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Finance CompaniesFinance Companies
Chapter 6
© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.McGraw-Hill/Irwin
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Historical Perspective
Finance companies originated during the depression. Installment credit General Electric Capital Corporation. Competition from banks increased during
1950s. Expansion of product lines
GMACCM is one of the largest commercial mortgage lenders in U.S.
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Finance Companies
Activities similar to banks, but no depository function.
May specialize in installment loans (e.g. automobile loans) or may be diversified, providing consumer loans and financing to corporations, especially through factoring.
Commercial paper is key source of funds. Captive Finance Companies: e.g. GMAC Highly concentrated
Largest 20 firms: 65 percent of assets
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Major Types of Finance Companies Sales finance institutions
Ford Motor Credit and Sears Roebuck Acceptance Corp.
Personal credit institutions HSBC Finance and AIG American General.
Business credit institutions CIT Group and FleetBoston Financial. Equipment leasing and factoring
Key Bank locally
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https://www.hfc.com/learn-about-loans/home/default_customer.html?WT_srch=&DCSext_sot=Self-Directed&WT_seg_1=Prospect
http://www.hsh.com/not-the-associates.html
https://www.beneficial.com/learn-about-loans/home/default_customer.html?WT_srch=&DCSext_sot=Self-Directed&WT_seg_1=Prospect
http://www.kefonline.com/
http://www.docshop.com/education/vision/refractive/lasik/financing/
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Largest Finance Companies
Company Name Total Assets (Millions)
General Electric Capital
Services
$333,780
Citigroup 164,205
GMAC 154,764
Ford Motor Credit Company 153,000
J. P. Morgan Chase 144,835
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Balance Sheet and Trends
Business and consumer loans are the major assets 52.8% of total assets, 2006. Reduced from 95.1% in 1977.
Increases in real estate loans and other assets.
Growth in leasing Finance companies face credit risk, interest
rate risk and liquidity risk.
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Balance Sheet and Trends
Consumer loans Primarily motor vehicle loans and leases. Anomalous low auto finance company rates are
anomalous following 9/11 attacks. Attempts to boost new vehicle sales via 0.0% loans
lasted into 2005. By 2003, rates 3.5% lower than banks on new
vehicle rates
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Consumer loans (continued)
Generally riskier customers than banks serve. Subprime mortgage lenders Jayhawk Acceptance Corp.
From auto loans to tummy tucks and nose jobs
Increase in “loan shark” firms with rates as high as 30% or more.
Payday loans 390 percent APR (Implication for EAR is
staggering!)
-126-12Balance Sheet and Trends
Mortgages Recent addition to finance company assets Smaller regulatory burden than banks May be direct mortgages, or as securitized
mortgage assets. Growth in home equity loans since passage of
Tax Reform Act of 1986. Tax deductibility issue. Conversion of credit card debt 2006 average home equity loan $82,872 Defaults in subprime and relatively strong
credit mortgages in 2007
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Business Loans
Business loans comprise largest portion of finance company loans.
Advantages over commercial banks: Fewer regulatory impediments to types of
products and services. Not depository institutions hence less regulatory
scrutiny and lower overheads. Often have substantial expertise and greater
willingness to accept riskier clients.
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Business Loans
Major subcategories: Retail and wholesale motor vehicle loans and
leases Equipment loans
tax issues and other associated advantages when finance company leases the equipment directly to the customer
Other business loans and securitized business assets
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Liabilities
Major liabilities: commercial paper and other debt (longer-term notes and bonds).
Finance firms are largest issuers of commercial paper (frequently through direct sale programs). Commercial paper maturities up to 270 days.
Consequently, management of liquidity risk differs from commercial banks relying on deposits
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Industry Performance
Strong loan demand and solid profits for the largest firms in the early 2000s Effects of low interest rates
Not surprisingly, the most successful became takeover targets Citigroup/Associates First Capital, Household International/HSBC Holdings
Mid 2000s problems arose 2005, 2006: falling home prices and rising
interest rates Pullback from subprime loans
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Regulation of Finance Companies
Federal Reserve definition of Finance Company Firm, other than depository institution, whose
primary assets are loans to individuals and businesses.
Subject to state-imposed usury ceilings. Much lower regulatory burden than
depository institutions. Not subject to Community Reinvestment Act. Lack the banks’ regulatory safety-net
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Regulation
With less regulatory scrutiny, finance companies must signal safety and soundness to capital markets in order to obtain funds.
Lower leverage than banks (11.4% capital-assets versus 10.36% for commercial banks in 2006).
Captive finance companies may employ default protection guarantees from parent company or other protection such as letters of credit.
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Global Issues
In foreign countries, Finance companies are generally subsidiaries of commercial banks or industrials
In Japan, ownership of finance companies by banks created opportunities when banks hit by increase in nonperforming loans GE Capital/Japan Leasing Corporation
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Pertinent Websites
American General www.aigag.com
Federal Reserve www.federalreserve.gov
Citigroup www.citigroup.com
Consumer Bankers Association www.cbanet.org
Ford Motor Credit www.fordcredit.com
General Electric Capital Corp. www.gecapital.com
General Motors Acceptance Corp. www.gmacfs.com
HSBC Finance www.hfc.com
Household International www.household.com