Question 1

Finance companies generally charge lower interest rates on consumer loans than do depository institutions.

Accepted Answer

A) True 
 B)False  False

Question 2

Compared to commercial banks, finance companies usually signal solvency and safety concerns by

Accepted Answer

A) holding higher leverage ratios. 
B) holding lower capital-asset ratio. 
C) holding less liquid long-term assets. 
D) holding higher capital-asset ratio. 
E) Answers A and B only. 
A) holding higher leverage ratios. 
B) holding lower capital-asset ratio. 
C) holding less liquid long-term assets. 
D) holding higher capital-asset ratio. 
E) Answers A and B only. D

Question 3

Over the last 30 years finance companies have replaced real estate loans and other assets with increasing amounts of consumer and business loans.

Accepted Answer

A) True 
 B)False  False

Question 4

As an industry, finance companies have escaped the merger and consolidation activity that has affected nearly every other sector of the financial services industry.

Accepted Answer

A) True 
 B)False

Question 5

Ally Financial [formerly General Motors Acceptance Corporation (GMAC)]

Accepted Answer

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. 
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.

Question 6

Traditionally, motor vehicle loans and leases are the largest category of consumer loans for finance companies.

Accepted Answer

A) True 
 B)False

Question 7

Finance companies prefer to outwardly purchase equipment and then lease it to a business rather than finance the purchase because they receive part of the lease payment in the form of a down payment from the purchaser.

Accepted Answer

A) True 
 B)False

Question 8

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.

Accepted Answer

A) True 
 B)False

Question 9

Wholesale loans are loan agreements between corporations and their customers at reduced interest rates.

Accepted Answer

A) True 
 B)False

Question 10

Finance companies are subject to regulations that restrict the types of products and services they can offer to small business customers.

Accepted Answer

A) True 
 B)False

Question 11

The typical customer of a payday lender has income of between $25,000 and $50,000 per year.

Accepted Answer

A) True 
 B)False

Question 12

The parent institution provides a large portion of the debt that a captive finance company will use to generate personal loans.

Accepted Answer

A) True 
 B)False

Question 13

Finance companies charge different rates than do commercial banks which

Accepted Answer

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 the above. 
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 the above.

Question 14

Finance companies have traditionally been subject to state-imposed usury ceilings on the maximum loan rate charged to any individual customers.

Accepted Answer

A) True 
 B)False

Question 15

The growth in home equity lines of credit over the last two decades has occurred in part because of the tax deductibility of the interest payments.

Accepted Answer

A) True 
 B)False

Question 16

Bad debt expense and administrative costs are lower on home equity loans than other typical loans of finance companies.

Accepted Answer

A) True 
 B)False

Question 17

Finance companies operate more like nonfinancial, nonregulated companies than any other type of financial institution.

Accepted Answer

A) True 
 B)False

Question 18

Sales finance companies do not directly compete with depository institutions for consumer loans.

Accepted Answer

A) True 
 B)False

Question 19

Finance companies generally attract less risky customers than do commercial banks.

Accepted Answer

A) True 
 B)False

Question 20

Finance companies that prey on desperate higher-risk customers charging unfairly exorbitant interest rates are referred to as

Accepted Answer

A) refinancing companies. 
B) captive companies. 
C) business credit companies. 
D) loan shark companies. 
E) personal credit companies. 
A) refinancing companies. 
B) captive companies. 
C) business credit companies. 
D) loan shark companies. 
E) personal credit companies.

Exam 3: Financial Services: Finance Companies

Finance companies generally charge lower interest rates on consumer loans than do depository institutions.

Compared to commercial banks, finance companies usually signal solvency and safety concerns by

Over the last 30 years finance companies have replaced real estate loans and other assets with increasing amounts of consumer and business loans.

As an industry, finance companies have escaped the merger and consolidation activity that has affected nearly every other sector of the financial services industry.

Ally Financial [formerly General Motors Acceptance Corporation (GMAC)]

Traditionally, motor vehicle loans and leases are the largest category of consumer loans for finance companies.

Finance companies prefer to outwardly purchase equipment and then lease it to a business rather than finance the purchase because they receive part of the lease payment in the form of a down payment from the purchaser.

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.

Wholesale loans are loan agreements between corporations and their customers at reduced interest rates.

Finance companies are subject to regulations that restrict the types of products and services they can offer to small business customers.

The typical customer of a payday lender has income of between $25,000 and $50,000 per year.

The parent institution provides a large portion of the debt that a captive finance company will use to generate personal loans.

Finance companies charge different rates than do commercial banks which

Finance companies have traditionally been subject to state-imposed usury ceilings on the maximum loan rate charged to any individual customers.

The growth in home equity lines of credit over the last two decades has occurred in part because of the tax deductibility of the interest payments.

Bad debt expense and administrative costs are lower on home equity loans than other typical loans of finance companies.

Finance companies operate more like nonfinancial, nonregulated companies than any other type of financial institution.

Sales finance companies do not directly compete with depository institutions for consumer loans.

Finance companies generally attract less risky customers than do commercial banks.

Finance companies that prey on desperate higher-risk customers charging unfairly exorbitant interest rates are referred to as

Why Are Financial Institutions Special

Financial Services: Depository Institutions

Financial Services: Securities Brokerage and Investment Banking

Financial Services: Mutual Funds and Hedge Funds

Financial Services: Insurance

Risks of Financial Institutions

Interest Rate Risk I

Interest Rate Risk II

Credit Risk: Individual Loan Risk

Credit Risk: Loan Portfolio and Concentration Risk

Liquidity Risk

Foreign Exchange Risk

Sovereign Risk

Market Risk

Off-Balance-Sheet Risk

Technology and Other Operational Risks

Liability and Liquidity Management

Deposit Insurance and Other Liability Guarantees

Capital Adequacy

Product and Geographic Expansion

Futures and Forwards

Options, Caps, Floors, and Collars

Swaps

Loan Sales

Securitization

Filters