This Document Contains Chapters 18 to 19 Chapter 18 Consumer Loans, Credit Cards, and Real Estate Lending Fill in the Blank Questions 1. The purchase of a house or a multifamily dwelling such as a duplex, triplex or apartment building is usually financed through the use of a _________ loan. Answer: residential mortgage 2. A(n) _________ loan is a short- or medium-term loan repayable in two or more consecutive payments, usually monthly or quarterly. Answer: installment 3. Household borrowings tend to be __________. Consumers are more concerned about the size of the debt repayments than the interest rate charged. Answer: interest inelastic 4. The fact that a consumer feels a strong moral and ethical responsibility to repay a loan on time refers to the _________ of that individual. The loan officer must be assured that the borrower is serious about repaying the loan before they are willing to make a loan. Answer: character 5. When a borrower receives a loan at one lending institution to repay another it is called _________ Answer: pyramiding of debt 6. The _________ allows a bank to call a loan that is in default and seize any checking or savings deposits the customer may hold with the bank in order to recover its funds. Answer: right of offset 7. _________ is a method to evaluate a large volume of consumer loans quickly with minimum labor. This method is a statistical model which predicts whether the consumer will repay the loan or not. Answer: Credit scoring 8. A(n) _________ is where the customer can use the difference between some percentage of the appraised value of their home and the mortgage remaining to secure a loan. This loan can be used to fund a college education, pay for a vacation or pay for home improvements. Answer: home equity loan 9. The law that requires the full disclosure of credit terms and which promotes the informed use of credit is the __________. This law requires the bank to report the APR of the loan, the dollar amount of all finance charges and, where appropriate, all fees. Answer: Truth in Lending Act 10. The law that limits how far a creditor or credit collection agency can go in pressing a customer to pay a past due debt is the __________. It does not allow a debt collector to "harass" a debtor. Answer: Fair Debt Collection Practices Act 11. Short-term credit to finance the building of homes or other dwellings is called __________. Answer: construction loans 12. A(n) _________ is a credit-rating agency that keeps records of borrowers' loan payment histories. Answer: credit bureau 13. The _________ permits consumers to dispute billing errors with a merchant or credit card company and receive a prompt investigation into any billing errors. Answer: Fair Credit Billing Act 14. The _________ prevents redlining out certain neighborhoods and refusing to provide loans and other services in those areas. Answer: Community Reinvestment Act 15. _________ is the granting of loans to weaker borrowers and charging them excessive fees and interest rates, increasing their risk of default Answer: Predatory lending 16. The _________ is the internal rate of return that equates present value of the payments with the amount of the loan. It is the rate required to be reported under the Truth in Lending Act. Answer: annual percentage rate (APR) 17. The interest rate method which requires the interest on the loan to be paid in advance is called the _________ method. Answer: discount rate 18. The interest rate method that adds the interest owed to the principal is called the __________ method. Answer: add-on 19. A rule of thumb used to determine how much interest income a bank is allowed to accrue at any point in time from a consumer loan paid off in monthly installments is called the _____________. Answer: Rule of 78s 20. A(n) _________ is an agreement drawn up by the bank that gives the bank control of the property if the loan cannot be repaid as planned. Answer: chattel mortgage 21. The interest rate on most consumer loans is based on the cost of loanable funds to the bank plus nonfunding cost plus premiums for default and time to maturity and also includes the desired profit margin on the loan. This method of pricing loans is known as __________. Answer: cost plus pricing 22. _________ is a basic method for calculating the interest owed on a loan that adjusts for declining balances and the time remaining on the loan. Answer: Simple interest 23. A variable rate loan on a residential mortgage is called a(n) __________. Answer: adjustable rate mortgage or ARM 24. Many home mortgage agreements include _________ which is an additional charge up front. Generally, each of these corresponds to one percent of the face value of the amount borrowed. Answer: points 25. A popular prepaid card used like a credit card, especially in Europe, is the _________ card. Answer: smart 26. A popular credit scoring system developed and sold by Fair Issac Corporation is known as ____________. Answer: FICO 27. Traditional home equity loans are usually priced using ________-term interest rates while home equity lines of credit are priced using __________-term interest rates. Answer: longer, shorter 28. _________ are loans that families and individuals can draw upon for immediate cash needs that are repayable in one lump sum. These loans often cover the cost of a vacation, medical care, the purchase of a home appliance or home repairs. Answer: Noninstallment loans 29. Credit cards are the best example of a _________ that offer consumers convenience and flexibility. Consumers can access them whenever the need arises. Answer: revolving lines of credit (revolving credit loans) 30. _________ are plastic cards that can be used to pay for goods and services but where credit is not extended. They are a convenient way to make deposits into and withdrawals from an ATM. Answer: Debit cards 31. Consumer loans tend to be _________. They tend to rise in periods of economic expansion and tend to fall in periods of economic downturn. Answer: cyclically sensitive 32. In the case of a borrower without a credit record or a very poor track record, a _________ may be requested to support repayment. Technically if the borrower defaults on the payment, they are obligated to repay the loan. Answer: cosigner 33. A bank generally prefers the borrower report _________ rather than gross salary. Answer: net income (or take-home pay) 34. One of the three biggest credit bureaus includes _________. Answer: Experian (Equifax, Transunion) 35. The _________ prohibits lenders from asking certain questions of a customer, such as a customer’s age or race. Answer: Equal Credit Opportunity Act 36. The fastest rising financial crime against individuals today is _________. This is the deliberate attempt to take unauthorized use of someone else’s personal information in order to fraudulently obtain money, credit or other property. Answer: identity theft 37. The _________ Act provides consumers with the opportunity to order one free credit report annually from each of the three nationwide credit bureaus. Answer: Fair and Accurate Credit Transactions (FACT) 38. _________ is the granting of loans to borrowers with below-average credit records. These loans tend to go to borrowers with a record of delinquent payments, previously charged-off loans, bankruptcies or court judgments. Answer: Subprime lending 39. In real estate lending, the property must be _________. The value and condition of the property are determined by an independent party. These must conform to industry and government standards. Answer: appraised 40. One new type of mortgage where no principal payments are made is called a(n) _________. Answer: Interest-only mortgage True/False Questions 41. The dominant lender in the United States to households is the finance company with commercial banks ranked second as consumer lenders. Answer: False 42. Non-residential consumer loans include credit to finance the purchase of home appliances. Answer: True 43. Credit cards offer convenience to customers plus a revolving line of credit. Answer: True 44. Consumer loans appear to have virtually no sensitivity to the business cycle, staying relatively level through both recessions and expansions. Answer: False 45. Households tend to be interest-inelastic borrowers. Answer: True 46. Lenders in the consumer loan field prefer to measure a borrowing customer's income by the amount of take-home pay. Answer: True 47. The "right of offset" allows a bank to sell a customer's property to the highest bidder to repay a customer's loan if the loan is in default. Answer: False 48. "Pyramiding of debt" refers to borrowing from one lender to repay another lender. Answer: True 49. Credit-scoring systems tend to be valid over long periods of time (usually several years) and need not be periodically retested. Answer: False 50. The Truth-in-Lending Act of 1968 gave consumers access to the information from their credit files kept at local and regional credit bureaus. Answer: False 51. Small business owners with gross annual revenues of $1 million or less who apply for credit have the right to receive a written notice if their loan request is turned down by a bank. Answer: True 52. The symbol "SN" indicates that a bank has been judged to be an outstanding performer under the terms of the Community Reinvestment Act. Answer: False 53. Banks awarded top CRA marks usually get strong commitments from their boards of directors and senior management to promote community involvement. Answer: True 54. FNMA will buy home mortgages provided the borrower's monthly house payment does not exceed 35 percent of monthly gross income. Answer: False 55. Under FNMA rules for buying home mortgages FNMA will not usually purchase a borrower's mortgage if the borrower's credit report is more than 45 days old. Answer: False 56. An installment loan is a loan in which the customer repays the loan in two or more consecutive payments. These payments are often monthly or quarterly. Answer: True 57. The Equal Credit Opportunity Act authorizes individuals and families to review their credit file for accuracy and to demand an investigation and correction of any apparent inaccuracies. Answer: False 58. The burden of proof is on the bank to demonstrate that its credit scoring system successfully identifies quality loan applications at a statistically significant level. Answer: True 59. Real estate loans are smaller in size and shorter in maturity than most other types of bank loans. Answer: False 60. The Community Reinvestment Act is designed to prevent a lender from arbitrarily marking out certain neighborhoods as undesirable and refusing to lend to people who live in those neighborhoods. Answer: True 61. There is usually a positive relationship between the interest rate a consumer is asked to pay and the amount of deposits the consumer is willing to keep with the bank. Answer: False 62. Competition for consumer loans tends to drive the interest rates on these loans down closer to loan production costs. Answer: True 63. Shorter term cash loans to consumers are normally secured, but longer-term consumer loans are usually unsecured. Answer: False 64. An auto loan usually carries with it a chattel mortgage, giving the bank a claim against the property covered by the loan. Answer: True 65. Most consumer loans are priced off some base or cost rate. Answer: True 66. The APR is the internal rate of return on a loan that equates total payments with the amount of the loan. Answer: True 67. The quotation to customers of the APR on the loan they are requesting usually discourages consumers from shopping around according to recent research findings. Answer: False 68. Unlike the APR method for calculating consumer loan rates, the simple interest approach adjusts for the length of time a borrower actually has use of credit. Answer: False 69. Under the simple interest method the customer saves on interest as an installment loan approaches maturity. Answer: True 70. With the discount rate method interest is deducted first before the customer has use of the proceeds of a loan. Answer: True 71. The majority of installment and lump-sum payment loans to families and individuals are made with floating interest rates. Answer: False 72. Points on a home mortgage loan result in a lender earning a higher effective interest rate on the loan than just the loan rate quoted to the borrower. Answer: True 73. According to the table presented in the book personal loans tend to have lower rates than automobile loans. Answer: False 74. According to the table presented in the book credit card loans tend to have the highest interest rates of all consumer loans. Answer: True 75. According to the table presented in the book new car loans have a lower interest rate than used car loans. Answer: True 76. There are very little economies of scale (cost savings) in the credit card business. Answer: False 77. Currently the debit card market is almost as large as the credit card market. Answer: False 78. One of the elements used in the FICO credit scoring system is the borrower's employment history and salary. Answer: False 79. The most important factor used in the FICO credit score is the borrower's payment history. Answer: True 80. Home mortgage real estate loans soared to record levels at the beginning of the 21st century. Answer: True Multiple Choice Questions 81. Short-term to medium-term loans repayable in two or more consecutive payments are known as: A) Noninstallment loans B) Installment loans C) Residential mortgage loans D) Non-residential cash loans E) None of the above Answer: B 82. Loans to individuals and families to finance the purchase of new homes are known as: A) Noninstallment loans B) Installment loans C) Residential mortgage loans D) Non-residential cash loans E) None of the above Answer: C 83. Short-term loans drawn upon by individuals and families for immediate cash needs and repayable in a lump sum when the borrower's note matures are known as: A) Noninstallment loans B) Installment loans C) Residential mortgage loans D) Non-residential cash loans E) None of the above Answer: A 84. The federal law that requires banks to notify their credit customers in writing when a loan request is denied is known as the: A) Equal Credit Opportunity Act B) Competitive Equality in Banking Act C) Truth-in-Lending Act D) Community Reinvestment Act E) None of the above. Answer: A 85. Major laws and regulations which must be complied with in the mortgage lending area include which of the following? A) National Affordable Housing Act B) Community Reinvestment Act C) Financial Institution Reform Recovery and Enforcement Act D) All of the above E) B and C only Answer: D 86. Which of the following factors have proven most important in credit scoring models? A) Credit Bureau ratings B) Income bracket C) Number of loans the customer has had D) All of the above E) A and B only Answer: E 87. The requirement that banks must provide their consumer loan customers with a statement of the APR for the proposed loan was established by: A) The Fair Credit Reporting Act. B) The Equal Credit Opportunity Act. C) The Truth-in-Lending Act. D) The Community Reinvestment Act. E) None of the above Answer: C 88. Which of the following consumer loans has grown in popularity as a result of the passage of the Tax Reform Act of 1986? A) Credit card loans B) Home equity loans C) Long-term, noninstallment loans D) Short-term, installment loans E) All of the above Answer: B 89. A bank that is judged by examiners as needing to improve under the performance requirements of the Community Reinvestment Act will receive an examiner rating of: A) 0 B) S C) N D) SN E) None of the above Answer: C 90. In order to be eligible for purchase by FNMA a home mortgage cannot have a maturity of less than 10 years nor more than: A) 25 years B) 30 years C) 35 years D) 40 years E) None of the above Answer: B 91. FNMA will not purchase home mortgages in the secondary market if the borrower's monthly debt repayments (including housing costs) exceed _________ percent of the borrower's monthly gross income. The correct percentage figure to complete the sentence above is: A) 28 B) 30 C) 36 D) 40 E) None of the above Answer: C 92. How did the Tax Reform Act of 1986 increase the appeal of home equity loans? A) It allowed customers to borrow up to 100 percent of the value of their home B) It eliminated bank income taxes from this type of loan C) It protected homes under Chapter 13 bankruptcy D) It eliminated individuals' tax deduction for interest payments on other types of loans E) It required banks to lend on homes in the geographic area of their deposits Answer: D 93. The federal law that permits consumers to dispute billing errors with a merchant or credit card company and receive a prompt investigation of any billing disputes is the: A) Fair Credit Reporting Act B) Fair Credit Billing Act C) Fair Debt Collection Practices Act D) Truth in Lending Act E) None of the above Answer: B 94. The bank's real estate loan officer should consider which of the following aspects of the customer's loan application carefully when making a home mortgage? A) The amount and stability of the borrower's income B) The borrower's available savings and where the down payment is coming from C) The borrower's track record in caring for and managing property. D) The outlook for real estate sales in the local market area E) All of the above are things that need to be looked at carefully Answer: E 95. An abusive practice is which lenders grant loans to weak borrowers and charge them high fees and interest rates which may cause the borrower to default on the loan is known as: A) Installment loans B) Credit card loans C) Predatory lending D) Herbivore lending E) None of the above Answer: C 96. The law which was passed to reduce predatory lending is known as: A) Community Reinvestment Act B) Home Ownership and Equity Protection Act C) Equal Credit Opportunity Act D) Fair Debt Collection Practices Act E) None of the above Answer: B 97. Which of the following is true regarding credit card loans? A) There is evidence that considerable economies of scale exist B) Credit cards cannot act as installment loans C) Credit cards are very inconvenient for consumers D) Credit cards are very inflexible for consumers E) All of the above are true Answer: A 98. A loan officer asks a customer what race she belongs to. Which law prohibits the loan officer from asking that question? A) Truth in Lending Act B) Equal Credit Opportunity Act C) Community Reinvestment Act D) Fair Debt Collection Practices Act E) None of the above Answer: B 99. Which of the following is not part of the evaluation of an installment loan? A) The borrower's track record in caring for and maintaining property B) Evidence of stable employment C) Evidence of residence stability D) Evidence of income stability E) All of the above are part of the evaluation of an installment loan Answer: A 100. Which of the following is an advantage of a credit scoring model? A) Credit scoring models rely on the evaluation of an experienced credit officer B) Credit scoring models are immune from charges of discrimination C) Credit scoring models never make mistakes D) Credit scoring models can handle a large volume of applications in a short period of time E) All of the above are advantages of credit scoring models Answer: D 101. When interest owed on a loan is added to the principal amount of the loan to determine a borrowing customer's required installment payments, this is known as the _________ method for figuring a customer's loan rate. Fill in the blank with an appropriate response below. A) Simple interest B) APR C) Discount D) Add-on E) None of the above Answer: D 102. The symbols ARM in lending means: A) Automatic rate modulation B) Amortization rate method C) Adjustable rate mortgage D) Adaptable readjusted mortgage E) None of the above. Answer: C 103. The charge on a home mortgage loan that a borrower may be asked to pay up front is referred to as: A) Loan Interest Owed B) Points C) Loading D) Tax equity E) None of the above. Answer: B 104. Which of the following has the highest interest rate according to the book? A) New automobile loan B) Used automobile loan C) Personal loan D) Credit card loan E) All of these have the same interest rate Answer: D 105. Which of the following has the lowest interest rate according to the book? A) New automobile loan B) Used automobile loan C) Personal loan D) Credit card loan E) All of these have the same interest rate Answer: A 106. A customer seeks a $150,000 home mortgage. The bank requires the customer to pay 1 ¾ points up front. How much of the loan is actually available to the customer? A) $150,000 B) $152,625 C) $147,375 D) $148,000 E) None of the above Answer: C 107. A customer wants to borrow $1200 from Edmond State Bank. Edmond State Bank has an add-on loan with an interest rate of 12 percent and monthly payments for one year. What are the monthly payments this customer will need to make on this loan? A) $100 per month B) $112 per month C) $107 per month D) $88 per month E) None of the above Answer: B 108. A customer wants to borrower $25,000 for one year. TRC State Bank has a discount loan with an interest rate of 15 percent. How much of the loan will be available to the customer? A) $25,000 B) $28,750 C) $22,500 D) $21,250 E) None of the above Answer: D 109. A customer wants to borrow $125,000 to purchase a new home. The APR on this loan is 10 percent and it is a 30-year mortgage with monthly payments. What monthly payment will this customer face on this loan? A) $1097 B) $55 C) $12,500 D) $13,260 E) None of the above Answer: A 110. Mark Brown receives a $2000 loan with the intention of repaying the loan in 12 months. However, at the end of one month, Mr. Brown discovers he can repay the loan in full. What percentage of the interest charge is Mr. Brown entitled to receive as a rebate? A) 36.67 percent B) 50.00 percent C) 91.67 percent D) 63.33 percent E) None of the above Answer: D 111. Paul Carter requests an automobile loan of $15,000 that will be repaid over the next four years in monthly repayments. The First National Bank tells Mr. Carter that his total finance charges will be $4675.20. What is the APR on this loan? A) 16 percent B) 1 percent C) 14 percent D) 7 percent E) None of the above Answer: C 112. Jane Smith has asked for a 30 year mortgage to purchase a home in Oklahoma City, Oklahoma. The purchase price of the home is $150,000 of which $125,000 must be borrowed. If the APR on this loan is 8 percent, how much will Jane's total financing charges be? A) $246,233 B) $205,194 C) $180,194 D) $165,097 E) None of the above Answer: B 113. Beverly Frickerson asks for a $15,000 loan for one year. The bank tells her that they will give her $13,050 immediately and deduct $1950 in interest up front. What is the effective rate of interest on this loan? A) 14.94 percent B) 13.00 percent C) 19.50 percent D) 11.50 percent E) None of the above Answer: A 114. The largest credit card lender (as a group) in the U.S. are: A) Thrifts B) Insurance companies C) Finance companies D) Oil companies Answer: C 115. Prepaid cards which compete with credit cards and debit cards are: A) Smart cards B) Deposit cards C) Match cards D) All of the above E) None of the above Answer: A 116. The first major bank within the U.S. to establish a separate department for granting household loans was: A) First National City Bank of New York B) BankAmerica C) Bank One D) State Street Bank E) Bank of New York Answer: A 117. The fastest growing consumer loan category is: A) Credit card loans B) Auto loans C) Home mortgages D) Personal loans E) Education loans Answer: C 118. The very popular FICO credit scoring system provides credit scores in the range: A) 0 to 10 B) 0 to 1000 C) 100 to 1000 D) 300 to 850 E) 20 to 80 Answer: D 119. The most important factor used in the FICO credit scoring system is: A) The borrower's payment history B) The amount of money owed C) Marital status D) Employment history and salary E) Age Answer: A 120. Jeremiah Uselton needs a loan to purchase a condo in Sarasota, Florida. What type of loan does Jeremiah need? A) Residential mortgage loan B) Installment loan C) Noninstallment loan D) Revolving line of credit E) None of the above Answer: A 121. Tammy Payne wants to buy a used car and wants a loan that she will pay off over the next three years with monthly payments. What type of loan does Tammy want? A) Residential mortgage loan B) Installment loan C) Noninstallment loan D) Revolving line of credit E) None of the above Answer: B 122. Emily Barnes has gone to the First State Bank and gotten a loan of $5000 so she can go on vacation. She plans on paying the loan back in one payment in three months. What type of loan has Emily gotten? A) Residential mortgage loan B) Installment loan C) Noninstallment loan D) Revolving line of credit E) None of the above Answer: C 123. Bill Wells uses his Discover card to buy new furniture for his apartment. The interest rate on this card is 18% and the minimum payment that is due is $100. What type of loan has Bill gotten? A) Residential mortgage loan B) Installment loan C) Noninstallment loan D) Revolving line of credit E) None of the above Answer: D 124. Jerry McGuire uses his Visa card to buy a new washer and dryer and a new refrigerator for his home. He plans on paying off the credit card over the next two years. How is Jerry using his credit card? A) As an installment loan B) As a noninstallment loan C) As a lump sum payer D) As a debit card E) None of the above Answer: A 125. The most profitable credit card customers for a bank are those that: A) Use their credit card frequently B) Pay off any charges incurred within a few days C) Charge at least $10,000 per year D) Use their credit card as a source of installment loans E) None of the above Answer: D 126. Alexis Downs uses her credit card to buy furniture but pays off the credit card at the end of the month before she incurs any interest costs. How is Alexis using her credit card? A) As an installment loan B) As a noninstallment loan C) As a lump sum payer D) As a debit card E) None of the above Answer: B 127. Donna Carlon is using her plastic card to buy groceries. The money is taken from her checking account immediately to pay for her groceries. How is Donna using her card? A) As an installment loan B) As a noninstallment loan C) As a lump sum payer D) As a debit card E) None of the above Answer: D 128. A bank is considering making a loan to Alice Granger. The bank is looking at her credit report from Equifax and also examining the reason Alice has put on the loan application for needing the loan? What aspect of evaluating a consumer loan application is the bank looking at? A) Character and purpose B) Income level C) Deposit balance D) Employment and residential stability E) Pyramiding of debt Answer: A 129. A bank is considering making a loan to Ron Weasley. Ron has a gross salary per month of $4000 but has take-home pay of $2800 per month. What aspect of evaluating a consumer loan application is this fact most concerned with? A) Character and purpose B) Income level C) Deposit balance D) Employment and residential stability E) Pyramiding of debt Answer: B 130. A bank is considering making a loan to Sean Finnigan. Sean owns his own home and has lived there for the past four years. What aspect of evaluating a consumer loan application is this fact most concerned with? A) Character and purpose B) Income level C) Deposit balance D) Employment and residential stability E) Pyramiding of debt Answer: D 131. A bank is considering making a loan to Sam Snape. Mr. Snape has $1000 in the bank right now but generally keeps a balance of $4500 most of the year. What aspect of evaluating a consumer loan application is this fact concerned with? A) Character and purpose B) Income level C) Deposit balance D) Employment and residential stability E) Pyramiding of debt Answer: C 132. A bank is considering making a loan to Neville Langdon. Neville has bounced three checks in the last year and already has $10,000 on a credit card and an automobile loan with a large balance. What aspect of evaluating a consumer loan application is this fact concerned with? A) Character and purpose B) Income level C) Deposit balance D) Employment and residential stability E) Pyramiding of debt Answer: E 133. A bank is considering making a loan to John Carter. John is a commissioned sales broker. Some months he earns as much as $10,000 and in other months he earns virtually nothing. Which aspect of evaluating a consumer loan would this be concerned with? A) Character and purpose B) Income level C) Deposit balance D) Employment and residential stability E) Pyramiding of debt Answer: B 134. Which of the following is a challenge of making a consumer loan? A) Audited financial statements are provided by consumers quarterly B) Consumers must disclose publicly any changes in their health that would affect the loan C) Consumers can more easily hide pertinent information D) Consumers can more easily adjust to financial setbacks than can businesses E) All of the above are challenges of making a consumer loan Answer: C 135. Mark Green is considering buying a new Honda Accord. The purchase price of the car is $21,000 but Mark has a trade-in worth $4500. Mark needs a loan to buy the car and knows that his local bank requires him to put down 10% of the purchase price after the value of the trade-in is considered. Mark also knows that bank will charge 8% for the loan and require monthly payments over the next 4 years. What is the minimum down payment that Mark can make? A) $2,100 B) $450 C) $1,650 D) $2,550 E) None of the above Answer: C 136. Mark Green is considering buying a new Honda Accord. The purchase price of the car is $21,000 but Mark has a trade-in worth $4500. Mark needs a loan to buy the car and knows that his local bank requires him to put down 10% of the purchase price after the value of the trade-in is considered. Mark also knows that bank will charge 8% for the loan and require monthly payments over the next 4 years. If Mark makes the minimum down payment on the car, what is the amount of the loan that Mark will receive? A) $18,900 B) $14,850 C) $16,500 D) $14,400 E) None of the above Answer: B 137. Mark Green is considering buying a new Honda Accord. The purchase price of the car is $21,000 but Mark has a trade-in worth $4500. Mark needs a loan to buy the car and knows that his local bank requires him to put down 10% of the purchase price after the value of the trade-in is considered. Mark also knows that bank will charge 8% for the loan and require monthly payments over the next 4 years. What is the size of Mark’s monthly payments if he makes the minimum down payment on the car? A) $353.50 B) $301.67 C) $512.67 D) $402.81 E) None of the above Answer: A 138. Mark Green is considering buying a new Honda Accord. The purchase price of the car is $21,000 but Mark has a trade-in worth $4500. Mark needs a loan to buy the car and knows that his local bank requires him to put down 10% of the purchase price after the value of the trade-in is considered. Mark also knows that bank will charge 8% for the loan and require monthly payments over the next 4 years. Mark’s monthly payments are 353.50 per month. What is Mark’s total finance charge if he takes the full 4 years to pay off the loan? A) $468 B) $4,032 C) $4,500 D) $2,488 E) None of the above Answer: D 139. The Equal Credit Opportunity Act requires that: A) A bank make loans to all minority applicants B) A bank only make loans to white male applicants C) A bank give reasons in writing for denying the loan D) A bank deny loans if the borrower has only been employed for three months E) None of the above Answer: C 140. Credit reports provided by credit bureaus provide lenders: A) With personal identifying data B) With personal credit histories derived from data submitted by lenders C) With public information that may bear on a borrower’s honesty and stability D) With the volume of inquiries from lenders about the borrower E) All of the above Answer: E 141. Which regulation requires out-of-state-banks that acquire local banks to commit to continued lending in the area and not use the acquired banks simply as deposit gatherers? A) Equal Credit Opportunity Act B) National Bank Act C) Federal Lending Act D) Fair Credit Reporting Act E) Community Reinvestment Act Answer: E 142. A bank customer is granted credit for a $2,000 loan at 10% to be repaid in 12 equal installments. If the loan is a discount loan, what is the monthly payment? A) 200.00 B) $192.35 C) $184.20 D) $173.12 E) $166.67 Answer: E 143. A bank customer is granted credit for a $2,000 loan at 10% to be repaid in 12 equal installments. If the loan quoted has an add-on rate, what are the net proceeds of the loan? A) $2,200 B) $2,100 C) $2,000 D) $1.800 E) Cannot be determined Answer: C 144. A bank customer is granted credit for a $2,000 loan at 10% to be repaid in 12 equal installments. If the loan quoted has an add-on rate, what is the approximate annual percentage rate (APR) on the loan? A) 20% B) 18% C) 14% D) 12% E) 10% Answer: B 145. As part of the new regulations of the mortgage market, the Federal Reserve Board moved to tighten the rules on mortgage lending in 2008. All of the following would improve transparency of the market except for: A) Lenders must verify the borrower’s reported income B) Lenders cannot rely on a home’s current market value to judge a borrower’s creditworthiness C) Lenders must rely on a borrower’s stated income D) Lenders must disclose more about the actual terms of a home mortgage loan to a borrower E) All of the above are included in the new rules Answer: C Chapter 19 Acquisitions and Mergers in Financial-Services Management Fill in the Blank Questions 1. The _________ is the law that requires each merging bank to seek approval from its principal federal regulating agency before a merger can take place. Answer: Bank Merger Act 2. Under the terms of Bank Merger Act, the federal regulating agencies must give top priority to the _________ of the proposed merger. Answer: competitive effects 3. In the _________ method of acquiring a bank, the bank purchases all or a portion of another bank's assets. Answer: purchase of assets 4. In the _________ method of acquiring a bank, the bank assumes all of the assets and liabilities of the other bank which ceases to exist. Answer: purchase of stock 5. If the earning per share of the merged firm has declined then the shareholders have suffered a problem known as _________. Answer: dilution of earnings 6. The _________ tells how may shares of stock the shareholders of the acquired firm will receive from the acquiring firm. Answer: exchange ratio 7. The _________ is the amount over the current stock price shareholders of the acquired firm will receive from the acquiring bank in a merger. Answer: merger premium 8. The _________ is a measure of the market concentration of a given market area. The larger this number is the more concentrated the market. Answer: Herfindahl-Hirschman Index (HHI) 9. A large metropolitan or money center bank is often called a(n) __________. Answer: wholesale bank 10. A(n) _________ takeover is a merger which is resisted by the existing management and stockholders. Answer: hostile 11. If a bank can show that the merger has _________ it may be able to overcome anticompetitive problems of the merger. This is the impact the merger has upon the convenience and service needs of the community. Answer: public benefits 12. To most authorities, the recent upsurge in mergers reflects the expectation of the stockholders that the _________ will increase once the merger is completed. This allows the merged bank to maximize future earnings. Answer: profit potential 13. One reason banks pursue mergers is for __________. This allows the bank to reduce fluctuations in revenues and net income. Answer: risk reduction 14. One reason banks pursue mergers is for __________. This allows the bank to enter new markets and find new sources of revenue. Answer: market positioning benefits 15. When the existing ownership of the bank experiences a loss in their share of the company due to an increased number of shares going to new stockholders it is known as __________. Answer: dilution of ownership 16. "Intangible synergies" is a relatively new name for _____________. Answer: goodwill 17. One of the reasons for a merger is _________. This where the merger is encouraged by the FDIC as a way to conserve scarce federal deposit insurance resources. Answer: because of failing institutions 18. Many mergers arise from expected _________. This takes place particularly when the acquired firm has earnings losses that can be used offset taxable profits of the acquirer. Answer: tax benefits 19. A bank may increase future earnings by _________. The bank can achieve greater efficiency by consolidating operations and unnecessary duplication. Answer: improving operating efficiency 20. When a bank expands the number of service options it offers after acquiring another financial firm they have practiced _________. Answer: product line diversification 21. When a bank enters into a new market area as the result of a merger with another financial institution they have practiced __________. Answer: geographic diversification 22. When a national bank wants to acquire another bank they must apply to the for approval. Answer: Comptroller of the Currency 23. The degree of _________ in a market is measured by the proportion of assets controlled by the largest institutions serving that market. In banking this is measured but the Herfindahl-Hirschman Index. Answer: concentration 24. The executive body of the EU has emerged as a key arbiter if mergers involving European businesses and uses the doctrine of _________. Answer: collective dominance 25. When a merger takes place some banks have been asked to _________ themselves of some of their branches. Many of these are sold to third parties. Answer: divest True/False Questions 26. In recent years banking has ranked in the top five of all U.S. industries in the number of reported merger transactions. Answer: True 27. If a bank with a higher stock-price-to-earnings ratio acquires a bank with a lower price-earnings ratio, earnings per share of the combined organization will increase even if combined earnings fall after the merger. Answer: False 28. In recent years in the United States bank merger premiums have commonly ranged from 150 to 250 percent. Answer: True 29. According to the textbook the financial success of a bank merger depends heavily upon the comparative dollar amounts of earnings reported by the two banking organizations and their relative price-earnings ratios. Answer: True 30. A proposed merger between two or more banks must be ratified by the board of directors of each bank involved and by the management of each of the banks and then the merger can proceed once regulators' approval is received. Answer: False 31. Under the terms of the Bank Merger Act each federal agency must give top priority to the competitive effects of a proposed merger. Answer: True 32. Mergers with anticompetitive effects can only be approved at the federal level if one of the banks involved is failing. Answer: False 33. A market area served by one bank which is the only provider of financial services in that market would have an HHI of 100 percent. Answer: False 34. A market served by just two banks, equal to each other in size, would have an HHI of 5,000. Answer: True 35. According to a recent survey, many European bank mergers in the 1980s and 1990s were motivated by the search for cost savings (economies of scale). Answer: True 36. The acquisition of First City Bancorporation of Texas by Chemical Bank of New York was motivated by both banks seeking market-positioning benefits. Answer: False 37. The merger of Bank of America and Security Pacific in 1992 resulted in an expansion of branch offices at both banks. Answer: False 38. Under the purchase-of-stock method the acquired bank ceases to exist as a separate corporation. Answer: True 39. Bank executives identify the most important factor in choosing a merger target as the ability of the merged bank to better accommodate their corporate customers. Answer: False 40. One of the major motives behind the rapid growth of mergers in recent years is that stockholders expect the profit potential will increase once the merger is completed. Answer: True 41. Some merger partners anticipate reduced earnings risk as a result of the merger. One reason for this may be that the merger opens up new markets with different economic characteristics. Answer: True 42. If one of the banks is in financial difficulty a merger is not allowed to take place. Answer: False 43. The passage of the Garn-St. Germain Depository Institutions Act allowed bank holding companies to acquire failing banks and thrifts in other states. Answer: True 44. The most important goal of any merger should be to increase the market value of the surviving firm. Answer: True 45. Mergers with anticompetitive effects cannot go unchallenged by federal authorities unless the banks can show that the resultant bank would have significant public benefits. Answer: True 46. As a result of many bank mergers, research indicates that goodwill on many bank balance sheets has exploded in recent years. Answer: True 47. According to FASB, goodwill must now be amortized over its useful life. Answer: False 48. In order to get regulatory approval for a merger, many times banks have been required to open up a number of new branch offices. Answer: False 49. A 2002 study by the Federal Reserve indicates that there are economies of scale (cost savings) resulting from small mergers among banks and insurance companies. Answer: True 50. There is no evidence for cost savings resulting from large financial institution mergers. Answer: True 51. Recent research indicates that some merger activity may actually stimulate "de novo" bank entry into the marketplace. Answer: True 52. The 2007 credit crunch resulted in numerous banks experiencing financial distress for which mergers and acquisitions were often the only option. Answer: True 53. The agency problem described in the textbook is referred to the idea of bank managers driven primarily by their own interest to increase salaries and benefits at the expense of company stockholders. Answer: True 54. One of the most common motives for large banks to acquire smaller banks is to gain access to capable new management which is always in short supply at larger institutions. Answer: False 55. Bank regulators may challenge the merger between two institutions but can never require banks to divest themselves of some of their offices in order to secure regulators’ approval. Answer: False Multiple Choice Questions 56. According to the literature on bank mergers these mergers are often motivated by: A) Their profit potential B) Expected reduction in the risk of fluctuations in cash flow and earnings C) Expected tax benefits D) All of the above. E) None of the above. Answer: D 57. According to the research literature, the principal beneficiaries of most bank mergers appear to be: A) The stockholders of the bank acquired B) The stockholders of the acquiring bank C) The public (in the form of new services offered and lower service fees) D) The staff of the acquired bank E) None of the above. Answer: A 58. According to the research literature, the lackadaisical profit performance surrounding a merger may be explained by the following: A) Managerial hubris B) The sizeable merger premium that acquirers have to pay to shareholders of the acquired firms C) Accounting irregularities when reporting earnings of the combined entity D) All of the above E) A and B only Answer: E 59. The ratio of the acquired bank's current stock price per share plus the additional amount paid by the acquirer for each share of the acquired bank's stock divided by the acquired bank's current stock price is the: A) Price-earnings ratio B) Merger premium C) Exchange rate (of a merger transaction) D) Combined stock price of the merging banks E) None of the above. Answer: B 60. The danger faced by the stockholders of an acquiring firm in a merger if an excessive number of new shares are issued relative to the value of their old shares is known as: A) More volatile earnings B) Reduction of the exchange ratio C) Dilution of ownership D) Increased risk of bankruptcy E) None of the above Answer: C 61. The federal law that requires each U.S. merging bank to notify its principal federal regulatory agency and request approval before a merger can take place is the: A) Bank Merger Act B) Glass-Steagall Act C) Depository Institutions Deregulation and Monetary Control Act D) Garn-St Germain Depository Institutions Act E) Gramm-Leach-Bliley Act Answer: A 62. A merger may increase the bank's expected future earnings or reduce its level of risk exposure by: A) Improved operating efficiency. B) Improved earnings per share. C) Geographic or product diversification. D) All of the above. E) A and B, only. Answer: D 63. The Herfindahl-Hirschman Index is a measure of: A) Market concentration. B) Merger premium. C) Synergy gained from a merger. D) All of the above. E) None of the above. Answer: A 64. There are three banks in East Panhandle. First National Bank currently has 40 percent of the deposits, while Second State Bank currently has 30 percent, as does New State Bank and Trust. What is the Herfindahl-Hirschman Index for East Panhandle? A) 100. B) 1200. C) 3400. D) 2400. E) None of the above Answer: C 65. There are three banks in East Panhandle. First State Bank currently has 25 percent of the deposits, while Second State Bank currently has 40 percent. What is the Herfindahl-Hirschman Index for East Panhandle (compute the share of Third State Bank first)? A) 100. B) 2200. C) 3450. D) 3640. E) None of the above Answer: C 66. There are three banks in East Panhandle. First State Bank currently has 25 percent of the deposits, while Second State Bank currently has 40 percent. Compute the share of the Third State Bank in the market and use the Department of Justice Guidelines to identify this market as: A) Unconcentrated B) Mildly concentrated C) Moderately concentrated D) Concentrated E) Excessively concentrated Answer: D 67. There are three banks in East Panhandle. First State Bank currently has 25 percent of the deposits, while Second State Bank currently has 40 percent. Compute the share of the Third State Bank in the market. Suppose First State and Third State propose to merge in order to compete with Second State Bank. According to the Department of Justice Guidelines, would this merger be allowed? A) Yes B) Yes but with certain regulatory restrictions C) No D) Not enough information to make the determination E) None of the above Answer: C 68. First National Bank's stock is currently selling at $40 per share and the bank recently reported earnings per share of $4.50 for its 200,000 shares. Second National Bank has 150,000 shares outstanding, with a current market price of $30 per share. Second National just reported its earnings per share of $5. If First National acquires Second National in a stock purchase, with the two banks agreeing to exchange stock at the current market prices, and post-merger earnings are expected to be $1,800,000, what will the post-merger EPS be? A) $4.36 B) $5.76 C) $5.28 D) $5.14 E) None of the above Answer: B 69. Recent research on interstate bank mergers suggests that: A) Earnings increased B) Employee productivity improved C) Faster growth ensued D) All of the above. E) None of the above. Answer: D 70. Suppose Bank A's stock price is $75 and Bank B's stock price is $25. Bank A is planning on purchasing Bank B and plans on paying Bank B shareholders a bonus of $10 per share. What is the merger premium that Bank B shareholders will receive? A) 110 percent B) 46.6 percent C) 200 percent D) 140 percent E) None of the above Answer: D 71. Suppose Bank A's stock price is $75 and Bank B's stock price is $25. Bank A is planning on purchasing Bank B and plans on paying Bank B shareholders a bonus of $10 per share. If Bank B has 100,000 shares outstanding, how many shares of Bank A will the shareholders of Bank B receive? A) 100,000 shares B) 33,333 shares C) 46,667 shares D) 214,286 shares E) None of the above Answer: C 72. The most important goal of any merger should be to: A) Increase the market value of the surviving firm B) Reduce the risk of the surviving firm through geographic diversification C) Increase managerial compensation D) Increase the efficiency of the target firm E) None of the above Answer: A 73. Which of the following are reasons that bank mergers do not work? A) Ill-prepared management B) A mismatch of corporate cultures C) Excessive prices paid by the acquirer for the acquired bank D) A failure to take into account customers' feelings and concerns E) All of the above are reasons bank mergers do not work Answer: E 74. Andover Bank is thinking about purchasing Berkley Bank. The current market value of Andover's stock is $55 per share. The current market value of Berkley's stock is $15 per share and Andover is planning on paying Berkley's stockholders a $5 bonus per share. Currently, Andover has 100,000 shares outstanding and earnings per share of $12. Currently, Berkley has 50,000 shares outstanding and earnings per share of $5. What is the market premium that Andover is paying on Berkley's shares? A) 367 percent B) 275 percent C) 133 percent D) 100 percent E) None of the above Answer: C 75. Andover Bank is thinking about purchasing Berkley Bank. The current market value of Andover's stock is $55 per share. The current market value of Berkley's stock is $15 per share and Andover is planning on paying Berkley's stockholders a $5 bonus per share. Currently, Andover has 100,000 shares outstanding and earnings per share of $12. Currently, Berkley has 50,000 shares outstanding and earnings per share of $5. What is the exchange ratio for this transaction? A) 3:11 B) 4:3 C) 5:2 D) 4:11 E) None of the above Answer: D 76. Andover Bank is thinking about purchasing Berkley Bank. The current market value of Andover's stock is $55 per share. The current market value of Berkley's stock is $15 per share and Andover is planning on paying Berkley's stockholders a $5 bonus per share. Currently, Andover has 100,000 shares outstanding and earnings per share of $12. Currently, Berkley has 50,000 shares outstanding and earnings per share of $5. What should the total number of shares outstanding be in the new bank? A) 118,182 shares B) 150,000 shares C) 166,667 shares D) 200,000 shares E) None of the above Answer: A 77. Andover Bank is thinking about purchasing Berkley Bank. The current market value of Andover's stock is $55 per share. The current market value of Berkley's stock is $15 per share and Andover is planning on paying Berkley's stockholders a $5 bonus per share. Currently, Andover has 100,000 shares outstanding and earnings per share of $12. Currently, Berkley has 50,000 shares outstanding and earnings per share of $5. Suppose that the earnings of the new bank are $1,600,000 and the combined bank will have 118,182 shares outstanding. What will the earnings per share of the new bank be? A) $17.00 per share B) $13.54 per share C) $9.67 per share D) $12.27 per share E) None of the above Answer: B 78. Andover Bank is thinking about purchasing Berkley Bank. The current market value of Andover's stock is $55 per share. The current market value of Berkley's stock is $15 per share and Andover is planning on paying Berkley's stockholders a $5 bonus per share. Currently, Andover has 100,000 shares outstanding and earnings per share of $12. Currently, Berkley has 50,000 shares outstanding and earnings per share of $5. Suppose the earnings of the combined bank do not increase over the total earnings of the two banks before the merger. In addition assume that the new bank will have 118,182 shares outstanding. What will the earnings per share of the new bank be? A) $17.00 per share B) $13.54 per share C) $9.67 per share D) $12.27 per share E) None of the above Answer: D 79. Suppose there are four banks in a local community. Each of these banks has 25 percent of the deposits in this community. What is the Herfindahl-Hirschman Index (HHI) for this community? A) 10,000 B) 100 C) 2500 D) 625 E) None of the above Answer: C 80. Suppose there are four banks in a local community. Each of these banks has 25 percent of the deposits in this community. This market is: A) Unconcentrated B) Mildly concentrated C) Moderately concentrated D) Concentrated E) None of the above Answer: D 81. Suppose there are four banks in a local community. Each of these banks has 25 percent of the deposits in this community. Calculate the change in the Herfindahl-Hirschman Index (HHI) if two of these banks merge. A) 625 B) 1000 C) 1150 D) 1200 E) 1250 Answer: E 82. In the United States, most bank mergers have occurred in the following geographic region of the country: A) Southeastern U.S. B) Northeastern U.S. C) The West D) The Midwest E) Southwestern U.S. Answer: A 83. Research indicates economies of scale (cost savings) for financial institution mergers which are: A) Small B) Large C) Medium D) All sizes E) No economies of scale have been found Answer: A 84. Dorchester County has the following five banks in its market area. Bank Total Assets First National Bank, NA $1,500 million Dorchester County Bank $750 million First State Bank $500 million Summerfield Bank $250 million Charlestown Bank $250 million All Banks $3,250 million Using this information, what is the market share of the First National Bank? A) 100.00% B) 75.00% C) 46.15% D) 15.38% E) None of the above Answer: C 85. Dorchester County has the following five banks in its market area. Bank Total Assets First National Bank, NA $1,500 million Dorchester County Bank $750 million First State Bank $500 million Summerfield Bank $250 million Charlestown Bank $250 million All Banks $3,250 million Using this information, what is the Hirfindahl-Hirschman Index for this market area? A) 3017 B) 5000 C) 10,000 D) 3,187,000 E) None of the above Answer: A 86. Dorchester County has the following five banks in its market area. Bank Total Assets First National Bank, NA $1,500 million Dorchester County Bank $750 million First State Bank $500 million Summerfield Bank $250 million Charlestown Bank $250 million All Banks $3,250 million If the Summerfield and Charlestown banks merge, what would be the Hirfindahl-Hirschmann Index after the merger? A) 3017 B) 3136 C) 5000 D) 10,000 E) None of the above Answer: B 87. There are 10 banks in a particular market area all with a market share of 10%. What is the Hirfindahl-Hirschmann Index for this market area? A) 10,000 B) 5000 C) 1000 D) 0 E) None of the above Answer: C 88. There are 10 banks in a particular market area all with a market share of 10%. Two of the banks plan to merge. What would the Hirfindahl-Hirschmann Index be after the merger? A) 5000 B) 1200 C) 1000 D) 0 E) None of the above Answer: B 89. There are 10 banks in a particular market area, all with a market share of 10%. Two of the banks plan to merger and the Hirfindahl-Hirschmann Index moves from 1000 to 1200. Would the Justice Department likely bring suit against the merger? A) Yes B) No C) Only if the banks divest themselves of half of their branches D) Cannot be determined from the information given Answer: B 90. What caused there to be a wave of mergers in Europe? A) Passage of the Riegle-Neal Interstate Banking Act B) Passage of the Gramm-Leach-Bliley Act C) Passage of the Bank Merger Act D) Formation of the European Union E) A, B and C above Answer: D 91. The First State Bank of Wyoming wants to acquire the First State Bank of Oklahoma. The management of the bank feels that this geographic diversification will increase earnings as new markets will be exploited and new services are offered to all of their bank customers. Which motive for a merger does this most likely reflect? A) Profit Potential B) Risk Reduction C) Rescue of Failing Institution D) Tax and Market-Positioning E) Maximizing Management Welfare Answer: A 92. The First State Bank of Wyoming wants to acquire the Second National Bank of South Carolina. They want to do this because management feels that South Carolina faces very different economic conditions than does Wyoming and that this acquisition will reduce variability in earnings in the future. What motive for a merger does this most likely reflect? A) Profit Potential B) Risk Reduction C) Rescue of Failing Institution D) Tax and Market Positioning E) Maximizing Management Welfare Answer: B 93. The First National Bank of Edmond wants to acquire the First State Bank of Oklahoma City. Management believes that this merger will enhance their reputation in the labor market because the new firm will be twice as big as what they are managing now. In addition, the First National Bank of Edmond has promised to pay $10,000,000 in compensation to the top managers of the First State Bank of Oklahoma City and help them cover any resulting tax liability. What motive for a merger does this most likely reflect? A) Profit Potential B) Risk Reduction C) Rescue of Failing Institution D) Tax and Market Positioning E) Maximizing Management Welfare Answer: E 94. The First National Bank of Edmond had decided to purchase The First National Bank of Plano in Texas. The bank is interested in this purchase because The First National Bank of Plano is in financial distress and the First National Bank of Edmond thinks this is a cheap way to get a start in the large Texas market. The FDIC supports this acquisition because they won’t have to make any insurance payouts. What motive for a merger does this most likely reflect? A) Profit Potential B) Risk Reduction C) Rescue of Failing Institution D) Tax and Market Positioning E) Maximizing Management Welfare Answer: C 95. The State Bank of Stillwater has had record profits this year. They are interested in purchasing the National Bank of Durant because they have had losses this year. The State Bank of Stillwater feels that they can turn around the National Bank of Durant and in the meantime they can enjoy a reduced tax burden after this acquisition. What motive for a merger does this most likely reflect? A) Profit Potential B) Risk Reduction C) Rescue of Failing Institution D) Tax and Market Positioning E) Maximizing Management Welfare Answer: D Test Bank for Bank Management and Financial Services Peter S. Rose, Sylvia C. Hudgins 9780073382432, 9780078034671
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