks

- Finance companies do NOT accept deposits - Finance companies rely on short and long term debt as a source of funds - finance companies lend to riskier customers than commercial banks

Why are finance companies the fastest growing FI groups?

1. attractive rates 2. lend to riskier borrowers 3. direct affiliation with manufacturing firms 4. limited regulation

3 Different consumer loans?

1. motor vehicle loans and leases 2. consumer loans 3. securitized loans

Advantages finance companies have in business loans:

1. not subject to regulation on products and services 2. no bank-type regulators 3. industry and product expertise 4. willing to accept risky customers 5. lower overheads

3 types of finance companies?

1. sales finance institutions 2. personal credit institutions 3. business credit institutions

how do finance companies signal safety and solvency?

by holding higher equity and capital-to-asset ratios and have low leverage ratios

What does the securitization of mortgages result in?

creation of mortgage-backed securities

interest paid on other types of consumer loans

are NOT tax deductible