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Chapter 14: Other Lending Institutions: Savings Institutions, Credit Unions and Finance Companies True/False

backed by two di&&erent insurance &unds. Answer ,alse "evel #edium

1). 8redit unions are not ta2ed' as a result well run 1. Prior to 1986 Regulation Q limited the interest rate credit unions are o&ten able to charge lower loan rates that depository institutions could pay on deposits and and pay slightly higher deposit rates than banks. allowed savings institutions to pay a slightly higher rate than banks. Answer !rue "evel #edium Answer !rue "evel #edium 11. !he 7ational 8redit 9nion Administration is the primary regulator o& &ederally chartered credit unions. $. %& all the depository institutions' as a percentage o& assets credit unions rely the most on deposit sources o& Answer !rue &unds. "evel *asy Answer !rue "evel #edium (. !he policy employed in the 198)s o& not closing economically insolvent savings institutions was called regulatory &orbearance. Answer !rue "evel *asy +. A&ter deposits' the second largest source o& &unds at savings institutions is ,-". loans. Answer !rue "evel *asy /. 0avings institutions must have at least 6/1 o& their assets in mortgage related areas in order to maintain their &avorable ta2 status and obtain ,-". loans. Answer !rue "evel #edium 6. 3n a mutual organi4ation the depositors are owners o& the institution. Answer !rue "evel *asy 1$. !here are more credit unions than other types o& thri&ts' but credit unions are generally smaller than other types o& thri&ts. Answer !rue "evel *asy 1(. !he largest 9.0. banks are larger than the entire credit union industry. Answer !rue "evel *asy 1+. .ecause o& the di&&erences in the makeup o& their ma:or loan types' &inance companies typically have shorter term loans than banks. Answer !rue "evel #edium 1/. 0ales &inance institutions speciali4e in loan sales to banks and thri&ts. Answer ,alse "evel #edium ultiple Choice

16. ;hich o& the &ollowing trends in the number and 5. !raditionally' most credit union members had a industry assets o& savings institutions is<are correct= common employer' but increasingly the re6uired 3. !he number o& savings institutions has &allen over commonality is a common location o& either residence time or workplace. 33. !he number o& savings institutions has increased over time Answer !rue 333. !otal industry assets &ell a&ter the savings "evel *asy institutions crisis o& the 198)s but had risen by $))5 3>. !otal industry assets are &alling over time 8. A downward sloping yield curve is likely to improve >. !otal industry assets are stable but the number o& the 73# o& a savings association. savings institutions has &allen A? 33 and 333 only Answer ,alse .? 3 and 333 only "evel #edium 8? 3 and 3> only @? 33 and 3> only 9. 0avings institution deposits and bank deposits are *? > only

Answer . "evel #edium 15. !he Q!" test re6uires that thri&ts A? "imit the amount o& mortgage related assets on the balance sheet to improve diversi&ication .? 3nvest in a minimum percentage o& government backed securities to protect their mortgage loans 8? "end no more than 8)1 o& the value o& a home to a borrower to ensure mortgage sa&ety @? Aeep (/1 o& their assets in sa&e li6uid investments to ensure ade6uate deposit li6uidity *? 3nvest at least 6/1 o& their assets in mortgages or mortgage related assets Answer * "evel #edium 18. ;hich one o& the &ollowing has the highest concentration o& mortgage related assets on the balance sheet= A? 0avings institutions .? 8ommercial banks 8? 8redit unions @? ,inance companies *? Pension &unds

$$. -istorically' most savings institutions were established as A? #utual organi4ations .? 0tockholder organi4ations 8? Partnerships @? 8haritable organi4ations *? .anks Answer A "evel *asy $(. @eposits at savings banks are backed by the BBBBB and deposits at savings institutions are backed by the BBBBB. A? .3,' .3, .? .3,' 0A3, 8? 0A3,' .3, @? 0A3,' 0A3, *? @3,' @3, Answer * "evel #edium

$+. BBBBBBBBB are the most diversi&ied o& depository institutions and BBBBBBBBBBB are on average the largest depository institutions. A? .anks C savings institutions Answer A .? 8redit unions C banks "evel *asy 8? 8redit unions C credit unions @? .anks C banks 19. A&ter 1989 savings institutions have primarily been *? 0avings institutions C banks regulated by A? ,ederal -ome "oan .ank .oard Answer @ .? ,ederal @eposit 3nsurance 8orporation "evel #edium 8? %&&ice o& !hri&t 0upervision @? 7ational 8redit 9nion Administration $/. !hroughout the 199)s to the present' assets o& credit unions have BBBBBBBBB and the number o& credit Answer 8 unions has BBBBBBBBBB. "evel *asy A? increased C increased .? decreased C decreased $). 3n $))5 the largest 9.0. savings institution was 8? increased C decreased A? ;ashington #utual @? decreased C increased .? 0overeign .ancorp *? increased C stayed the same 8? 7avy ,ederal @? -udson 8ity .ancorp Answer 8 *? -0.8 ,inancial "evel #edium Answer A "evel *asy $6. 8redit unions are 3. #utual associations 33. 7ot open to the general public 333. ,or pro&it institutions A? 3 only .? 33 only 8? 3 and 33 only @? 3' 33 and 333 *? 33 and 333 only

$1. !he predominant liabilities &or savings institutions are A? 8ommercial deposits and ,-". borrowings .? ;holesale money market notes and reserves at the ,ed 8? 0mall time and savings deposits and ,-". borrowings @? 8hecking accounts and money market mutual &unds Answer 8 "evel *asy Answer 8 "evel #edium $5. !he 9.0. central credit union and the corporate

credit union A? Are the primary regulators o& the credit union industry .? Pool &unds and provide investment services to local credit unions 8? 0erve as the trade organi4ation &or the industry @? 8harter credit unions *? Provide deposit insurance &or credit unions Answer . "evel #edium $8. 8redit unions have several advantages over banks. !hese include 3. 8redit unions are not ta2ed 33. 8redit unions are better diversi&ied than banks 333. 8redit unions can collectively pool &unds 3>. @ue to regulations credit unions have better economies o& scale and scope than banks >. .ecause o& their ties to employers credit unions have better personnel e2pertise than banks A? 3 and 33 only .? 3 and 333 only 8? 333 and 3> only @? 333' 3> and > only *? 3' 333 and > only Answer . "evel @i&&icult $9. As a percentage o& total assets' credit unions invest BBBBBBB in securities than banks and BBBBBB in consumer loans than banks. A? #ore C more .? "ess C less 8? #ore C less @? "ess C more *? "ess C about the same Answer A "evel #edium (). 03 pro&itability declined in the mid $)))s due to 3. !he yield curve becoming more positively sloped 33. 3ncreases in de&ault rates on mortgage loans 333. 3ncreases in the 73# ratio 3>. !he yield curve becoming &latter and even inverted A? 3 and 33 only .? 33 and 333 only 8? 33 and 3> only @? 333 and 3> only *? 3 and 333 only Answer 8 "evel #edium (1. Rank the &ollowing &rom greatest to smallest in terms o& industry asset si4e in $))+ 3. .anks 33. 0avings institutions 333. 8redit 9nions 3>. ,inance companies

A? .? 8? @? *?

3>' 3' 33' 333 3' 3>' 33' 333 3' 33' 3>' 333 3' 33' 333' 3> 33' 3>' 333' 3

Answer . "evel @i&&icult ($. 3n $))5 BBBBBBBBBBBBBBB had on average the greatest amount o& e6uity as a percentage o& assets and BBBBBBBBBBBBBB had the lowest. A? savings institutionsC credit unions .? banksC credit unions 8? credit unionsC &inance companies @? &inance companiesC credit unions *? &inance companiesC banks Answer A "evel @i&&icult ((. 3n $))5' industry average R%A was highest &or which one o& the &ollowing industries= A? .anks .? 0avings banks 8? 8redit unions @? 0avings associations Answer 8 "evel @i&&icult (+. A payday lender makes a loan to a customer. !he customer is given D18) today and she must repay D$)) in two weeks to the lender. ;hat rate must be 6uoted to the customer= A? 1).))1 .? 11.111 8? $88.891 @? $6).$$1 *? (9).))1 Answer 8 "evel @i&&icult (/. ,actoring is A? *6uipment leasing .? 0ervicing mortgage &actors 8? Purchasing corporate accounts receivables at a discount @? ,inancing automobile purchases *? #aking installment loans to customers Answer 8 "evel #edium (6. 0ales &inance companies A? 0peciali4e in making loans to customers o& a speci&ic retailer or manu&acturer .? 0peciali4e in making installments and other loans to whatever consumers are interested 8? 0peciali4e in providing loans to businesses @? 0peciali4e in international &actoring and &or&aiting

*? 7one o& the above Answer A "evel *asy (5. A &inance company that makes loans to high risk customers is called a A? 0ubprime lender .? 8ommercial bank 8? ,actor @? ;arehouse lender *? 0upraprime lender Answer A "evel *asy (8. ,inance companies en:oy several advantages over banks. !hese include all but which one o& the &ollowing= A? ,inance companies can o&&er various types o& products and services without regulatory inter&erence. .? #any &inance companies have considerable knowledge and e2pertise about speci&ic industries and products. 8? ,inance companies can accept riskier customers than banks. @? ,inance companies generally have lower overhead than banks. *? ,inance companies have lower &unds costs than banks. Answer * "evel #edium (9. A captive &inance company is one that A? 3s owned by a retailer or manu&acturer .? 3s owned by a bank holding company 8? 3s owned by its depositors @? "ends only to high risk individuals that cannot obtain loans elsewhere Ei.e. captives? *? 3s regulated at the ,ederal level Answer A "evel *asy +). A loan agreement between ,ord #otor 8redit and a local ,ord dealer is an e2ample o& A? ,loor planning .? .usiness e6uipment loan 8? ,actoring o& receivables @? @epreciation loan *? 7one o& the above Answer A "evel #edium +1. -ome e6uity loans are popular with &inance companies. ;hich one o& the &ollowing statements about home e6uity loans is not correct= A? !hese loans allow customer to borrow on a line o& credit secured with a second mortgage .? 3nterest payments on home e6uity loans are not ta2

deductible 8? .ad debt e2pense on home e6uity loans are lower than on many other types o& &inance company loans @? !he average outstanding balance on home e6uity loans was D8/'+5$ in $))5. *? 3& the borrower de&aults on the home e6uity loan the &inance company can sei4e the house Answer . "evel #edium +$. ,or the &inance company industry as a whole the largest single loan type is A? .usiness loans .? 8onsumer loans 8? Real *state loans @? -igh risk consumer loans *? 8redit card loans Answer A "evel #edium +(. Aggregate &inance company pro&itability was poor in $))5 primarily due to which segment o& the &inance company industry= A? .usiness &actoring .? *6uipment loans 8? *6uipment leasing @? 0ecuriti4ation o& auto loans *? 0ubprime lending Answer * "evel *asy ++. ;hich one o& the &ollowing utili4es the least amount o& deposits as a source o& &unds= A? .anks .? 8redit unions 8? ,inance companies @? 0avings associations *? 0avings banks Answer 8 "evel *asy +/. ,inance companies obtain a signi&icant portion o& their short term &inancing &rom A? !ime and savings deposits .? !ransaction accounts 8? "ong term bonds @? 3ssuing commercial paper *? *6uity Answer @ "evel *asy +6. ;hich one o& the &ollowing institutions is the least regulated= A? .anks .? 8redit unions 8? ,inance companies @? 0avings associations *? 0avings banks

Answer 8 "evel *asy Short !ns"er

to the 03Fs R%A and 73#= -ow would your answer change i& the 03 normally sells the mortgages every 6 months and originates additional new mortgage loans=

Answer !he original gross pro&it margin was /.5/1 H (./1 I $.$/1' a&ter si2 months the pro&it margin on +5. *2plain why low interest rates and strong mortgage these loans &alls to /.5/1 H +.$/1 I 1./)1. !his will markets helps keep pro&itability high at savings reduce the 03Fs R%A and 73#' ceteris paribus. 3& the institutions. 03 is selling the mortgages every si2 months however' the new mortgage rates may be su&&iciently higher to Answer "ow interest rates have helped savings o&&set the rising deposit interest rates' thus preserving institutions E03s? maintain pro&itability because many the pro&it margin and R%A and R%*. thri&ts &und long term mortgages with short term "evel #edium deposits. "ow interest rates have encouraged mortgage re&inancing and new home buying' both activities allow /). ;hat are the ma:or advantages that credit unions thri&ts to earn origination and servicing &ees and to en:oy over banks= pro&it on the spread between interest earned on the Answer mortgages and costs paid on deposits. .ecause 03s Advantages o& credit unions concentrate in mortgages the health o& the housing J 8redit unions are not ta2ed because o& their nonH industry will strongly a&&ect their pro&itability. .ecause pro&it status. !he 89 should be able to o&&er either many mortgages are sold the de&ault risk may not lie lower loan rates or pay higher deposit rates because o& with the originating 03' but de&aults will result in tighter the ta2 advantage. origination standards and less &ees &or the originating J8redit unions are allowed to pool &unds with each institution. -igher de&ault rates will a&&ect the other and invest their &unds collectively in money and mortgage port&olio that 03s keep and can result in capital markets through the corporate central and 9.0. impaired capital and poor pro&itability. central credit unions. 8redit unions may obtain loans "evel #edium &rom these entities and receive management advice. J !he &ollowing three are not in the te2t +8. 3n dollars' how many subprime mortgages were J *mployer based credit unions may re6uire loan originated in relation to the total mortgage market in payments to be directly deposited to the credit union' $))6= -ow has the subprime crisis a&&ected the reducing processing and collection costs. pro&itability o& &inance companies= Are all &inance J 8redit unions o&ten receive donated services and companies e6ually a&&ected= *2plain. donated &acilities that help keep their costs down. J 8redit union regulators are not as adversarial as bank Answer 3n $))6 there were about D6)) billion o& regulators. !hey act to promote as well as regulate the subprime mortgages originated' about $)1 o& the industry. mortgage market. "ower home prices and at least "evel @i&&icult slightly higher interest rates led to increasing de&ault on mortgages in $))/ through at least $))8. !he /1. ;hat are the ma:or disadvantages that credit percentage o& subprime mortgages on which payments unions &ace versus banks= were at least 6) days past due :umped &rom 61 to 1+1 Answer in $))6' cutting originations o& subprime mortgages by @isadvantages o& credit unions ()1 in $))5. 0tock prices and pro&its o& mortgage J8redit unions are underdiversi&ied due to the common lenders with e2tensive subprime involvement were bond re6uirement. An employer based credit union sharply negatively impacted' including the nationFs could e2perience simultaneous loan de&aults and largest mortgage lender' 8ountry ,inancial' but also deposit withdrawals due to employer de&ault layo&&s or other lenders such as -0.8' ;ashington #utual' strikes. ,remont General and 7ew 8entury ,inancial. %ther J 8redit unions are much smaller than the average &inance companies that were &ocused on business bank. 8redit unions may have to operate well below lending &ared better. ;ith the weaker economy the si4e that would generate optimal economies o& scale brought about by the subprime mess some o& the and scope. captive &inance companies' particularly G#A8' J 8redit unions lack the skills necessary to o&&er other su&&ered pro&it declines as well. &inancial services such as insurance' brokerage' etc. "evel @i&&icult J 8redit unions lack e2pertise to evaluate business loans and o&&er many o& the services larger banks can +9. A savings institution E03? has &unded D1$ million o& o&&er. () year &i2ed rate mortgages with an average interest J 7ot in te2t 8redit unions have di&&iculty attracting rate o& /.5/1. !hese assets are &unded with time 6uality personnel to serve as managers. %&ten the deposits with an average maturity o& si2 months. !he board o& directors and<or senior personnel serve on a deposits are currently paying (./1. 3n si2 months time voluntary basis. however' the ,ed has raised interest rates twice and the "evel @i&&icult depositors now must be paid +.$/1. ;hat will happen

/$. -ow do the primary risks o& credit unions di&&er &rom banks= ,rom savings institutions E03s?= ,rom &inance companies= Answer 8redit unions &ace credit risk on consumer loans' but banks have credit risk on consumer and business loans and many o&& balance sheet activities. .usiness loan evaluation is more comple2' and banks are generally involved in riskier loans than either credit unions or 03s Ewith the possible e2ception o& 03 involvement in commercial real estate?. !he lack o& diversi&ication o& a credit union adds to their risk also. .ank deposits' particularly large deposits and business accounts' are likely to be more sensitive to interest rates than credit union deposits. 8redit union customers e2hibit more loyalty than typical bank and 03 customers. 8redit unions hold more li6uid assets E1? than banks or 03s' and they can a&&ord to do so because o& the lack o& a pro&it motive. 03 loans are usually well collaterali4ed but longer term than their liabilities' generating interest rate risk. 8redit unions do not normally have a large imbalance between the maturity o& their assets and liabilities. 8redit unions &ace regulatory risk because o& the recent lawsuits by banks attempting to limit the growth o& credit unions. 0ome &inance companies lend to higher risk consumersC some are much more e2tensively involved in business loans than credit unions. ,inance companies are larger so they may provide services more cost e&&ectively than the small credit unions. ,inally &inance companies cannot take deposits so they are denied the steady' low cost source o& &unds that credit unions en:oy. "evel @i&&icult /(. !he American .ankers Association and others are seeking to limit growth o& credit unions. ;hat is the basis &or the bankersK concern= ;hat does the credit union industry argue= ;hat kind o& limits on credit unions are the bankers seeking=

threat to banks because their Lcommon bondL is very broad' namely to live and<or work in a given community. "evel @i&&icult /+. ;hy are some industry analysts skeptical about the ability o& the savings industry to survive in the &uture= Answer #any analysts are skeptical about the ability o& the industry to compete with the much larger banking industry because o& the economies o& scale and scope engendered by technology. !he banking industry is better placed to take advantage o& these economies and banks already have the relationships built with corporate customers. #oreover' we have not yet seen a period o& both high interest rates and a prolonged period o& weak mortgage markets. 3& the upcoming years bring both the viability o& the savings industry could again come into 6uestion because o& the lack o& diversi&ication. !he proposal &rom !reasury 0ecretary -enry Paulson includes eliminating the thri&t charter and re6uiring those institutions to become banks. "evel @i&&icult //. ;hy have larger credit unions e2perienced greater pro&itability than smaller credit unions= @o you e2pect this to continue= ;hy or why not= Answer "arger credit unions have been more pro&itable because they have a larger customer base over which they can spread their &i2ed costs and they tend to be better diversi&ied and thus are more able to weather tougher economic times. "arger credit unions are likely to continue to be more pro&itable due to economies o& scale and scope and the advent o& technology Ea ma:or &i2ed cost investment? in the &inancial services industry. "evel #edium

/6. ;hat are home e6uity loans= ;hat has happened Answer !he bankers are arguing that credit unions can to the average balance o& home e6uity loans in recent un&airly compete with banks &or consumer loans and years= ;hy do &inance companies pre&er home e6uity deposits because credit unions are not ta2ed. !he loans to unsecured debt= banking industry estimates the ta2 advantage to be worth about D1 billion per year. !he credit union Answer -ome e6uity loans are loans which pledge the industry claims that the advantage to members is e6uity value o& the home as collateral. !he average between D$)) and D/)) per member per year. ;ith balance on these loan types has increased dramatically over 9) million members' this works out to be 6uite a &rom about D$6'))) in 1999 to over D8/'5+$ in $))5. bit larger than the cost o& the ta2 advantage. !he ,inance companies pre&er home e6uity loans to common bond re6uirement is designed to limit unsecured credit because the collateral reduces the need competition among credit unions Eeach other? and &or an e2tensive credit check and provides the lender between banks and credit unions. -istorically' credit with better collateral in the event o& de&ault. union members were sponsored primarily by an "evel @i&&icult employer' and most people could not participate in a credit union. !he weakening o& the common bond /5. ;hat are the advantages o& a &inance company or a re6uirement and the growth o& credit unions have bank leasing e6uipment to a small business customer brought this industry into more direct competition with rather than &inancing the customerFs purchase o& the banks &or consumer banking services. .anks are e6uipment= seeking to limit growth o& credit unions by limiting credit unionsK ability to accept new members and to Answer limit the number o& community based credit unions. J 3t is easier &or the bank or &inance company to 8ommunity based credit unions represent the greatest repossess the e6uipment in the event o& de&ault with a

lease because they retain title to it. J "ease agreements are easier to sell to companies because many do not have re6uired down payments. J .y retaining ownership' the bank or &inance company gets a ta2 deduction &or depreciation o& the e6uipment leased. 3n some cases the small business will not be able to use the &ull amount o& the depreciation ta2 shield due to insu&&icient income' whereas the bank or &inance company can. "evel #edium

Provide some e2amples to back up your answer. Answer 7onHbank &inancial lending has gained as a percentage o& total lending in many &oreign countries including low income mortgage lending in #e2ico' credit card lending in !hailand and leasing and &actoring in *astern *urope. 3n "atin America &rom 199+ to $))5 the percent o& aggregate &inancing provided by nonHbank ,3s grew &rom $$1 to ((1. "evel @i&&icult

61. ;hy have postal savings institutions &lourished in /8. -ow do sales &inance companies di&&er &rom many &oreign countries= ;hat uni6ue advantages do personal credit and business credit institutions= "ist an they have and what services do many o&&er= e2ample o& each. Answer Postal savings institutions have an advantage in reaching large numbers o& small savers who have to Answer 0ales &inance companies' such as G#A8 or come to the post o&&ice &or mailing needs. !hey do not G*88' speciali4e in making loans to customers o& a have to build or ac6uire buildings as a regular bank speci&ic retailer or manu&acturerC personal credit would. #any have partnerships or are wholly institutions speciali4e in loans to consumers' usually to supported by the host government. 0ome o&&er riskier customers. An e2ample o& the latter is -0.8 traditional checking and savings accounts and many ,inance. .usiness credit institutions such as -eller also o&&er stock investments' insurance product and ,inancial provide &inancing to corporations via leasing telephone and online services. and &actoring. "evel #edium "evel #edium /9. ;hat are the advantages &inance companies E,8s? have over banks in the area o& business lending= ;hat disadvantages do they have= Answer ,inance company advantages include J.anks have e2tensive product regulations and ,8s do not. J3n many cases ,8s have e2tensive in&ormation about company products and the industry because o& their ties to manu&acturers. J,8s can lend to riskier customers than banks and i& they are good at credit analysis can earn a higher rate o& return on these customers. J,8s have lower overhead than banks' because they do not seek retail sources o& &unds that re6uire substantial investments in brick and mortar Ebranches?. .ank advantages include J#any banks are larger and have more e2pertise in providing a wider range o& &inancial services. !hese two &actors imply that banks can e2ploit economies o& scale and scope and may have higher pro&itability than &inance companies E,8s?. J.anks obtain a ma:or portion o& their &unds Edeposits? at a subsidi4ed cost because o& ,ederal deposit insurance. !his lowers their &unds cost and allows them to carry less e6uity on the balance sheet' potentially improving the shareholders return on e6uity. J8onsumer &inance companies have the reputation &or providing high risk loans and tend to attract those types o& customers. 0ubprime and consumer ,8s are sensitive to the economy because their customerFs &inances are o&ten hurt by economic downturns as occurred in late $))5 and $))8. "evel @i&&icult 6). -as the importance o& &oreign nonHbank &inancial lending been increasing or decreasing in recent years=