New regulations under the Dodd-Frank Act require equipment lenders to gather data on borrower demographics, which could have far-reaching implications for equipment vendors’ workload and access to capital.
Section 1071 of the Dodd-Frank Act will require financial institutions that originate at least 2,500 small business loans per year in 2022 and 2023 to begin collecting consumer data, including demographic information, starting Oct. 1, 2024, according to the Consumer Financial Protection Bureau (CFPB), Financial institutions that originate between 500 and 2,500 covered transactions per year in 2022 and 2023 will need to begin collecting consumer data on Apr 1, 2025, while financial institutions that originate at least 100 covered transactions per year in 2022 and 2023 will need to begin collecting consumer data on Jan. 1, 2026. Any institutions that did not meet the covered transaction threshold for 2022 and 2023, but originate at least 100 transactions in 2024 and 2025, will begin collecting data in Jan. 1, 2026.
Many lenders are used to data collection regulations, especially if they participate in mortgage lending, because the Home Mortgage Disclosure Act is similar to Section 1071, RJ Grimshaw, president of Ann Arbor, Mich.-based UniFi Equipment Finance, told Equipment Finance News. Now their vendor partners will be required to collect data because they interact directly with customers.
“Dealers, as well as institutions, are going to have to start gathering data on everyone who buys, or looks to finance, a piece of equipment,” Grimshaw said.
Under the finalized version of section 1071, dealers will need to gather the census tract in which a women-owned, minority-owned, or small business loan applicant is located; the gross annual revenue in the last fiscal year of any women-owned, minority-owned, or small business loan applicant preceding the date of the application; and the race, sex and ethnicity of the principal owners of the business, according to the CFPB.
Friction for dealers, vendors
For dealers and vendors, the new rule may create friction with consumers, Grimshaw said.
“From the lender’s perspective, the government relies on us to be the police for them. However, now it’s getting to the dealer side, and that’s where you’re going to add a lot of friction,” he said. “These dealers — the guy who’s selling Volvo excavators — he doesn’t want to ask someone, ‘Hey, can you identify yourself?’ That’s just an awkward conversation on many fronts.”
Since vendors are likely to be the last entity in front of the customer, they are going to have to participate in data collection in some capacity, Moorari Shah, partner at Sheppard Mullin Richter & Hampton, said during the May 8 Equipment Leasing and Finance Association Legal Forum.
“The vendor is likely the person that’s actually in front of the customer to some degree, as opposed to financiers,” Shah said. “The extent to which that vendor is most likely to be able to collect the data and have the last interaction with the customer before the deal is signed, is also something that’s going to play into whether both parties have to report, or just one party.”
Small business compliance concerns
Beyond the difficulties of a conversation about identification with customers, compliance under Section 1071 represents additional work that could affect small businesses.
Lenders are “always being told different things that we have to do from a compliance perspective and things of that nature,” UniFi’s Grimshaw said. “For the dealers, it’s going to be added … work that I’m not sure how it will be received.”
Compliance regulations are one of the three major issues small businesses face, alongside access to capital and competition from larger companies, he said. “What we’re doing now is we’re adding compliance and we’re making it more difficult to access the capital, because some people might just access and say, ‘We’re not dealing with anyone under $5 million in revenue.’”