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					Unit 25. Finance Companies
        I. Characteristics and Background of FCs
• A. Definition-The Fed defines FC as a firm, whose primary assets are loans to
   individuals and businesses. FCs, like depository institutions, are financial
   intermediaries that borrow funds for relending and make profits on the
   difference between the interest rate on borrowed funds and the rate charged on
   the loans.
• B. Characteristics of FCs?
  (1) Primary function of FCs is to make loans to both individuals and businesses;
  (2) FCs provide services, including consumer lending, business lending, and
       mortgage financing;
  (3) Unlike banks, FCs do not accept deposits, but instead rely on short/long-term
      debts;
  (4) Additionally, FCs often lend to customers that commercial banks consider
       too risky.
• C. Two examples: GE and GM.
  (1) General Electric Capital Corp.
  (2) General Motors Acceptance Corp.
GM FC
                        II. Types of FCs
• A. Three major types of FCs
  (a) Sales finance institutions specialize in making loans to
     customers of specific manufacturer, such as Ford Motor Credit;
  (b) Personal credit institutions specialize in making installment and
     other loans to consumers, such as Household Finance Co.;
  (c) Business credit institutions provide financing to corporations,
      especially through equipment leasing(设备租赁) and
      factoring (保理业务), in which the finance company purchase
      accounts receivable from corporate customers, such as Heller
      Financial.
Volkswagen FC
                 B. Services Provided by FCs
• Consumer loans include vehicle loans and leases, other consumer loans,
   securitized (资产证券化) loans, and loans to purchase other types of consumer
   goods.FCs charge higher interest rates for auto loans than
   commercial banks, but need less paperwork than commercial banks.)
• Mortgages include all loans secured by liens (留置权) on any type of real
   estate. Mortgages can be made directly or as securitized mortgage assets.
• Business loans represent the largest portion of the loan portfolio of FCs. FCs
   have several advantages over CBs in offering services to small business
   customers:
  (1) they are not subject to regulations(监管) that restrict the type of products
      and services they can offer;
  (2) because FCs do not accept deposits, they have no bank-type regulators
      looking directly over their shoulders;
  (3) being (in many cases) subsidiaries of Holding company(控股公司), FCs
      often have substantial industry and product expertise;
  (4) FCs are more willing to accept risky customers than are CBs;
  (5) FCs generally have lower overheads (经营费用) than bank, for instance,
      they do not need tellers (出纳员) and branches for taking deposits.
Daimler-Chrysler FC
              III. Recent Trend of FCs
• The outlook for the industry as a whole is currently quite bright.
  Loan demand among lower and middle-income consumers is
  strong. Because many of these potential borrowers have little
  savings, no slowdown in demand for FC services is expected.
• Some problems for FCs specializing in loans are relatively
  lower-quality customers than CBs.
                 IV. Regulations of FCs
• FCs are subject to ceilings on the maximum loan size and loan rate
  assigned to any individual customer.
• Because FCs do not accept deposits, they are not subject to
  extensive oversight of any specific federal and state regulators,
  and they are much less regulated than banks and thrifts.
• The lack of regulatory oversight for FCs enables them to offer a
  wide scope of services and avoid the expense of regulatory
  compliance(核规).
• Since FCs are heavy borrowers in the capital markets, they need to
  signal their solvency (有偿付能力) and safety to investors.
  Such signals are usually sent by holding much higher equity or
  capital-asset ratio and therefore, lower leverage ratios than CBs do.
• Some FCs use default protection guarantees (违约保护担保)
  from their parent companies and/or guarantees, such as L/C or
  credit line (信用额度) purchased from high-quality
  commercial or investment banks.

				
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