IN DECEMBER, ELFA responded to the Consumer Financial Protection Bureau’s (CFPB) proposals regarding Section 1071 of Dodd-Frank. The CFPB had issued these proposals in coordination with their panel meetings required by the Small Business Regulatory Enforcement Fairness Act of 1996 (SBREFA). This represents the most detailed look that the public has had at the approach that the CFPB is utilizing with regard to Section 1071 since it was passed a decade ago.
Of note, the proposals would exempt true leases, but cover most other small business finance transactions by commercial finance companies. There are some exemptions in the proposals, but for the most part, these will only exempt the smallest finance companies. If the proposals were to be enacted in anything approximating the SBREFA proposals it would be a watershed moment in the commercial finance space, especially for non-bank commercial finance companies.
ELFA’s comments took a three-step approach. First, we attempted to gain meaningful exemptions, then, if exemptions couldn’t be utilized, we advocated for simple rules (e.g., a bright-line revenue test to define small business) and, lastly, we pushed for an indemnification of finance companies from having to verify demographic information provided by their customers such as the ethnicity of a business’s owners.
The following provides a little more detail with regard to ELFA’s comments, the full version of which can be found in the federal advocacy section of the ELFA website. ELFA indicated the Association’s belief that:
Of note, the proposals would exempt true leases, but cover most other small business finance transactions by commercial finance companies. There are some exemptions in the proposals, but for the most part, these will only exempt the smallest finance companies. If the proposals were to be enacted in anything approximating the SBREFA proposals it would be a watershed moment in the commercial finance space, especially for non-bank commercial finance companies.
ELFA’s comments took a three-step approach. First, we attempted to gain meaningful exemptions, then, if exemptions couldn’t be utilized, we advocated for simple rules (e.g., a bright-line revenue test to define small business) and, lastly, we pushed for an indemnification of finance companies from having to verify demographic information provided by their customers such as the ethnicity of a business’s owners.
The following provides a little more detail with regard to ELFA’s comments, the full version of which can be found in the federal advocacy section of the ELFA website. ELFA indicated the Association’s belief that:
- The CFPB should adopt the two-step reporting process outlined in ELFA’s 2017 comments. ELFA believes this will not only produce the best information but it will also be the most efficient methodology for all participants, the government, obligors and obligees. If the CFPB does not adopt some variant of this reporting process, the CFPB should: o Develop an optional form—with input from industry—that financial institutions can use to collect customer data, with clarity that the customer is solely responsible for accuracy; and
- The CFPB should adopt a simple, revenue-based definition of small business. The CFPB proposal of a $1M ceiling for revenue is reasonable, although a significantly lower ceiling is supported by the existing administrative record and would capture a significant majority of small business lending.
- Asset specific financing should be exempt because it is drastically different than the cash loan and line of credit facilities that were the seminal focus of §1071.
- Financing to publicly traded companies and large loans (e.g., loans greater than $100,000 or if the aggregate exposure exceeds $250,000) to all businesses should be specifically exempted.
- Vendor finance and dealer transactions should be exempted because of the inherent difficulties associated with information collection by non-affiliated entities.
- The size-based exemption levels contemplated in the CFPB proposal need to be raised significantly to be meaningful.
- In the absence of much broader exemptions, staged implementation of Section 1071 is advisable.
- The CFPB should take great care in publishing any 1071 information due to the privacy and anti-competitive factors inherent in this data. Many borrowers want their finances kept confidential for a myriad of reasons and competition on a variety of factors is critical to efficiently providing credit to small businesses. If this information is made public, it will cause many borrowers to decline to provide the information, creating a skewed and unreliable database. It will also inevitably cause greater competition on headline rates, if the CFPB requires rate disclosure, at the expense of other factors in the financing such as servicing. This would also open the door to rate manipulation through down payment adjustments and the like.
o Clearly define “feasibility” in restricting access to customer information by loan officers and underwriters.
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EL&F magazine article
Federal Insight
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2021