Independent state and federal disclosure laws are creating compliance problems for dealers and lenders.
Unique commercial financing disclosure laws have been enacted across nine states with eight more states working on similar laws, and Section 1071 of the Dodd-Frank Act is likely to remain in place.
Dealers and lenders are facing a “compliance nightmare,” Mehul Madia, special counsel at Sheppard Mullin Richter and Hampton’s Washington office, said at Equipment Finance Connect 2024 on May 7.
Section 1071 of the Dodd-Frank Act requires certain financial institutions to collect and report small business lending applicant business and demographic information to the Consumer Financial Protection Bureau (CFPB). The equipment finance industry, including trade associations such as the Equipment Leasing and Finance Association and the National Equipment Finance Association, have advocated against the legislation since the CFPB proposed the rule in September 2021.
“The reality is each state has different laws, and that’s what makes this very challenging, as most of these exempt individual transactions over half a million [dollars], with New York at $2.5 million, but there are differences in what the various states do,” Madia said. “The reality is, it’s still even more complicated than that because they’ve got different costs for each state.
“There’s a pattern of state laws leading to a compliance nightmare.” — Mehul Madia, special counsel, Sheppard Mullin Richter and Hampton
However, some similarities exist across the states, Madia said.
“For example, California, Florida, Georgia, New York cover loans and factoring, while Virginia and Connecticut just cover merchant cash advances,” he said.
Changing compliance landscape
Keeping up with changes in disclosure laws alone presents compliance challenges for lenders and dealers and may require the creation or expansion of compliance departments, such as the new compliance department at Equify Financial, Equify Chief Executive Patrick Hoiby said during a May 6 panel at Equipment Finance Connect 2024.
“What you’re going to see nationwide is all the states are going to move to disclosure, and we’re trying to stay ahead of it,” he said. “It is a big issue and I had to create a six-person compliance department just to keep up with the regulations, especially in California.”
Increased regulations, whether through disclosure laws or Section 1071 of the Dodd-Frank Act, create a hurdle for equipment dealers and lenders to overcome, John Boy, finance and sales administration manager at Anderson Equipment, said during another May 6 panel at Equipment Finance Connect 2024.
“Part of the hurdle in the industry in general is we’re moving toward more and more regulations,” he said. “There’s a lot of industry-specific things with banking and lending. They’re driving that need to have a better open dialogue with our companies that we are working with.”
As a result, dealers are also placing increased importance on compliance, Beckham Thomas, founder and chief executive of commercial equipment finance software provider TRNSACT, said during a May 6 panel at Equipment Finance Connect 2024.
“Commercial equipment dealers now care more about compliance than they used to,” — Beckham Thomas, founder and CEO, TRNSACT.
Dealers are emphasizing the FTC safeguards, identity theft protection, know-your-business, know-your-customer and money laundering requirements to ensure compliance, he added.
Cost of doing business
With information that must be disclosed varying across the states, managing disclosure compliance for operations that cross jurisdictions is just part of the process unless standardization is adopted, Madia said.
“Unfortunately, right now, it’s the cost of doing business,” he said. “There’s a hope that it gets to standardized forms or standardized ways to do it but, for right now, it’s almost like a bespoke disclosure for each state.”
The lack of standardization at the state and federal levels creates compliance problems for both dealers and lenders, Madia said.
“As a lender in these states, you’re going to have very different requirements,” he said. “As a dealer in these kinds of states, you’re going to be required to provide different types of information.”
Federal government compliance concerns
While commercial financing disclosure laws primarily exist at the state level, the federal government began to address the issue in 2021.
“The federal government in 2021 had some legislation proposed in the Small Business Lending Disclosure Act, but that hasn’t gone anywhere,” Madia said.
While a federal commercial financing disclosure requirement could solve some of the standardization problems, new concerns could develop as a result.
Meanwhile, the CFPB’s Section 1071 rule was limited by an October 2023 nationwide injunction, that ended with the Supreme Court’s decision in CFPB v. Community Financial Services Association of America.
On May 16, the Supreme Court ruled 7-2 that the CFPB’s funding mechanism is constitutional.
“An appropriation is simply a law that authorizes expenditures from a specified source of public money for designated purposes,” Justice Clarence Thomas wrote in the majority opinion. “The statute that provides the bureau’s funding meets these requirements.”
Digital-age compliance
With the number of commercial financing disclosure laws growing, compliance challenges for dealers and lenders are at an all-time high. As a result, legacy approaches to compliance and security no longer work, Thomas said.
“Within the digital age, it’s no longer sufficient to hope that the salesperson who took a photo of a credit application or the PDF on mobile devices is secure,” he said. “It needs to be a part of the holistic security program.”
Ensuring regulatory compliance is top of mind as dealers and lenders face increased scrutiny, Thomas said.
“Our approach has been to enable dealers to not only efficiently drive customer and salesperson experience, but receive a credit application or sensitive personal identifiable information and store them securely,” he said.
“We then run an automated set compliance test utilizing third-party tools, like Experian, Equifax and others, to ensure that the dealer is able to check the box in terms of compliance regulations.”
AI represents a key component of possible compliance solutions for lenders, David Costa, chief technology officer of Kubota Credit, said during the May 6 panel.
AI can play a role “with respect to compliance evaluation and coaching at the end goals,” he said. “That’s something that would deliver a great deal of value for us and make the idea of a compliance audit a little bit less terrifying.”
Customer experience
While compliance, efficiency and security remain vital for data and information management, dealers, lenders and service providers must remember that customer experience plays a significant role in the viability of any technology, Eric Pettigrew, director of financial services at truck and trailer group Doggett Freightliner, said during the panel.
It is critical to implement technology “with a look at the customer experience and then, from there, is safety, compliance and efficiencies,” he said. Digital innovation must improve customer experience and “make sure that it’s secure, compliant and efficient.”
Ultimately, TRNSACT’s Thomas said, while compliance is key to running and improving a successful business, customers drive the viability of equipment dealers and lenders, so they must find the solutions that work for customers.
Advancing technologies will allow dealers and lenders to improve their business efficiency, customer experience and financial performance, Thomas said. “If that’s being done with software and technology that enables more customer-facing time — when and how the customer wants it — everyone is winning.”
