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