CONSUMER FINANCE
OPERATIONS
CHAPTER 22
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Dr David P Echevarria
1
FINANCE COMPANIES
A. An enterprise engaged in the lending of
money against collateral or speculatively
1. To manufacturers
2. To retailers
a. esp. one specializing in the financing of hirepurchase contracts
B. Lending Capital Raised in the Marketplace
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Dr David P Echevarria
2
FINANCE COMPANIES
C. Types of Finance Companies
1.
2.
3.
Non depository financial institution - a financial institution that funds
their investment activities from the sale of securities or insurance
Consumer finance company, small loan company - a finance
company that makes loans to people who have trouble getting a bank
loan
Captive finance company - a finance company owned by a
manufacturer to finance dealers' inventories or to make loans to
consumers buying the company's products
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Dr David P Echevarria
3
FINANCE COMPANIES
1.
Sales finance company - a finance company that buys (at a discount)
the installment sales contracts of retail merchants (factoring)
2. Commercial credit company, commercial finance company - a
finance company that makes loans to manufacturers and wholesalers
http://www.consumeraffairs.com/finance/loan_companies.html
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Dr David P Echevarria
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FINANCE COMPANIES
D. Evolution of Finance Companies
1. Cowperwait & Sons (1807) provide installment credit to
spur furniture sales
2. Singer Sewing Machine Co. began offering I.C. in 1850
3. Sears, Roebuck and Company in 1911
4. Major expansion of market coincides with marketing of
automobiles (c.a. 1915)
a.
b.
Floor-planning for dealers
Installment plans for car buyers
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Dr David P Echevarria
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SOURCES OF FINANCE
COMPANY (FC) FUNDS
A. Bank Loans
1. FC borrow money from banks to relend to
customers
2. Installment contracts frequently discounted and
sold to banks
3. When volume of business exceeded bank
abilities FC issued commercial paper
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Dr David P Echevarria
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SOURCES OF FINANCE
COMPANY (FC) FUNDS
B. Commercial Paper (CP) as a Source of
Lendable Funds
1. Credit ratings are essential to raising funds via CP
2. Average issue is $120,000,000 with a maturity of 30 days
or less
3. Only 1200 of more than 2 million companies issue CP in
the US
4. Half is sold through dealers and the rest is directly placed
with investors
5. Commercial Paper is principal source of funds for
finance companies
C. Sales of Securities: stocks, bonds
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Dr David P Echevarria
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USES OF FINANCE COMPANY
FUNDS
A. Consumer Loans
1. Banks now dominate in this area (2006) 84%
versus 16% for F.C.s
2. Many finance companies have entered second
mortgage markets
a. Home equity loan
b. Tax Reform Act of 1986 ended deductibility of nonmortgage interest
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Dr David P Echevarria
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USES OF FINANCE COMPANY
FUNDS
A. Business Loans
1. Factoring; buying receivables from
manufacturers
a. Recourse is important aspect of factoring
b. Can be a very expensive way to obtain immediate
cash flow
2. Leasing to mid-size companies
a. Loans secured by asset leased. Repossess if default
b. Tax benefits (depreciation) accrue to F.C
c. May also provide for exchange of tax benefits via
lower rates
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Dr David P Echevarria
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RISK MANAGEMENT
A. Consumer Finance companies face the same
risks as Banks and Thrifts
1. Liquidity risk
2. Interest rate risk
3. Credit risk
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Dr David P Echevarria
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REGULATION OF FINANCE
COMPANIES
A. Finance Company activities largely state regulated
1. Some restrictions on branching or inter-state expansion
2. Main form of regulation is in lending to consumers (i.e.,
Truth-in-Lending Laws)
3. State usury laws only restrictions
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Dr David P Echevarria
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REGULATION OF FINANCE
COMPANIES
B. A Few Words on Captive Finance Subsidiaries
(CFS)
1. CFS exist to finance parent company's sales (GE, GM,
Ford, etc.)
2. CFS are very profitable; ROE of 12 - 15 % not
uncommon
3. CFS offer competitive advantage to parent
4. CFS may also extend financing activity beyond parent
(GECC)
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Dr David P Echevarria
12
Recent Developments
CFPB Proposes New Federal Oversight of
Nonbank Auto Finance Companies
WASHINGTON, D.C. – The Consumer Financial Protection
Bureau (CFPB) is proposing to oversee larger nonbank auto
finance companies for the first time at the federal level. The
Bureau also released a supervision report that details the autolending discrimination that the Bureau has uncovered at
banks. The report highlights that the Bureau’s supervisory
actions against banks will result in about $56 million in
redress for up to 190,000 consumers harmed by discriminatory
practices.
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Dr David P Echevarria
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Federal Oversight
A. Fairly marketing and disclosing auto financing

No deceptive practices
B. Providing accurate information to credit bureaus
 Distorted consumer credit records by inaccurately
reporting information like the consumer’s payment history
and delinquency status to credit bureaus
C. Treating consumers fairly when collecting debts

Make sure that auto finance companies are not using
illegal debt collection tactics
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Dr David P Echevarria
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HOMEWORK QUESTIONS
A. Why did finance companies come into being?
B. How do finance companies raise lendable capital?
C. What two markets are served by finance
companies?
D. Into what areas have finance companies expanded
their activities from straight lending?
E. In what way(s) does federal regulation impact
finance companies? Who regulates finance
companies?
F. What is a captive finance subsidiary and how does
it benefit its corporate parent?
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Dr David P Echevarria
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