Deck 3: Finance Companies

Question 1

Finance companies differ from banks in that they do not accept deposits.

Answer 1

True

Question 2

Sales finance institutions provide financing to customers of specific retailers.

Answer 2

True

Question 3

Personal credit institutions may be willing to approve of collateral that deposit-taking institutions do not find acceptable.

Answer 3

True

Question 4

Equipment leasing to customers is a function of business credit institutions.

Question 5

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

Question 6

Finance companies generally charge lower interest rates on consumer loans than do deposit-taking institutions.

Question 7

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

Question 8

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.

Question 9

Personal credit institutions specialize in making equipment leases to consumers.

Question 10

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.

Question 11

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

Question 12

The largest 20 firms in the North American nondeposit-taking finance company industry account for more than 65 percent of industry assets.

Question 13

General Electric Capital Corporation is considered a captive finance company.

Question 14

Finance companies have been among the slowest growing FI groups in recent years.

Question 15

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

Question 16

Securitized mortgage assets are used as collateral backing secondary market securities.

Question 17

Factoring is the process where accounts are purchased by a nonfinancial company at a discount from their face value in exchange for the responsibility of collection.

Question 18

Sales finance institutions compete directly with deposit-taking institutions for consumer loans.

Question 19

As of 2012, real estate loans dominated the assets of finance companies.

Question 20

A major role of the captive finance company is to provide financing for the purchase of products manufactured or sold by the parent company.

Question 21

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

Question 22

Wholesale and retail motor vehicle loans and leases constitute the largest subcategory of business loans for finance companies.

Question 23

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

Question 24

Finance companies have had no significant downturns in economic performance over the last two decades.

Question 25

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

Question 26

As a percent of assets, finance companies currently rely more heavily on commercial paper as a source of financing than in 1977.

Question 27

Finance companies generally have higher overhead than do commercial banks.

Question 28

It is impossible for an individual to be approved for a finance company loan with a bankruptcy on their record.

Question 29

Because finance companies do not accept deposits, they do not have bank regulators providing oversight of their activities.

Question 30

Finance companies have traditionally been subject usury ceilings on the maximum loan rate charged to any individual customer.

Question 31

Business loans represent 60% of the loan portfolio of finance companies.

Question 32

Sales finance companies do not directly compete with deposit-taking institutions for consumer loans.

Question 33

As of March 2012, the payday loan industry was regulated by OSFI.

Question 34

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

Question 35

The largest category of business loans of finance companies is securitized business assets.

Question 36

A finance company that lends money to high risk customers is known as a subprime lender.

Question 37

As the economic expansion continued in Canada and the U.S. through the 1990s, the demand for finance company loans increased.

Question 38

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.

Question 39

Finance companies have relied primarily on short-term commercial paper and other debt sources to finance asset growth.

Question 40

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

Question 41

Which of the following is NOT true?

A)The fastest growing area of finance companies in recent years has been in the area of leasing and business loans.
B)Consumer loans represent the largest portion of the loan portfolio of finance companies.
C)Finance companies rely on short-term commercial paper and customer deposits to finance their assets.
D)Finance companies rely on short-term commercial paper and long-term debt to finance their assets.
E)Finance companies are now the largest issuers of commercial paper in the U.S.

Question 42

A company that specializes in making installment loans to consumers 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.

Question 43

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.

Question 44

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.

Question 45

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.

Question 46

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)is not supervised by OSFI.
E)is wholly owned by a parent corporation.

Question 47

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.

Question 48

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.

Question 49

Which of the following is a major source of debt capital for a captive finance company?

A)Premiums.
B)Deposits.
C)Equity.
D)Bank loans.
E)Parent company.

Question 50

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.

Question 51

Which of the following is NOT an advantage of a finance company over a 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.

Question 52

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.

Question 53

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)had its Canadian assets purchase by Royal Bank of Canada in 2013.
D)did not participate in U.S. federal bailout funds during the financial crisis because of their financial strength.
E)is the largest finance company in the U.S.

Question 54

This type of finance company competes directly with deposit-taking 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.

Question 55

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 term deposits.
E)use very small amounts of long-term debt and bonds.

Question 56

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 usury law guidelines.
E)All of these.

Question 57

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.

Question 58

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.
E)repossession in the event of default is easier and the finance company receives the benefit of a depreciation expense.

Question 59

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.

Question 60

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.

Question 61

A company that provides financing to corporations, especially through equipment leasing and factoring would best be categorized as a

A)sales finance institution.
B)personal credit institution.
C)subprime lender.
D)loan shark.
E)business credit institution.

Question 62

Home equity loans have

A)become less profitable for finance companies.
B)seen reduced demand in Canada since the financial market crisis in 2008.
C)interest charges that are 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 by their home.

Question 63

Which of the following observations concerning payday lenders is NOT true?

A)They provide short-term cash advances.
B)Their advances are due when borrowers receive their next paycheque.
C)The industry originated from cheque cashing outlets.
D)The payday loan industry is regulated at the provincial and territorial level.
E)The demand for short-term loans has decreased considerably.

Question 64

Compared to 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.

Question 65

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.
E)holding higher leverage ratios, and holding lower capital-asset ratio.

Question 66

Which of the following observations concerning mortgages is NOT valid?

A)They may refer to loans secured by a 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 tax deductible to the homeowner in Canada.

Question 67

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.

Question 68

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.

Question 69

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.

Question 70

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 lower than those of banks.
D)mortgage lending become less important to the industry.
E)finance companies were required to offer term deposit products to their customers.

Question 71

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.