FINA365 Chapter 3

Finance companies that prey on desperate higher-risk customers charging unfairly exorbitant interest rates are referred to as: A) refinancing companies B) captive companies C) business credit companies D) loan shark companies E) personal credit companies

D) loan shark companies

Which of the following is NOT true? A)The finance company industry tends to be very concentrated. B)Twenty of the largest finance companies account for more than 65% of the industry assets. C) Many of the largest finance companies tend to be wholly owned or are captive subsidiaries of major manufacturing firms. D)Finance companies specialize only in consumer loans and do not make business loans. E)Finance companies often provide captive financing for the purchase of products manufactured by their parent company.

D)Finance companies specialize only in consumer loans and do not make business loans.

Compared to commercial banks, finance companies usually signal solvency and safety concerns by A) holding higher leverage ratios. B)holding lower capital-asset ratio. C) holding less liquid long-term assets. D) holding higher capital-asset ratio.

D) holding higher capital-asset ratio.

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 A) Commercial bank B) personal credit institution C) savings bank D) sales finance institution E) payday lender

E) payday lender

Which of the following is NOT a major type of finance company? A) Factoring B) Business Credit C) Sales Finance D) Personal Credit

A) Factoring

Which of the following is NOT an advantage of a finance company over a commercial bank in providing services to small business customers? A) Finance companies are less willing to accept risky customers than are banks. B) Finance companies are not subject to regulations that restrict the type of products and services they can offer. C) Finance companies often have substantial industry and product expertise. D) Finance companies generally have lower overhead than banks. E) Finance companies do not accept deposits and therefore are not subject to bank-type regulatory restrictions.

A) Finance companies are less willing to accept risky customers than are banks.

This type of finance company competes directly with depository institutions for consumer loans because they can frequently process loans faster and more conveniently. A) Sales finance institution B) Personal credit institution C) Business credit institution D) Lease finance company E) Factoring company

A) Sales finance institution

Finance companies have enjoyed very high rates of growth because they: A) are willing to lend to riskier customers than commercial banks. B)charge higher rates on lower risk loans. C)do not have ties or affiliations with manufacturing firms. D)face very high levels of regulation, which assures their success. E)do not sell the loans that they originate.

A) are willing to lend to riskier customers than commercial banks.

During 2006, originations of new subprime mortgages totaled approximately __________, which was ________ of new mortgages originated that year. A)$600 billion; one-fifth B)$400 billion; one-tenth C)$100 billion; one-half D)$400 billion; one-third E) $600 billion; one-half

A)$600 billion; one-fifth

A company that specializes in making loans to the customers of a particular retailer or manufacturer would best be categorized as a A) Sales finance institution B) Personal credit institution C) Business credit institution D) Lease finance company E) Factoring company

A)Sales finance institution

During the period from 1977 to 2012, A)total assets in finance companies grew over 1,000%. B)commercial paper became a less important source of funds for finance companies. C)assets in finance companies became less diversified. D)mortgage lending declined in importance to finance companies. E)in finance companies, consumer lending increased as a percent of total assets.

A)total assets in finance companies grew over 1,000%.

What is the primary function of finance companies? A) Protect individuals and corporations from adverse events. B) Make loans to both individuals and corporations. C) Extend loans to banks and other financial institutions. D) Pool the financial resources of individuals and companies and invest in diversified portfolios of assets. E) Assist in the trading of securities in the secondary markets.

B) Make loans to both individuals and corporations.

Which of the following is traditionally the major type of consumer loans for finance companies? A) Revolving loans B) Motor vehicle loans and leases C) Wholesale loans D) Equipment leases E) Home equity loans

B) Motor vehicle loans and leases

Which of the following is the type of loan that Ford Motor Credit Corporation provides to Ford dealers to finance the cars that the dealer has for sale? A) Inventory loan B) Wholesale loan C) Automobile lease D) Factoring E) Equipment loan

B) Wholesale loan

As of 2012, which of the following is true concerning payday lending? A)The typical borrower earns less than $25,000. B)Payday lending has been effectively banned in 18 states. C)Interest rate on payday loans were capped at an annual interest rate of 30% by federal legislation. D)Less than $30 billion of payday loans were generated by the industry. E)Payday lenders were banned from forming relationships with nationally chartered banks.

B)Payday lending has been effectively banned in 18 states.

In financing their asset growth, finance companies: A)have relied more on bank loans over time. B)rely heavily on short-term commercial paper. C)use less equity capital than commercial banks. D)do not issue demand deposits, but can issue time deposits. E)use very small amounts of long-term debt and bonds.

B)rely heavily on short-term commercial paper.

What led to the rise of finance companies? A) The Great Recession B) A severe decline in credit availability to customers C) Failure of banks D) B and C E) None of these

D) B & C

Which of the following is NOT a type of consumer loan? A)Personal cash loan B)Mobile home loan C) Private-label credit card loan D) Equipment loan E) Motor vehicle loan

D) Equipment loan

Prior to the financial crisis that began in 2007, finance companies: A) had experienced slow asset growth because of the upcoming economic slowdown. B) had found subprime lending to be a risk-free method to achieve growth. C) had experienced strong profit and loan growth, especially those companies that lend to less risky customers. D) had experienced strong success in the area of electronic lending. E) had avoided takeover attempts by other financial institutions.

C) had experienced strong profit and loan growth, especially those companies that lend to less risky customers.

Compared to commercial banks, why do finance companies often have substantial industry and product expertise? A)Because they have no bank-type regulators looking directly over their shoulders. B)Because they are specialized in market research and analysis. C)Because they are often subsidiaries of corporate-sector holding companies. D)Because they are more often willing to accept risky customers. E)All of these

C)Because they are often subsidiaries of corporate-sector holding companies.

A finance company may be classified as a subprime lender if it: A)charges interest rates below those charged by commercial banks. B)lends to low-risk customers. C)lends to high-risk customers. D)originated from check cashing outlets in the early 1990s. E)is wholly owned by a parent corporation.

C)lends to high-risk customers.

In contrast to earlier periods in the finance company industry, during the middle 2000s, A)regulatory reform led to decreasing profits. B)mortgages originated were generally not securitized. C)new car loan rates charged by finance companies were been lower than those of commercial banks. D)mortgage lending become less important to the industry. E)finance companies were required to offer time deposit products to their customers.

C)new car loan rates charged by finance companies were been lower than those of commercial banks.

Ally Financial [formerly General Motors Acceptance Corporation (GMAC)] A)is a wholly owned subsidiary of General Motors. B)only provides financing to purchasers of automobiles built by General Motors. C)was classified as a commercial bank holding company in 2008. D)did not participate in federal bailout funds during the financial crisis because of their financial strength. E) is the largest finance company in the U.S.

C)was classified as a commercial bank holding company in 2008.

Finance companies often prefer to lease equipment to customers because: A)repossession in the event of default is easier. B)a lease with little or no down payment is more attractive to business customers. C)the finance company receives the benefit of depreciation expense. D)All of these

D) All of these

Finance companies charge different rates than do commercial banks which: A) tend to be higher than bank rates. B)often reflect a more risky borrower. C)causes some finance companies to be classified as subprime lenders. D)must meet state usury law guidelines. E)All of these

E) All of these

Which of the following might lead a consumer to seek a loan from a subprime lender? A) Inability to document their income. B)Have previously filed for bankruptcy. C)Has never had a loan before. D)Lack of savings for a down payment. E)All of these

E) All of these

Which of the following is NOT a type of finance company? A) Sales finance institutions B) Personal credit institutions C) Business credit institutions D) Captive finance company E) All of these are types of finance companies

E) All of these are types of finance companies

Home equity loans have: A)become less profitable for finance companies. B)seen reduced demand since the Tax Reform Act of 1986 was passed. C)interest charges that are not tax deductible. D) a higher bad debt expense than those on other finance company loans. E) allows customers to borrow on a line of credit secured with a second mortgage on their home.

E) allows customers to borrow on a line of credit secured with a second mortgage on their home.

A company that provides financing to corporations, especially through equipment leasing and factoring would best be categorized as a: A) Sales fiance institution B) personal credit institution C) subprime lender D) loan shark E) business credit institution

E) business credit institution

Factoring involves: A) making loans to customers that depository institutions find too risky to lend. B) providing financing for the purchase of products manufactured by the parent company. C) approving of collateral that depository institutions do not find acceptable. D) providing financing through equipment leasing. E) purchasing of accounts receivable by finance company from corporate customers.

E) purchasing of accounts receivable by finance company from corporate customers.

Which of the following observations concerning mortgages is NOT valid? A)They may refer to loans secured by lien on residential houses. B)They are a minor component in finance company portfolios. C)Mortgage-backed securities are created by securitization D)Home equity loans are examples of second mortgages. E)The interest on a mortgage loan secured by a primary residence is not tax deductible to the homeowner.

E)The interest on a mortgage loan secured by a primary residence is not tax deductible to the homeowner.