2023 could be one of those years that we look back upon as the last year before everything changed—or not. It’s always risky to write a “What to Expect in the Year Ahead” article. Last year’s version of this article recommended that companies review how they would get ready for Section 1071 and invite their Members of Congress to visit their facilities. Show of hands for how many of you did both? That article also predicted a Republican takeover of the House and proved correct, but only by a slim margin.
So, what does 2023 hold for the equipment leasing and finance industry? First, and by far the biggest change, will be that the CFPB has agreed to a court-enforced March 31, 2023 deadline for issuing final rules under Section 1071 of Dodd-Frank. These rules, once in place, will dramatically change the credit process for equipment finance companies of all types by requiring the collection of demographic information about customers, and provision of transaction level details to the government regardless of whether the customer wants to opt out. These rules, if the proposed effective date timeline holds, would be effective 90 days after they are published, and will begin to be enforced 18 months after they are published. In other words, October 2024 deserves to have a big red circle around it on everyone’s calendar.
The coming year provides equipment finance companies the opportunity to get ready for this change, especially once the rule is published. Look for webinars and other educational opportunities to be coming out frequently from ELFA. Additionally, start working with your credit and legal teams to develop processes to give yourself the best chance for an efficient transition to this new environment. And lastly, talk to the service providers involved in your origination process to see how their systems will be changing to accommodate the new rules. (If you are one of those service providers, flip that sentence around!)
In the tax space, it’s too early to tell as of press time whether any tax provisions will be given an extension, but it’s looking likely that the tightening of the interest deductibility rules to an EBIT standard will remain in place, and that 100% expensing will become 80% expensing. On the latter of those, one could reasonably expect that if the change from 100% to 80% was relatively anti-climactic, the scheduled change to 60% a year from now might be just as uneventful. While the under-appreciated change to the depreciation rules has proven to be the expansion to used equipment, the ramping down of the expensing rules will have an impact on customers’ propensity to utilize cash versus finance or lease. These two provisions interact, with the lowering of the first year’s depreciation making losing the depreciation add-back on the interest limitation calculation a little less harsh. One could make the economic argument that both of these factors may incentivize operating leases, as long as the lessor has sufficient interest income to not get caught by the interest deductibility limitations.
Where the political meets the policy fronts there could be a lot of light and heat. The light will be generated by the burgeoning 2024 race for the White House and the Congress. The heat will be brought by the serious consequences of debt limit politics. The last time these games were played for real, the result was a downgrading of U.S. Treasuries. This year’s path has all the markings of a winding road ahead that may have a lot of bumps and hazardous conditions.
All these items have the potential to significantly change the landscape in which equipment finance companies operate. Each of them has the potential to fizzle out, but also to scale up, and if they go big, each could have tectonic effects on that landscape. Buckle up!
So, what does 2023 hold for the equipment leasing and finance industry? First, and by far the biggest change, will be that the CFPB has agreed to a court-enforced March 31, 2023 deadline for issuing final rules under Section 1071 of Dodd-Frank. These rules, once in place, will dramatically change the credit process for equipment finance companies of all types by requiring the collection of demographic information about customers, and provision of transaction level details to the government regardless of whether the customer wants to opt out. These rules, if the proposed effective date timeline holds, would be effective 90 days after they are published, and will begin to be enforced 18 months after they are published. In other words, October 2024 deserves to have a big red circle around it on everyone’s calendar.
The coming year provides equipment finance companies the opportunity to get ready for this change, especially once the rule is published. Look for webinars and other educational opportunities to be coming out frequently from ELFA. Additionally, start working with your credit and legal teams to develop processes to give yourself the best chance for an efficient transition to this new environment. And lastly, talk to the service providers involved in your origination process to see how their systems will be changing to accommodate the new rules. (If you are one of those service providers, flip that sentence around!)
October 2024 deserves to have a big red circle around it on everyone’s calendar.
In the tax space, it’s too early to tell as of press time whether any tax provisions will be given an extension, but it’s looking likely that the tightening of the interest deductibility rules to an EBIT standard will remain in place, and that 100% expensing will become 80% expensing. On the latter of those, one could reasonably expect that if the change from 100% to 80% was relatively anti-climactic, the scheduled change to 60% a year from now might be just as uneventful. While the under-appreciated change to the depreciation rules has proven to be the expansion to used equipment, the ramping down of the expensing rules will have an impact on customers’ propensity to utilize cash versus finance or lease. These two provisions interact, with the lowering of the first year’s depreciation making losing the depreciation add-back on the interest limitation calculation a little less harsh. One could make the economic argument that both of these factors may incentivize operating leases, as long as the lessor has sufficient interest income to not get caught by the interest deductibility limitations.
Where the political meets the policy fronts there could be a lot of light and heat. The light will be generated by the burgeoning 2024 race for the White House and the Congress. The heat will be brought by the serious consequences of debt limit politics. The last time these games were played for real, the result was a downgrading of U.S. Treasuries. This year’s path has all the markings of a winding road ahead that may have a lot of bumps and hazardous conditions.
All these items have the potential to significantly change the landscape in which equipment finance companies operate. Each of them has the potential to fizzle out, but also to scale up, and if they go big, each could have tectonic effects on that landscape. Buckle up!
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EL&F magazine article
SECTION 1071
Federal Insight
Column
2023