Finance Companies
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Finance Companies






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Finance Companies Finance Companies Presentation Transcript

  • Overview
    • In this segment ... Finance Companies:
      • Activities of finance companies
      • Competitive environment
      • Size, structure and composition
      • Regulation
      • Global issues
  • Historical Perspective
      • Finance companies originated during depression.
        • Installment credit
        • General Electric Capital Corporation.
        • Competition from banks increased during 1950s.
      • Expansion of product lines
        • GMAC is largest commercial mortgage lender in U.S.
      • Industry is highly concentrated
        • Largest 20 firms account for more than 80% of assets.
  • 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
  • Major Types of Finance Companies
      • Sales finance institutions
        • Ford Motor Credit and Sears Roebuck Acceptance Corp.
      • Personal credit institutions
        • Household Finance Corp. and American General Finance.
      • Business credit institutions
        • CIT Group and Heller Financial.
        • Equipment leasing and factoring.
  • Web Resources
    • For information on finance companies, visit:
    Web Surf
  • Largest Finance Companies
  • Balance Sheet and Trends
      • Business and consumer loans are the major assets
        • 58.8% of total assets, 2000.
        • Reduced from 95.1% in 1977.
      • Increases in real estate loans and other assets.
      • Growth in leasing (largely due to tax incentives of 1981 Economic Recovery Act).
  • Balance Sheet and Trends
      • Consumer loans
        • Primarily motor vehicle loans and leases.
        • Recent low auto finance company rates are anomalous.
        • Generally riskier customers than banks serve.
          • Subprime mortgage lenders
        • Recent increase in “loan shark” firms with rates as high as 30% or more.
        • Other consumer loans about 25.8% of consumer loan portfolio, December 2000.
  • Balance 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.
  • Web Resources
    • For information on home equity loans, visit the Consumer Bankers Association at:
    Web Surf
  • 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.
  • Business loans
    • Major subcategories:
      • retail and wholesale motor vehicle loans and leases
      • equipment loans
        • tax issues associated when finance company leases the equipment directly to the customer
      • other business loans and securitized business assets
  • 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.
  • Industry Performance
    • Strong loan demand
    • Strong profits for the largest firms
      • e.g. Household International, Associates First Capital, Beneficial
    • Most successful have become takeover targets
      • Citigroup/Associates First Capital,
      • Tyco International/CIT Group
  • Industry Performance
    • High risk has a downside:
      • Subprime lending: Jayhawk Acceptance Corporation
      • Cityscape Financial Corp., Aames Financial Corp., Advanta, FirstPlus Financial Group, The Money Store, Associates First Capital
      • FTC scrutiny of subprime lending practices violating Truth in Lending Act, Fair Credit Reporting Act, Equal Opportunity Act
  • Electronic Lending
    • Mainly mortgages completed over the Internet
      • E-Loan
      • Suffered with the dot-com downturn
  • Web Resources
    • For additional information, visit:
    Web Surf
  • 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.
  • Regulation
      • With less regulatory scrutiny, finance companies must signal safety and soundness to capital markets in order to obtain funds.
      • Lower leverage than banks (10.9% capital-assets versus 8.5% for commercial banks).
      • Captive finance companies may employ default protection guarantees from parent company or other protection such as letters of credit.
  • 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
  • Pertinent Websites
    • Aames Financial Corp.
    • Advanta
    • American General
    • Federal Reserve
    • CIT Group
    • Citigroup
    • Consumer Bankers Association
    • Federal Trade Commission
    • First Union Bank
    Web Surf
  • Pertinent Websites
    • Ford Motor Credit
    • GE Capital Corp.
    • GMAC
    • Household International
    • The Wall Street Journal
    Web Surf