Chapter 3
A company that specializes in making loans to the customers of a particular retailer or manufacturer would best be categorized as a
Sale finance institution
Finance company that competes directly with depository institutions for consumer loans based on faster loans processing and convenience
Sale finance institution
Factoring is the process where accounts are purchased by a non-financial company at a discount from their face value in exchange for the responsibility of collection
False, purchasing accounts receivables from corporations and finance company assumes the responsibility of collecting
Sales finance companies do not directly compete with depository institutions for consumer loans
False, sales finance institutions can process loans quicker and more conveniently
A finance company may be classified as a subprime lender if it
lends to high risk customers
Finance companies that prey on desperate higher-risk customers charging unfairly exorbitant interest rates are referred to as
loan shark companies
What is the primary function of finance companies
make loans to both individuals and corporations
Factoring involves
purchasing of accounts receivable by finance companies from corporate customers
In financing their asset growth, finance companies
rely heavily on short-term commercial paper
Advantages of finance companies over commercial banks in providing services to small business customers
-Finance companies are not subject to regulations that restrict the type of products and services they can offer -Finance companies often have substantial industry and product expertise -Finance companies generally have lower overhead than banks -Finance companies do not accept deposits and therefore are not subject to bank-type regulatory restrictions Not an advantage: -Finance companies are less willing to accept risky customers than banks (they are willing to except riskier customers)
Which of the following might lead a consumer to seek a loan from a subprime lender
-inability to document their income -have previously filed for bankruptcy -has never had a loan before -lack of savings for a down payment
Types of consumer loans
-personal cash loan -mobile home loan -private-label credit card loan -motor vehicle loan Non consumer loans: -equipment loan
Types of finance companies
-sales finance institutions -personal credit institutions -business credit institutions -captive finance company
Finance companies charge different rates than do commercial banks which
-tend to be higher than bank rates -often reflect a more risky borrower -causes somefinance companies to be classified as subprime lenders -must meet state usury law guidelines
Home equity loans
Allows customers to borrow on a line of credit secured with a second mortgage on their home
Finance companies generally attract less risky customers than do commercial banks
False
It is impossible for an individual to be approved for a finance company loan with bankruptcy on their record
False
A person with a history of bad credit and an inconsistent record of payments on other debt is most likely to find a short-term loan through a
Payday lender
Which of the following is a major source of debt capital for a captive finance company
The parent company
A finance company that lends money to high rick customers is known as a subprime lender
True
A major role of the captive finance company is to provide financing for the purchase of products manufactured or sold by the parent company
True
Bad debt expense and administrative costs are lower on home equity than other typical loans of finance companies
True
Because finance companies do not accept deposits, they do not have bank regulators providing oversight of their activities
True
Finance companies differ from banks in that they do not accept deposits
True
Finance companies have relied primarily on short-term commercial paper and other debt sources to finance asset growth
True
Securitized mortgage assets are used as collateral backing secondary securities
True
The parent institution provides a large portion of debt that a captive finance company will use to generate personal loans
True
When a finance company pools mortgages with similar characteristics and securitizes the pool, the loans are removed from the balance sheet of the finance company
True
Wholesale and retail motor vehicle loans and leases constitute the largest subcategory of business loans
True
Finance companies
True: -the fastest growing area of finance companies in recent years has been in the area of leasing and business loans -consumer loans represent the largest portion of the loan portfolio of finance companies -Finance companies rely on short-term commercial paper and long-term debt to finance their assets -Finance companies are now the largest issuers of commercial paper in US False: -Finance companies rely on short-term commercial paper and customer deposits to finance their assets, (just commercial paper and loans, not customer deposits)
finance companies have enjoyed very high rates of growth because they
are willing to lend to riskier customers than commercial banks