Academic journal article
By Dynan, Karen E.; Johnson, Kathleen W.; Slowinski, Samuel M.; Grothe, Greg D.; Leddon, Hank
Federal Reserve Bulletin , Vol. 88, No. 1
Finance companies are important providers of credit to households and businesses. For households, they originate loans and leases to finance the purchase of consumer goods such as automobiles, furniture, and household appliances; they also extend personal cash loans and loans secured by junior liens on real estate, such as home equity loans. For businesses, they supply short- and intermediate-term credit (including leases) for such purposes as the purchase of equipment and motor vehicles and the financing of inventories. (1)
With roughly $1 trillion in financial assets as of mid-2000, the finance company sector occupies an intermediate position among the sectors that typically lend to households and businesses: In terms of assets, it is more than twice as large as the credit union sector, about the same size as the thrift sector, but only about one-fifth as large as the commercial banking sector. The approximately 1,000 companies that make up the sector (down from about 1,200 in 1996) range in size from very small to very large and include the "captive" subsidiary finance companies of motor vehicle manufacturers. The companies tend to be diversified, with more than 90 percent of the sector's assets as of mid-2000 held by companies that did not concentrate in any one type of receivable. The larger firms are more likely to be diversified; of the small firms that specialize, most focus on short- and intermediate-term business receivables. The sector is quite concentrated, and has been for some time, with the twenty largest companies accounting for more than two-thirds of total receivables (see box "Industry Concentration").
The Federal Reserve System has surveyed the assets and liabilities of finance companies at roughly five-year intervals since 1955. The surveys provide benchmarks for the System's monthly report on the outstanding accounts receivable of finance companies and provide a comprehensive update on these companies' sources of funds. This information in turn becomes an important input to the estimates of total consumer credit and the U.S. flow of funds accounts produced at the Federal Reserve Board. Summarized in this article are the results of the most recent survey, which collected finance company balance sheet information as of June 30, 2000. (Details on sampling procedures are given in appendix A, and complete balance sheet data are provided in table B.1.)
FINANCE COMPANY RECEIVABLES
The total value of receivables owned or securitized by finance companies increased nearly 50 percent between 1996 and 2000, or approximately 11 percent a year on average (table 1). (2) The gain occurred against a backdrop of brisk economic expansion, with nominal gross domestic product increasing at an average annual rate of about 6 percent over the period. Business lending remained the largest major line of activity, accounting for just under half of all receivables. There was apparently some shift between the other two major lines of activity, however. The share of total receivables accounted for by consumer lending and leasing declined 2 percentage points (to 39 percent); that decline was matched by a comparable rise in the share accounted for by real estate loans (to 17 percent). With most real estate receivables at finance companies being home equity loans, this shift may indicate that households have been substituting lower-cost, collateralized home equity loans for high-cost, uncollateralized consumer loans as a source of credit.
Finance companies sometimes securitize their loans by pooling them and selling them to a bankruptcy-remote entity, which then sells securities backed by the revenue stream generated by the loans. (3) A securitized loan is removed from the finance company's balance sheet, although the company typically continues to collect the service payment and would bear the cost of a default. (4) After rising rapidly in the early 1990s, when securitization was a relatively new practice, the proportion of finance company loans that was securitized increased only moderately in the late 1990s, from 16 percent in 1996 to 18 percent in 2000. …