Question 1

Sales finance institutions compete directly with depository institutions for consumer loans.

Accepted Answer

Sales finance institutions, such as auto finance companies, offer financing options to consumers for large purchases like cars and appliances, which puts them in direct competition with depository institutions like banks and credit unions who also offer consumer loans.

Question 2

Personal credit institutions specialize in making equipment leases to consumers.

Accepted Answer

Personal credit institutions mainly offer consumer loans and credit cards, not equipment leases. Equipment leases are typically provided by leasing companies or through equipment vendors.

Question 3

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

Accepted Answer

This is true because home equity loans are secured against the borrower's property, which reduces the risk of default and therefore bad debt expense for the finance company. Additionally, administrative costs may be lower because the borrower is typically an existing customer of the finance company, which reduces the need for extensive marketing and underwriting activities.

Question 4

As of 2015, real estate loans dominated the assets of finance companies.

Accepted Answer

The answer of As of 2015, real estate loans dominated...

Question 5

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

Accepted Answer

This statement is false. Finance companies often attract higher-risk customers, such as those with poor credit, because they specialize in lending to individuals or small businesses that may not qualify for loans from traditional commercial banks.

Question 6

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

Accepted Answer

Captive finance companies are usually owned and operated by a parent institution such as a car manufacturer or a retailer. The parent institution often provides funding for the captive finance company to generate loans or leases for their customers. This is known as "captive financing" because the financing is provided by a company that is captive to the parent institution.

Question 7

Sales finance institutions provide financing to customers of specific retailers.

Accepted Answer

Sales finance institutions provide financing to customers of specific retailers, such as through store credit cards or lease-to-own programs.

Question 8

The largest 20 firms in the nondepository finance company industry account for more than 65 percent of industry assets.

Accepted Answer

This statement is true. The nondepository finance company industry is highly concentrated, with the largest 20 firms holding a significant majority of the industry's assets.

Question 9

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

Accepted Answer

Finance companies have actually been one of the fastest growing FI groups in recent years. According to a report by the Federal Reserve, finance companies' assets grew at an annual rate of 4.4% between 2014 and 2018, outpacing the growth of commercial banks (2.8%), credit unions (3.7%), and savings institutions (1.7%).

Question 10

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.

Accepted Answer

Factoring is the process where accounts receivable are sold to a financial company (factor) at a discount in exchange for immediate cash, with the factor assuming the responsibility of collecting the receivables.

Question 11

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

The answer of Over the last 30 years finance companies...

Question 12

General Electric Capital Corporation is considered a captive finance company.

Accepted Answer

General Electric Capital Corporation is a subsidiary of General Electric and provides financing options primarily for customers purchasing GE products and services. Therefore, it is considered a captive finance company.

Question 13

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

The tax deductibility of the interest payments on home equity lines of credit has indeed contributed to their growth over the past 20 years. This tax benefit has made HELOCs a more attractive borrowing option for homeowners.

Question 14

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

Accepted Answer

Finance companies typically charge higher interest rates on consumer loans than depository institutions as they take on higher risk borrowers.

Question 15

Personal finance companies will make loans to people that are unable to borrow from a depository institution.

Accepted Answer

The answer of Personal finance companies will make loans to...

Question 16

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

Accepted Answer

Securitized mortgage assets, such as mortgage-backed securities, are commonly used as collateral backing secondary market securities. This helps to spread out the risk associated with individual mortgages and allows investors to invest in a diversified pool of loans.

Question 17

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

Accepted Answer

Equipment leasing to customers is often offered by business credit institutions as a way for businesses to obtain the equipment they need without having to purchase it outright.

Question 18

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

Accepted Answer

This is one of the primary functions of a captive finance company - to provide financing for purchases of products from the parent company.

Question 19

Personal credit institutions may be willing to approve collateral that depository institutions do not find acceptable.

Accepted Answer

Personal credit institutions often have more flexibility in determining what collateral they will accept, while depository institutions may be more restricted by regulations and policies.

Question 20

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

Accepted Answer

Finance companies primarily provide loans and other financial services, but they do not accept deposits from customers like banks do.

Quiz 3: Financial Services: Finance Companies