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Equipment Leasing & Finance

Cutting Through the Fog

May-June 2022


Credit and collections professionals use recent experience to help pierce the veil of uncertainty.

EACH YEAR, the climate at credit and collections divisions in equipment finance companies changes. The culmination of an almost infinite variety of events, conditions and expectations, the environment in these enclaves is anything but static. This year, credit and collections experts face more complexity than ever, due to a fog of circumstances unlikely to lift until late 2022 or early 2023.

Jim Tobin, Director of Retail Credit at Volvo Financial Services U.S., says 2022 has so many variables that credit and collections professionals probably won’t see the impacts to borrowers until later. “Something new pops up every day. Throw in world events and evolving business models, and there are a ton of moving parts. Some of these may not impact borrowers immediately, but when you consider increased interest rates, financing and leasing will certainly see impacts later this year and beyond. Businesses might be all right now, but these uncertainties will definitely come into play later,” he says.

James Tobin

“We’re already closely monitoring world events, interest rates and oil prices, knowing these things affect our customers in many different ways.”

Jim Tobin, Volvo Financial Services U.S.

Lou Maslowe, Chief Risk Officer at Marlin Capital Solutions and Chair of ELFA’s Credit & Collections Committee, elaborates: “Right now, the industry is enjoying almost unprecedented excellent portfolio performance, creating new opportunities after the pandemic. We don’t anticipate a near change in delinquency or charge-offs, but conditions are developing that will impact the economy and, as a result, the credit quality of our borrowers. Among these: continuing supply-chain issues and the high rate of inflation, which will lead to higher interest rates.”

Other factors are also in play this year. Maslowe says the labor shortage that began during the pandemic continues and is hitting small businesses especially hard. “This has not only stunted growth but caused many businesses to close,” he says. He further cites the spike in oil prices as bearing down particularly on companies serving the transportation markets. “We’re dealing with these situations while also operating in an intensely competitive environment, which if anything has grown, given the stellar portfolio performance everyone is enjoying,” he concludes. “As a result, many in the industry are relaxing credit standards and documentation requirements, which could come back later and have an impact.” 

At the same time, supply-chain issues continue creating heartburn for customers and a mixed bag for lessors. “Given the shortage of new equipment and parts, most leasing companies are benefitting from higher residual realization as well as better recovery rates because collateral values have improved,” Maslowe observes. “But we need to remain cognizant that we’re now financing assets with inflated values that could drive higher losses and lower residual realization in the future.”

Workplace issues also need resolution as equipment finance companies search for a balance between in-office and remote working. Says Maslowe, “Requiring workers to be in the office at all times puts you at a disadvantage competitively. But if you allow people to work remotely, you have to deal with the challenges that come with it.”

Experience as Lighthouse

Few would dispute that the challenges facing credit and collections professionals in 2022 are formidable. But those interviewed for this story express optimism nonetheless. They believe innovations achieved last year in customer relationships and service can help light the way now. “I think we’ll have an opportunity to continue serving customers much as we did during COVID-19,” says Tobin. “We’ll lean on some of that experience to learn how to live now in a changing world. We’re already closely monitoring world events, interest rates and oil prices, knowing these things affect our customers in many different ways. We have to leverage what we learn, continue to adapt, and always be mindful of how our customers will be impacted.”


“Many banks and companies did lease and loan modifications in 2020, then monitored these closely, and ended with a solid 2021.” 

Robert Fagan, Eastern Funding LLC 

Specifically, Tobin says the pandemic taught him and his team at Volvo Financial Services U.S. “to look at everything to ask if it’s value-added, and we continue doing that today in regard to internal and external customers and end users. Why are we doing something? We’re digitizing, for example, to look at data in new and different ways, to move away from massive spread sheets, and to put meaningful data in front of people in clear and concise ways. It’s about refinement. For example, you analyze 10 things that are most important to certain decisions, and you might find that only eight of them are important now. You can’t be static.”

Robert Fagan, Vice President of Customer Service and Collections at Eastern Funding LLC, thinks the results obtained by his credit and collections team in 2021 will hold through 2022. “Many banks and companies did lease and loan modifications in 2020, then monitored these closely, and ended with a solid 2021,” he says. “Eastern Funding was one of these, and we rebounded nicely from the pandemic with low losses and delinquencies. The implications for this year are similar.”

Chris Jung

“We continue to look for ways to leverage technology to be more efficient while also adhering to our credit and decisioning framework.” 

Chris Jung, U.S. Cisco Systems Capital Corporation

He does admit to some concern on the credit side due to soon-rising interest rates and the war in Ukraine. “The war affects the markets, and the interest rate affects us,” he says. “But we did very well in credit and collections before the pandemic, and then we worked through that. We will work through this.”

Technology as Solution and Challenge

When used to solve one problem, technology can sometimes create others. This is happening now on two fronts in credit and collections. Chris Jung, Americas Chief Credit & Risk Officer, Cisco Systems Capital Corporation, says his company is examining hybrid work options now while also focusing on several other operations and technology projects. “The transition to hybrid work is changing how our customers want to consume and pay for technology, and we’re shifting with the market to support their IT transformation,” he explains. “The hybrid workplace paradigm not only impacts our customers; it also affects how we operate. This evolution will continue to drive change as we all learn how to work effectively in this environment.”

The same could be said of digitalization. Most customers want to do business online, and equipment finance companies have invested heavily to let them do it. But Maslowe points out that an increase in digitalization brings an increased risk of fraud, particularly identity theft. 

He thinks automated anti-fraud tools provide the best defense. “These help validate that an individual signing documents is associated with the business in question and that they are who they say they are and not someone stealing their identity,” he explains. “The software validates the connection through Internet Provider address identity and through driver’s license verification. You take a picture of yourself and the software compares it with your license. Companies throughout the industry are having to do this to deter fraud.”

“In the current environment, it would be wise to set residuals conservatively… in order to manage the risk of lower asset prices in the future.”  

Scott McCann, Pinnacle Financial Partners 

Attempting to fight fraud through manual procedures puts companies at a disadvantage because it’s less reliable and takes longer to get the transaction consummated. “From applications on the front end to funding on the back end, you want to automate your fraud defenses,” Maslowe advises. 

Credit and collections teams are also using other technologies more frequently and without issue. As Cisco Systems transitions to a service-by-subscription business model, Jung says new payment solutions enable and enhance the motion. “We continuously review data analytics to improve our automated credit platform to ensure our credit decisions provide the appropriate risk and reward, and alignment to our long-term goals,” he says. “Our platform won the ELFA Operations & Technology Excellence Award in 2017, and we continue to look for ways to leverage technology to be more efficient while also adhering to our credit and decisioning framework.” 

At Eastern Funding, a new customer portal is nearly complete. “Customers can log in and see everything they need,” says Fagan. “Two weeks ago, we added a payment portal, and the feedback has been great. Not only can customers make payments online; we are notified when it happens and log the payment into the system.” 

The company also recently configured its phones to ring through Zoom. “If someone calls in with a question, Zoom connects to Customer Service, and Collections is the back-up,” says Fagan. “Now we can see who picks up calls when they come in, and if there’s a missed call, we’re able to get the message. This is a great feature that helps customers and also keeps our people accountable.”

Opportunities Today 

In addition to staying close to customers to meet their needs quickly, Scott McCann, Senior Credit Officer at Pinnacle Financial Partners, thinks opportunities exist across industry sectors, even as uncertainties shift and continue. “There is a lot of pent-up demand for capex financing as we emerge from the pandemic and because of supply-chain challenges,” he says. “Any store you walk into, you notice there are things they don’t have, and it’s not limited to food or furniture. Despite ongoing challenges that include geopolitical events, U.S. business and consumer demand for goods and services is very strong and drives the need for increased capacity in manufacturing, transportation and other sectors that need equipment financing.”

McCann says portfolio performance is also strong now, with manageable levels of criticized assets, minimal losses and very few past dues. “Most of our equipment finance clients are doing well and growing their businesses,” he notes. “With interest rates rising, borrowers have a sense of urgency in wanting to lock in term debt financing as soon as possible. And because lenders are hungry for assets, we’re seeing continued strong competition for deals.”

“I’m really looking forward to seeing and networking with our colleagues in the industry at the 2022 Credit & Collections Conference.”  

Lou Maslowe, Marlin Capital Solutions 

Meanwhile, inflation is increasing the cost of equipment, and McCann says setting residual values can be particularly tricky. He makes a suggestion: “In the current environment, it would be wise to set residuals conservatively—meaning at a lower percentage of cost—in order to manage the risk of lower asset prices in the future.” 

Outlook for the Second Half 2022

Improving demand is generally a blessing. But McCann says it can be stressful when credit teams are stretched. “It seems like everyone in the industry is looking for credit and portfolio management expertise,” he says. “As more firms become more adept at hiring, onboarding and integrating new team members from remote locations, competition and compensation for talent will likely continue to increase.”

Hiring is indeed a hot topic, and will be discussed at ELFA’s 2022 Credit & Collections Management Conference (see the box). “There’s no right answer about how to do it, and I believe companies are going to want something between remote work and in-office,” says Maslowe. “Are your offices updated to accommodate hybrid working? Do you have the electronic infrastructure in a conference room to have a Microsoft Teams call when half of your people are there? And if you do that, why come into the office at all? There are so many aspects of the hybrid workplace that companies need to consider.”

Also on the agenda this year: compliance with new regulatory requirements issued by California, New York and Utah. All three bills are awaiting final regulations and have not been finalized yet.

Despite the exhaustive list of issues demanding attention, our sources generally expect positive outcomes for the rest of this year and see many reasons for optimism. Summarizes Fagan, “We had a solid 2021, and we’re off to a good start this year. I look forward to 2022 being a good year not only for Eastern Funding, but industrywide.”

See You at the Conference!

HOORAY! The chance to convene physically at ELFA’s 2022 Credit & Collections Management Conference is generating excitement. “This will be our first in-person conference in three years,” exults Lou Maslowe. “I’m really looking forward to seeing and networking with our colleagues in the industry.”

Scheduled for June 6-8 in San Antonio at Hilton Del Palacio Rio, the meeting will focus on managing new risks to this vital component of equipment financing. “Think supply-chain, inflation and the largest workplace change ever,” says Maslowe. “We’ll poll attendees for different experiences and learn how their companies are dealing with it.”

Jim Tobin will attend for the first time and will team with other members of the ELFA Credit & Collections Committee to present a session on the supply chain. “I’m excited about seeing everyone and being part of the presenting team,” he says, and notes that the Conference is particularly important this year because of the changes affecting credit and collections. He says, “Just weeks ago, the supply-chain situation was improving. But even that dialogue is changing now.” 

Visit www.elfaonline.org/events/2022/CC/ for more information.


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