finance companies

BUS FINANCE 826

Overview

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

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.

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

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.

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

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Largest Finance Companies

Company Name Total Assets

General Electric Capital Services $370,636

Ford Motor Credit Company 174,300

General Motors Acceptance Corp. 168,410

Associates First Capital Corp. 82,957

Household International, Inc. 76,706

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).

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.

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.

Web Resources

• For information on home equity loans, visit the Consumer Bankers Association at:

www.cbanet.org

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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.

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

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.

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

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

Electronic Lending

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

Web Resources

• For additional information, visit:

www.household.com

www.firstunion.com

www.citigroup.com

www.ftc.gov

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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.

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.

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

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

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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

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