Dealing with Regulatory Uncertainty

In a single week in late July, the CFPB’s rule implementing Section 1071 suffered blows from two branches of government. Legislatively, the House Financial Services Committee approved a resolution that, if passed into law, would overturn the final rule entirely. Just a few days later, a federal judge in Texas issued an injunction delaying implementation of Section 1071 for a large swath of covered institutions. The impact of both of these actions is still hard to judge, but it was undeniably a rough week for Section 1071 and leaves a significant amount of uncertainty for regulated institutions. 

ELFA supported the House Financial Services Committee action to overturn the rule because 1071 was always designed to be a voluntary provision for customers and the CFPB turned the rule into one that every transaction must be reported on, even if the customer wants to opt out. 

Relating to the injunction, ELFA sought to have the CFPB take administrative action to have all covered institutions be subject to the same implementation timeframes for Section 1071. ELFA has also successfully intervened in the underlying lawsuit, and is actively seeking to expand the injunction to include all ELFA members.

 

Section 1071 has been lurking around a corner for more than a decade now, and for all of that decade it’s always seemed like it’s around the next corner but, as Sen. Bob Bennett used to say, if you keep turning the corner you end up back where you started. How to deal with regulatory and legal uncertainty is a weighty question for financial institutions that are subject to these regulatory efforts. Do you wait and risk being behind the curve on implementation? Do you get ready early and risk spending significant resources for something that may look different when it finally arrives and legitimately may never arrive at all? 

The undeniable regulatory trend in commercial finance is to treat commercial finance more like consumer finance. Regulations covering consumer transactions have been tracking pro-consumer for decades now. Unfortunately, the transitive property applies, and the long-term trend is for commercial transactions to be regulated in a manner that favors the borrower forsaking pareto at the cost of the lender. 

In the combined light of the regulatory uncertainty and the overall trends it makes sense to invest in ways that keep your options open. Investing in additional training on existing fair lending rules makes sense, doesn’t lock you into a path and reduces regulatory risk. Scoping out what it takes to collect some of the non-demographic information required by Section 1071, such as annual revenues or NAICS codes, without requesting it from your customer, makes sense and might lead to the identification of business processes that could be valuable regardless of the regulatory environment. What doesn’t make sense is to lock yourself into a regulatory compliance structure that is static and unable to respond to a dynamic regulatory environment at both the federal and state levels. 

ELFA is going to continue to provide resources, including training sources, in the Section 1071 Industry Topic section of the ELFA website at www.elfaonline.org/1071. If there are resources that you think we should be providing, please let us know. We are also going to continue to advocate in all three branches of government for the equipment finance industry. If there are problems big or small, especially if those problems are implementation challenges due to legal idiosyncrasies, please let us know. 

The precise regulatory environment that the equipment finance industry is going to face in the coming years is uncertain. While past performance is never a perfect predictor of the future, it’s generally the best we have. Regulatory trends for the last decade have been pro-borrower. There’s no obvious event on the horizon that is going to reverse that trend, so it’s best to plan your business model to be ready to respond to the changes that come along with that trend.