BUS FINANCE 826

1
BUS FINANCE 826
2
Overview

• In this segment ... Finance Companies
• Activities of finance companies
• Competitive environment
• Size, structure and composition
• Regulation
• Global issues

3
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.

4
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

5
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.

6
Web Resources

• For information on finance companies, visit
• www.ge.com/gec
• www.gmacfs.com
• www.fordcredit.com
• www.household.com
• www.americangeneral.com
• www.citgroup.com

Web Surf
7
Largest Finance Companies
8
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).

9
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.

10
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.

11
Web Resources

• For information on home equity loans, visit the
  Consumer Bankers Association at
• www.cbanet.org

Web Surf
12
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.

13
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

14
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.

15
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

16
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

17
Electronic Lending

• Mainly mortgages completed over the Internet
• E-Loan
• Suffered with the dot-com downturn

18
Web Resources

• For additional information, visit
• www.household.com
• www.firstunion.com
• www.citigroup.com
• www.ftc.gov

Web Surf
19
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.

20
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.

21
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

22
Pertinent Websites

• Aames Financial Corp. www.aames.net/afc/index.chi
• Advanta www.advanta.com
• American General www.americangeneral.com
• Federal Reserve www.federalreserve.gov
• CIT Group www.citgroup.com
• Citigroup www.citigroup.com
• Consumer Bankers Association www.cbanet.org
• Federal Trade Commission www.ftc.gov
• First Union Bank www.firstunion.com

Web Surf
23
Pertinent Websites

• Ford Motor Credit www.fordcredit.com
• GE Capital Corp. www.ge.com/gec
• GMAC www.gmacfc.com
• Household International www.household.com
• The Wall Street Journal www.wsj.com

Web Surf