Question 1

As of March 2015, the payday loan industry was regulated at the federal level.

Accepted Answer

As of March 2015, the payday loan industry was not regulated at the federal level. However, some states have their own regulations on payday lending.

Question 2

Wholesale and retail motor vehicle loans and leases constitute the largest subcategory of business loans.

Accepted Answer

Wholesale and retail motor vehicle loans and leases are a significant category of business loans, but not necessarily the largest subcategory overall. However, they may be the largest subcategory for certain lenders or industries.

Question 3

Because finance companies do not accept deposits, they do not have bank regulators providing oversight of their activities.

Accepted Answer

Finance companies do not accept deposits, which means that they are not subject to regulations by bank regulators. However, they are still subject to regulations from other government agencies such as the Consumer Financial Protection Bureau (CFPB) and the Federal Trade Commission (FTC).

Question 4

Wholesale loans are loan agreements between corporations and their customers at reduced interest rates.

Accepted Answer

Wholesale loans refer to the loans banks or financial institutions provide to other banks, financial entities, or large institutional customers, not directly to individual customers at reduced interest rates.

Question 5

A finance company that lends money to high risk customers is known as a subprime lender.

Accepted Answer

This statement is true. Subprime lenders specialize in lending to individuals with poor credit history or who have a higher risk of defaulting on loans.

Question 6

Business loans represent 50% of the loan portfolio of finance companies.

Accepted Answer

Business loans are a significant part of the loan portfolio of finance companies, but they do not represent 50% of the portfolio as it also includes consumer loans, mortgages, and other types of loans.

Question 7

Payday lenders are a subset of subprime lenders.

Accepted Answer

Payday lenders specifically offer short-term loans with high interest rates to individuals who may not qualify for traditional loans, which is characteristic of subprime lending. Therefore, payday lenders are a subset of subprime lenders.

Question 8

Finance companies have relied primarily on short-term commercial paper and other debt sources to finance asset growth.

Accepted Answer

Finance companies typically rely on short-term funding sources like commercial paper to finance their assets. This allows them to quickly access funds and manage their liquidity needs.

Question 9

Traditionally, motor vehicle loans and leases are the largest category of consumer loans for finance companies.

Accepted Answer

This statement is true. According to industry statistics, motor vehicle loans and leases make up the largest category of consumer loans for finance companies.

Question 10

The largest category of business loans of finance companies is securitized business assets.

Accepted Answer

The largest category of business loans of finance companies is typically equipment financing or direct loans to businesses, not securitized business assets. Finance companies often specialize in providing loans for specific purposes like equipment purchase, vehicle financing, or invoice financing, rather than dealing primarily in securitizing business assets.

Question 11

When a finance company pools mortgages with similar characteristics and securitizes the pool, the loans are removed from the balance sheet of the finance company.

Accepted Answer

When mortgages are securitized, they are packaged together in a pool and sold off to investors. This means that the finance company no longer holds these mortgages on their balance sheet, as they have been effectively transferred to the investors.

Question 12

Finance companies prefer to outwardly purchase equipment and then lease it to a business rather than finance the purchase because they receive part of the lease payment in the form of a down payment from the purchaser.

Accepted Answer

Finance companies may prefer to lease equipment to businesses because leasing can offer a steady stream of income over time and may offer tax benefits. However, the preference to lease rather than finance a purchase is not primarily because they receive part of the lease payment as a down payment; rather, it's due to factors like risk management, asset depreciation, and potential tax advantages.

Question 13

Finance companies are subject to regulations that restrict the types of products and services they can offer to small business customers.

Accepted Answer

The answer of Finance companies are subject to regulations that...

Question 14

As the economic expansion continued through the 1990s, the demand for finance company loans increased.

Accepted Answer

As the economic expansion continued, more people were looking for loans including those offered by finance companies.

Question 15

Finance companies have had no significant downturns in economic performance over the last two decades.

Accepted Answer

Finance companies have experienced significant downturns in economic performance, most notably during the 2008 financial crisis.

Question 16

It is impossible for an individual to be approved for a finance company loan with a bankruptcy on their record.

Accepted Answer

While having a bankruptcy on your record may make it more difficult to be approved for a loan, it is not impossible. Some finance companies may still consider lending to individuals with bankruptcies, but they may charge higher interest rates or require additional collateral to offset the risk.

Question 17

Major finance companies did not suffer as much from the recent financial crisis as depository institutions primarily because they are forbidden from creating home mortgages.

Accepted Answer

Major finance companies, such as Lehman Brothers and Bear Stearns, were heavily involved in the creation and distribution of complex financial instruments, such as mortgage-backed securities, that played a major role in the financial crisis. While they may not have created home mortgages themselves, they were still significantly impacted by the collapse of the housing market and the resulting defaults on mortgages.

Question 18

Finance companies generally have higher overhead than do commercial banks.

Accepted Answer

Finance companies typically have lower overhead costs compared to commercial banks because they do not have the extensive branch networks and the associated costs that banks do, and they often focus on more specialized lending.

Question 19

Sales finance companies do not directly compete with depository institutions for consumer loans.

Accepted Answer

Sales finance companies do compete with depository institutions for consumer loans, as they both offer financing options for purchasing goods or services. However, sales finance companies typically specialize in specific types of loans, such as auto loans or retail installment contracts, while depository institutions offer a wider range of loan products.

Question 20

As a percent of assets, finance companies currently rely more heavily on commercial paper as a source of financing than in 1977.

Accepted Answer

Finance companies have diversified their sources of financing over the years, and the reliance on commercial paper has decreased as they have accessed other funding sources like long-term debt and securitization.

Quiz 3: Financial Services: Finance Companies