Risk Management Manual of Examination Policies - FDIC

LOANS Section 3.2
Floor plan (wholesale) lending is a form of retail goods
inventory financing in which each loan advance is made
against a specific piece of collateral. As each piece of
collateral is sold by the dealer, the loan advance against
that piece of collateral is repaid. Items commonly subject
to floor plan debt are automobiles, home appliances,
furniture, television and stereophonic equipment, boats,
mobile homes and other types of merchandise usually sold
under a sales finance contract. Drafting agreements are a
relatively common approach utilized in conjunction with
floor plan financing. Under this arrangement, the bank
establishes a line of credit for the borrower and authorizes
the good’s manufacturer to draw drafts on the bank in
payment for goods shipped. The bank agrees to honor
these drafts, assuming proper documentation (such as
invoices, manufacturer's statement of origin, etc.) is
provided. The method facilitates inventory purchases by,
in effect, guaranteeing payment to the manufacturer for
merchandise supplied. Floor plan loans involve all the
basic risks inherent in any form of inventory financing.
However, because of the banker's inability to exercise full
control over the floored items, the exposure to loss may be
greater than in other similar types of financing. Most
dealers have minimal capital bases relative to debt. As a
result, close and frequent review of the dealer's financial
information is necessary. As with all inventory financing,
collateral value is of prime importance. Control requires
the bank to determine the collateral value at the time the
loan is placed on the books, frequently inspect the
collateral to determine its condition, and impose a
curtailment requirement sufficient to keep collateral value
in line with loan balances.
Handling procedures for floor plan lines will vary greatly
depending on bank size and location, dealer size and the
type of merchandise being financed. In many cases, the
term "trust receipt" is used to describe the debt instrument
existing between the bank and the dealer. Trust receipts
may result from drafting agreements between a bank and a
manufacturer for the benefit of a dealer. In other instances,
the dealer may order inventory, bring titles or invoices to
the bank, and then obtain a loan secured or to be secured
by the inventory. Some banks may use master debt
instruments, and others may use a trust receipt or note for
each piece of inventory. The method of perfecting a
security interest also varies from state to state. The
important point is that a bank enacts realistic handling
policies and ensures that its collateral position is properly
protected.
Examination procedures and examiner considerations for
reviewing floor plan lending activities are included in the
ED Modules in the Loan References section.
Check Credit and Credit Card Loans
Check credit is defined as the granting of unsecured
revolving lines of credit to individuals or businesses.
Check credit services are provided by the overdraft system,
cash reserve system, and special draft system. The most
common is the overdraft system. In that method, a transfer
is made from a preestablished line of credit to a customer's
demand deposit account when a check which would cause
an overdraft position is presented. Transfers normally are
made in stated increments, up to the maximum line of
credit approved by the bank, and the customer is notified
that the funds have been transferred. In a cash reserve
system, customers must request that the bank transfer funds
from their preestablished line of credit to their demand
deposit account before negotiating a check against them.
A special draft system involves the customer negotiating a
special check drawn directly against a preestablished line
of credit. In that method, demand deposit accounts are not
affected. In all three systems, the bank periodically
provides its check credit customers with a statement of
account activity. Required minimum payments are
computed as a fraction of the balance of the account on the
cycle date and may be made by automatic charges to a
demand deposit account.
Most bank credit card plans are similar. The bank solicits
retail merchants, service organizations and others who
agree to accept a credit card in lieu of cash for sales or
services rendered. The parties also agree to a discount
percentage of each sales draft and a maximum dollar
amount per transaction. Amounts exceeding that limit
require prior approval by the bank. Merchants also may be
assessed a fee for imprinters or promotional materials. The
merchant deposits the bank credit card sales draft at the
bank and receives immediate credit for the discounted
amount. The bank assumes the credit risk and charges the
nonrecourse sales draft to the individual customer's credit
card account. Monthly statements are rendered by the
bank to the customer who may elect to remit the entire
amount, generally without service charge, or pay in
monthly installments, with an additional percentage
charged on the outstanding balance each month. A
cardholder also may obtain cash advances from the bank or
dispensing machines. Those advances accrue interest from
the transaction date. A bank may be involved in a credit
card plan in three ways:
• Agent Bank, which receives credit card applications
from customers and sales drafts from merchants and
forwards such documents to banks described below,
and is accountable for such documents during the
process of receiving and forwarding.
Loans (12-04) 3.2-24 DSC Risk Management Manual of Examination Policies
Federal Deposit Insurance Corporation