Overview of Finance Companies
Finance Companies
 About finance companies
 Finance companies originated during depression.
 Installment credit
 General Electric Capital Corporation.
 Competition from banks increased during 1950s.
•
GMAC is largest commercial mortgage lender in U.S.
• Industry is highly concentrated: Largest 20 firms account for more than
65% of assets.
 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.
 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.
 Balance Sheet and Trends
 Business and consumer loans are the major assets
 52.8% of total assets, 2006.
 Reduced from 95.1% in 1977.
 Consumer loans
•
Primarily motor vehicle loans and leases.
•
Recent low auto finance company rates are anomalous.
•
Generally riskier customers than banks serve (including subprime
mortgage lenders)
 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
• Defaults in subprime and relatively strong credit mortgages after 2007
 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.
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 Major liabilities: commercial paper and other debt (longer-term notes and bonds).

Finance firms are largest issuers of commercial paper
• 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
 High risk has a downside:
 Regulation of Finance Companies
 Federal Reserve definition of Finance Company
 Firm, other than depository institution, whose primary assets are loans to
individuals and businesses.
 Much lower regulatory burden than depository institutions.
 Not subject to Community Reinvestment Act.
 With less regulatory scrutiny, finance companies must signal safety and
soundness to capital markets in order to obtain funds.
 Lower leverage than banks (11.4% capital-assets versus 10.36% for commercial
banks in 2006)
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