Deck 14: Other Lending Institutions: Savings Institutions, Credit Unions, and Finance Companies

Question 1

Sales finance institutions specialize in loan sales to banks and thrifts.

Answer 1

False

Question 2

The largest U.S. banks are larger than the entire credit union industry.

Answer 2

True

Question 3

The QTL test requires that thrifts

A) limit the amount of mortgage-related assets on the balance sheet to improve diversification.
B) invest in a minimum percentage of government-backed securities to protect their mortgage loans.
C) lend no more than 80% of the value of a home to a borrower to ensure mortgage safety.
D) keep 35% of their assets in safe liquid investments to ensure adequate deposit liquidity.
E) invest at least 65% of their assets in mortgages or mortgage-related assets.

Answer 3

E

Question 4

Which one of the following has the highest concentration of mortgage-related assets on the balance sheet?

A) Savings institutions
B) Commercial banks
C) Credit unions
D) Finance companies
E) Pension funds

Question 5

The predominant liabilities for savings institutions are

A) commercial deposits and FHLB borrowings.
B) wholesale money market notes and reserves at the Fed.
C) small time and savings deposits and FHLB borrowings.
D) checking accounts and money market mutual funds.

Question 6

Prior to 1986, Regulation Q limited the interest rate that depository institutions could pay on deposits and allowed savings institutions to pay a slightly higher rate than banks.

Question 7

After deposits, the second largest source of funds at savings institutions is FHLB loans.

Question 8

After 1989, savings institutions have primarily been regulated by

A) Federal Home Loan Bank Board
B) Federal Deposit Insurance Corporation
C) Office of Thrift Supervision
D) National Credit Union Administration

Question 9

Credit unions are not taxed, as a result well-run credit unions are often able to charge lower loan rates and pay slightly higher deposit rates than banks.

Question 10

Which of the following trends in the number and industry assets of savings institutions is/are correct?
I) The number of savings institutions has fallen over time.
II) The number of savings institutions has increased over time.
III) Total industry assets fell during the recession of the late 2000s.
IV) Total industry assets are falling over time.
V) Total industry assets are stable but the number of savings institutions has fallen.

A) II and III only
B) I and III only
C) I and IV only
D) II and IV only
E) V only

Question 11

There are more credit unions than other types of thrifts, but credit unions are generally smaller than other types of thrifts.

Question 12

The policy employed in the 1980s of not closing economically insolvent savings institutions was called regulatory forbearance.

Question 13

In a mutual organization, the depositors are owners of the institution.

Question 14

Traditionally, most credit union members had a common employer, but increasingly the required commonality is a common location of either residence or workplace.

Question 15

Savings institution deposits and bank deposits are backed by two different insurance funds.

Question 16

Because of the differences in the makeup of their major loan types, finance companies typically have shorter-term loans than banks.

Question 17

In 2010, the largest U.S. savings institution was

A) ING Bank
B) Washington Mutual
C) Navy Federal
D) Hudson City Bancorp
E) HSBC Financial

Question 18

Savings institutions must have at least 65% of their assets in mortgage related areas in order to maintain their favorable tax status and obtain FHLB loans.

Question 19

The National Credit Union Administration is the primary regulator of federally chartered credit unions.

Question 20

Of all the depository institutions, as a percentage of assets, credit unions rely the most on deposit sources of funds.

Question 21

Deposits at savings banks are backed by the _______________ and deposits at savings institutions are backed by the ______________.

A) BIF; BIF
B) BIF; SAIF
C) SAIF; BIF
D) SAIF; SAIF
E) DIF; DIF

Question 22

In 2010, _______________ had on average the greatest amount of equity as a percentage of assets and ______________ had the lowest.

A) savings institutions; credit unions
B) banks; credit unions
C) credit unions; finance companies
D) finance companies; credit unions
E) finance companies; banks

Question 23

Home equity loans are popular with finance companies. Which one of the following statements about home equity loans is not correct?

A) These loans allow customers to borrow on a line of credit secured with a second mortgage.
B) Interest payments on home equity loans are not tax deductible.
C) Bad debt expense on home equity loans are lower than on many other types of finance company loans.
D) The average outstanding balance on home equity loans was $85,472 in 2007.
E) If the borrower defaults on the home equity loan, the finance company can seize the house.

Question 24

Factoring is

A) equipment leasing.
B) servicing mortgage factors.
C) purchasing corporate accounts receivables at a discount.
D) financing automobile purchases.
E) making installment loans to customers.

Question 25

Which one of the following utilizes the least amount of deposits as a source of funds?

A) Banks
B) Credit unions
C) Finance companies
D) Savings associations
E) Savings banks

Question 26

A finance company that makes loans to high risk customers is called a

A) subprime lender
B) commercial bank
C) factor
D) warehouse lender
E) credit lender

Question 27

Credit unions have several advantages over banks. These include
I) Credit unions are not taxed.
II) Credit unions are better diversified than banks.
III) Credit unions can collectively pool funds.
IV) Due to regulations, credit unions have better economies of scale and scope than banks.
V) Because of their ties to employers credit unions have better personnel expertise than banks.

A) I and II only
B) I and III only
C) III and IV only
D) III, IV, and V only
E) I, III, and V only

Question 28

Historically, most savings institutions were established as

A) mutual organizations
B) stockholder organizations
C) partnerships
D) charitable organizations
E) banks

Question 29

Aggregate finance company profitability was poor in the late 2000s primarily due to which segment of the finance company industry?

A) Business factoring
B) Equipment loans
C) Equipment leasing
D) Securitization of auto loans
E) Subprime lending

Question 30

The U.S. central credit union and the corporate credit union

A) are the primary regulators of the credit union industry.
B) pool funds and provide investment services to local credit unions.
C) serve as the trade organization for the industry.
D) charter credit unions.
E) provide deposit insurance for credit unions.

Question 31

Rank the following from greatest to smallest in terms of industry asset size in 2010.
I) Banks
II) Savings institutions
III) Credit unions
IV) Finance companies

A) IV, I, II, III
B) I, IV, II, III
C) I, II, IV, III
D) I, II, III, IV
E) II, IV, III, I

Question 32

Credit unions are
I) Mutual associations
II) Not open to the general public
III) For profit institutions

A) I only
B) II only
C) I and II only
D) I, II, and III
E) II and III only

Question 33

_____________ are the most diversified of depository institutions and ______________ are on average the largest depository institutions.

A) Banks; savings institutions
B) Credit unions; banks
C) Credit unions; credit unions
D) Banks; banks
E) Savings institutions; banks

Question 34

As a percentage of total assets, credit unions invest _______________ in securities than banks and ______________ in consumer loans than banks.

A) more; more
B) less; less
C) more; less
D) less; more
E) less; about the same

Question 35

Finance companies enjoy several advantages over banks. These include all but which one of the following?

A) Finance companies can offer various types of products and services without regulatory interference.
B) Many finance companies have considerable knowledge and expertise about specific industries and products.
C) Finance companies can accept riskier customers than banks.
D) Finance companies generally have lower overhead than banks.
E) Finance companies have lower funds costs than banks.

Question 36

SI profitability declined in the mid-2000s due to
I) the yield curve becoming more positively sloped.
II) decreases in the NIM ratio.
III) increases in the NIM ratio.
IV) the yield curve becoming flatter and even inverted.

A) I and II only
B) II and III only
C) II and IV only
D) III and IV only
E) I and III only

Question 37

Sales finance companies

A) specialize in making loans to customers of a specific retailer or manufacturer.
B) specialize in making installments and other loans to whatever consumers are interested.
C) specialize in providing loans to businesses.
D) specialize in international factoring and forfaiting.
E) none of the above

Question 38

For the finance company industry as a whole, the largest single loan type is

A) business loans
B) consumer loans
C) real estate loans
D) high-risk consumer loans
E) credit card loans

Question 39

A captive finance company is one that

A) is owned by a retailer or manufacturer.
B) is owned by a bank holding company.
C) is owned by its depositors.
D) lends only to high-risk individuals that cannot obtain loans elsewhere (i.e., captives).
E) is regulated at the federal level.

Question 40

A loan agreement between Ford Motor Credit and a local Ford dealer is an example of

A) floor planning.
B) business equipment loan.
C) factoring of receivables.
D) depreciation loan.
E) none of the above

Question 41

How do sales finance companies differ from personal credit and business credit institutions? List an example of each.

Question 42

Explain why low interest rates and strong mortgage markets help keep profitability high at savings institutions.

Question 43

The American Bankers Association and others are seeking to limit growth of credit unions. What is the basis for the bankers' concern? What does the credit union industry argue? What kind of limits on credit unions are the bankers seeking?

Question 44

What are the advantages of a finance company or a bank leasing equipment to a small business customer rather than financing the customer's purchase of the equipment?

Question 45

What are home equity loans? What has happened to the average balance of home equity loans in recent years? Why do finance companies prefer home equity loans to unsecured debt?

Question 46

A savings institution (SI) has funded $12 million of 30-year fixed-rate mortgages with an average interest rate of 5.75%. These assets are funded with time deposits with an average maturity of six months. The deposits are currently paying 3.5%. In six months' time, however, the Fed has raised interest rates twice and the depositors now must be paid 4.25%. What will happen to the SI's ROA and NIM? How would your answer change if the SI normally sells the mortgages every 6 months and originates additional new mortgage loans?

Question 47

Finance companies obtain a significant portion of their short-term financing from

A) time and savings deposits.
B) transaction accounts.
C) long-term bonds.
D) issuing commercial paper.
E) equity.

Question 48

In dollars, how many subprime mortgages were originated in relation to the total mortgage market in 2006? How has the subprime crisis affected the profitability of finance companies? Are all finance companies equally affected? Explain.

Question 49

What are the advantages finance companies (FCs) have over banks in the area of business lending? What disadvantages do they have?

Question 50

Has the importance of foreign non-bank financial lending been increasing or decreasing in recent years? Provide some examples to back up your answer.

Question 51

Which one of the following institutions is the least regulated?

A) Banks
B) Credit unions
C) Finance companies
D) Savings associations
E) Savings banks

Question 52

Why have postal savings institutions flourished in many foreign countries? What unique advantages do they have and what services do many offer?

Question 53

Why have larger credit unions experienced greater profitability than smaller credit unions? Do you expect this to continue? Why or why not?

Question 54

How do the primary risks of credit unions differ from banks? From savings institutions (SIs)? From finance companies?

Question 55

What are the major disadvantages that credit unions face versus banks?

Question 56

What are the major advantages that credit unions enjoy over banks?