Equipment finance brokers are facing increasing scrutiny as bad brokers attract regulators’ attention, but regulations can benefit good brokers.
Equipment finance brokers play a key role in connecting customers with lenders, but because anyone can become a broker, it creates a Wild West environment, Jesse Carlson, executive vice president and general counsel of independent financier Kapitus, said Sept. 23 during the B2B Finance Expo in Las Vegas.
Bad brokers garner negative attention in the mostly unregulated environment, he added.
“The worst actors, or the people who are least compliant, tend to draw the attention of the regulatory authorities, and that attention may not be limited to the one bad actor there,” Carlson said. Regulators “are looking at what is going on in the market and who is complaining in order to determine what they’re going to do.”
Brokers operating within guidelines
But brokers operating within the compliance guidelines can benefit, Carlson said.
“It is a barrier to entry from others, and it is a distinguishing factor for a broker who is able to work with someone who can show that they’re doing things the right way, and have an interest in not only avoiding penalties, but looking at the benefits and doing the right thing,” he said.
“As there is more regulation, providers and lenders are going to be more selective about who they do business with, so [conscientous brokers] are able to expand the number of companies you can do business with, and you can show that you have an understanding and respect for the regulations that come with being a provider of financial services,” Carlson said.
Legislation such as the FTC Act, the Equal Credit Opportunity Act, the Fair Credit Reporting Act, and Section 1071 of the Dodd-Frank Act, as well as state disclosure laws, pressure the financial institutions and brokers, Carlson said.
Equipment brokers’ role in equipment finance
Brokers remain a key component of the industry, with the American Association of Commercial Finance Brokers (AACFB), the primary industry association, estimating that its members represent $12 billion in transactions annually. According to the Equipment Leasing and Finance Association, $1.16 trillion of capital goods and software investments are financed through loans, leases and other financial instruments, meaning about 1% of transactions run through AACFB members.
Wheatland, Wyo.-based equipment financier C.H. Brown markets almost all its finance offerings to more than 500 brokers and gets deals from 120 brokers a year on average, Kit West, business development director, told Equipment Finance News.
Another equipment financier, Austin, Texas-based 360 Equipment Finance, originates 100% of its subprime transactions through brokers, according to the company’s website.
As commercial finance becomes more regulated, banks and non-banks are going to focus on broker partners, Carlson said.
“One thing as a broker is that regulators tend to make the larger, more visible and easier-to-find providers responsible for the actions of the companies they do business with,” he said. “Regulatory authorities make the banks responsible for the behavior of their vendors, and so as you see more regulation in the commercial finance space, you’re going to see non-bank providers start to look at controlling the people they do business with and [have] higher standards for the people they do business with.”
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