Miscellaneous Business Credit Institutions

SIC 6159

Industry report:

This industry covers establishments primarily engaged in furnishing intermediate or long-term general and industrial credit, including the finance leasing of automobiles, trucks, and machinery and equipment. Also included in this industry are private establishments primarily engaged in extending agricultural credit. Federal and federally sponsored credit agencies primarily engaged in extending agricultural credit are classified in SIC 6111: Federal and Federally Sponsored Credit Agencies. Establishments primarily engaged in other types of leasing of passenger cars and trucks are classified in various automotive rental and leasing industries.

Background and Development

Modern business is frequently conducted on a credit basis. The need for credit developed as market economies became more complex and included many players: manufacturers, suppliers, distributors, and retailers. Credit facilitates smooth operations.

The decision to extend credit depends on three factors: character, capacity, and capital. Each factor introduces risk to the transaction. The risk of lending on character is called moral risk. Business risk involves lending on capacity. The risk of lending on capital is called property risk. An ideal business borrower will have a minimum combination of each.

Lenders are often not in a position to evaluate a business against these criteria. To verify a credit applicant's creditworthiness, a lender may contact either general or special mercantile agencies to find needed information. General agencies, such as Dun & Bradstreet, collect information on a range of business enterprises nationwide, while special agencies limit their coverage to one or a few business areas and may operate either nationally or locally.

General agencies furnish two types of reports. General reports are leased by subscribers on a quarterly basis and contain capital ratings, which are based on financial statements, and credit ratings, which denote the grade of credit. Special reports are limited to specific businesses or companies and are provided under contract. These reports are more extensive than the general reports and contain background as well as general information. Credit reporting agencies collect their information from several sources, including direct investigations, trade creditor and banking connections, and public and insurance records.

Business transactions, including credit transactions, are regulated by the Uniform Commercial Code (UCC) The UCC is a collection of modernized, codified, and standardized laws that apply to all commercial transactions, except real property. The code is binding in most U.S. jurisdictions and has standardized most commercial law.

Automobile Finance Leasing.
As automobile purchases require significant capital investment, most new car purchases are made with the help of automobile financing, typically made by banks and finance companies. Under a lease arrangement, the financier keeps the automobile's title. The customer usually makes monthly payments and has an option to buy the vehicle at the end of the lease period.

Banks also offer floor plan financing to support dealers' leasing programs. Floor plan financing, or trust receipt financing, is a form of inventory financing under which the bank holds title to the automobile inventory. The dealer is loaned money to buy the inventory from suppliers and holds the inventory in trust for the bank. As the borrower sells inventory to consumers, he pays the bank. The dealer keeps the mark-up of the retail price over the payments due the bank. When the sale is made on a credit basis, the dealer often sells the obligation to the bank.

GMAC Inc. had also been an industry giant in this sector in the early years of the twenty-first century. In 2001 it held $1 trillion in loans for 150 million vehicles around the world. However, it ran into trouble during the financial crisis of the late 2000s, and in 2008 the U.S. Treasury invested $5 billion of bail-out funds in the company, followed by an additional $7.5 billion in 2009, effectively making GMAC a government entity. In 2008 the firm became a bank holding company and in 2010 was renamed Ally Financial Inc.

Agricultural Credit Institutions.
There are two types of agricultural credit institutions: federal and commercial. Federal institutions include the Farm Credit System, the Farm Services Agency, and the Rural Utilities Service.

These federal institutions were created to provide credit opportunities to underserved communities in which financial services otherwise were neither available nor affordable. The federal government has also created organizations to encourage activities that are in the national interest. Most of these services are targeted at rural and agricultural communities. For example, the federal government is deeply involved in the financial structure of the agricultural industry because of the former's interest in protecting the nation's ability to produce food. In many communities, sparse populations and an unstable agricultural business creates a nonprofitable environment for private firms to provide credit.

These organizations, while government sponsored, are typically more private than public. The board and chief executive officer are typically appointed by the U.S. president and the institution's operations are nominally overseen by a cabinet-level secretary; however, the day-to-day operations of the organization are left to the staff. Furthermore, these agencies operate under the assumption that they are accountable for their continued financial well-being.

Many commercial organizations provide agricultural credit with the support of federal institutions. Commercial lenders may extend credit to an agricultural endeavor that is secured or guaranteed by the federal agency involved. The type of financing may be short-, medium- or long-term, depending on the terms of the agency's support and the needs of the borrower.

Farm Mortgage Companies.
Farm mortgage companies provide credit for farm and home purchases. These mortgages may be private or backed by government institutions such as the Farm Services Agency (FSA), which helps farmers get mortgages for homes or personal farms.

The FSA operates primarily in rural areas. Offices, located in county-seat towns, accept applications for loans that are designed to provide enough income to raise families' living standards to allow them to make payments on their debts. The applications are reviewed and approved by a local committee that is composed of three people, at least two of whom must be farmers. The money for the loans and grants made by the administration come from appropriations from Congress and private lenders who make loans guaranteed by the agency.

The agency, a division of the U.S. Department of Agriculture (USDA), operates under the Consolidated Farmers Home Administration Act of 1961, Title V of the Housing Act of 1949, and Part III, Title A of the Economic Opportunity Act of 1964. It was originally established under the Farmers Home Administration Act of 1946. The modern FSA developed out of the former Farmers Home Administration in 1995 when the USDA restructured its organization and the FSA was created to take over the former agency's farm lending functions. The FSA provides approximately 4 percent of agricultural loans.

Finance Leasing of Equipment and Vehicles.
The acquisition of equipment and vehicles represents a significant capital investment. Therefore, most equipment and vehicle purchases are made with the help of some type of financing, often leasing. Lease financing is typically made by banks and finance companies. Under a lease arrangement, the financier retains the title to the equipment. The customer typically makes monthly payments and has an option to buy the equipment at the end of the lease period.

Farm Credit System
The Farm Credit System (FCS) was created as twelve Federal Intermediate Credit Banks (FICBs) by Title II of the Federal Farm Loan Act of 1923. These banks were created to discount or buy short- and intermediate-term notes of agricultural business from commercial banks, savings and loans, and other financial institutions.

The FICBs work closely with Production Credit Associations (PCAs). PCAs are primary lenders that provide rural communities with short- and medium-term credit for a variety of needs. The loans they offer vary in maturity length from a few months to seven years. The PCAs often work in conjunction with commercial banks to provide these services to their rural customers. As primary lenders, the PCAs sustain all losses to the extent of available resources. The PCAs adopt mutual loss sharing, participating loan plans, or both, to spread their risk. The borrowers of the individual PCAs elect that institution's directors.

The FICBs loan money to farmers, ranchers, producers and harvesters of aquatic products, operators providing farm services, and rural residents. They make loans to and discount commercial paper for local financial institutions. The FICBs also helps the PCAs in making sound credit available in rural areas. The FICBs issue stock and sell participation certificates to raise capital. The majority of their loans are made for production purposes and mature within one year. Farm and rural home loans, however, are on extended terms of up to 10 years. Loans to producers and harvesters of aquatic products are for up to 15 years.

The Farm Credit Act of 1987 provided added flexibility to the system and allowed the consolidation of FICBs and PCAs, which became known as Farm Credit Services. As of 2010, the Farm Credit System consisted of five Farm Credit Banks, which extend loans and services to approximately 90 agricultural credit associations and cooperatives. The Farm Credit System provides approximately $160 billion in loans to agricultural and rural enterprises, meeting the funding needs of more than 30 percent of the U.S. agricultural industry.

Small Business Investment Companies.
Investment companies are typically involved in three activities: investing, reinvesting, or trading securities; issuing face amount certificates of the installment type; and holding investment securities having a market value exceeding 40 percent of the issuer's total assets.

In the United States, investment companies are a relatively new phenomenon. They did not become commonplace until after 1923 and grew quickly through the 1960s, leading to increased regulation. Investment companies are regulated by the Securities and Exchange Commission (SEC). In general, there are five areas of regulation: registration, adequacy of capital, conservatism of capital structure, investment policies, and management practices and procedures. The SEC periodically inspects investment companies to ensure compliance with their regulations.

The U.S. Small Business Administration (SBA) also operates the Small Business Investment Company program, a public-private partnership created in 1958 to make venture capital available to small business for start-up or growth-related expenses. According to the SBA, the federal government is the country's largest single investor in U.S. private equity funds.

Livestock Loan Companies.
Livestock loan companies are sanctioned by the Federal Reserve Act as companies organized for lending credit to cattlemen and ranchers for the purchase, raising, and marketing of cattle and other livestock. They may be either independent institutions or affiliated with local banks. As affiliates, livestock loan companies are exempted from the restrictions outlined in Section 23-A of the Federal Reserve Act.

There are several steps in making a livestock loan: the borrower provides a sworn statement of his/her financial condition, the cattle are inspected, a search of public records to determine the status of any liens is completed, a chattel mortgage is executed, usually at 25 percent above the amount of the loan, and the note is executed.

Livestock loan companies relieve commercial banks of the burden of carrying cattle paper, which often amounts to several million dollars. These companies frequently act as intermediaries between borrowers and money center banks. They may also be involved in rediscounting some classes of cattle paper for purchase by the Federal Reserve Banks.

Machinery and Equipment Finance Leasing.
Since machinery and equipment represent a significant expenditure of cash, most businesses finance these purchases. Leasing is one type of financing arrangement. As with automobile leasing, the financier keeps the title to the equipment, while the customer typically makes monthly or quarterly payments and has an option to buy the equipment at the end of the lease period.

Current Conditions

The entire U.S. financial services industry was undergoing major restructuring in the early 2010s. As a response to the financial meltdown of the late 2000s, aided in part by the subprime mortgage crisis, in which record numbers of foreclosures were filed and hundreds of banks and other financial companies went under, the U.S. government passed such legislation as the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010, which called for sweeping reform of the financial services sector, and the Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (SAFE Act), among others. The full effects of such legislation on business credit and other sectors of the industry were as yet to be realized as the nation headed into the later years of the 2010s.

Industry Leaders

According to the Mortgage Bankers Association (MBA), Wells Fargo & Co. was the largest commercial and multifamily loan servicer in 2010. The company had doubled its size when it purchased Wachovia Corp. in 2008. According to the MBA, Wells Fargo held 40,292 loans worth $462.8 billion as of mid-2010. Revenues for 2009 were about $98.6 billion with 281,000 employees. Second was PNC Real Estate/Midland Loan Services, which held 36,593 loans worth $307.8 billion, followed by Berkadia Commercial Mortgage LLC with 27,360 loans worth $202.5 billion; Bank of America Merrill Lynch with 11,441 loans worth $133.3 billion; and KeyBank Real Estate Capital with 11,247 loans worth $124.7 billion. Rounding out the top 10 were GEMSA Loan Services L.P., Prudential Asset Resources, Deutsche Bank, NorthMarq Capital, and TriMont Real Estate Advisors, Inc.

Workforce

Each of the organizations covered in this industry classification are small or medium-sized companies employing between one and 25,000 employees as loan officers, secretaries, financial analysts, managerial staff, and clerks, to name a few. These organizations are spread throughout the country. Some of these organizations are government related and subsequently have employees concentrated in the greater Washington, D.C., area. Similarly, since many of the organizations serve rural constituencies, a significant portion of the industry's workforce lives in communities of fewer than 50,000 inhabitants.

According to figures from Dun & Bradstreet, the miscellaneous business credit industry employed 60,352 people in 2010. A majority of these firms were small, with almost 80 percent employed fewer than 10 people. However, large firms employing more than 100 people accounted for more than 95 percent of all revenues.

© COPYRIGHT 2018 The Gale Group, Inc. This material is published under license from the publisher through the Gale Group, Farmington Hills, Michigan. All inquiries regarding rights should be directed to the Gale Group. For permission to reuse this article, contact the Copyright Clearance Center.

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