Ask Alta: What does my CEO need to know – right now – about new financial disclosure laws regulating equipment finance?

A Q&A with Paul Bent

What is the most pressing development equipment finance leaders need to understand about financial disclosure laws in the U.S.? 

They’re here to stay, they are not just for consumer loans, and they will be pervasive.  Every U.S. leasing and finance company should be developing (if they don’t already have it) the capability to calculate APR on a capitalized lease, regardless of how complicated the structuring may be.  This is not a trivial task, but it will likely become part of every company’s standard pricing and structuring repertoire.  Some calculation engines are already available online.

Which states are leading the way?

California was in the lead, not surprisingly, given that state’s history of strict laws and regulations governing the commercial finance marketplace.  However, it has taken the Golden State so long to develop accompanying regulations that New York is now likely to leapfrog the pack and become the first to go “live” in January 2022.

California is still in position to be the most complicated. They’ve drafted dozens of pages of regulations stating exactly how mandatory disclosures must be calculated, formatted, and set forth in loan (capitalized lease) documents for all deals up to $500,000 that are presented, although not necessarily closed, to businesses directed or managed from California, whether commercial or consumer in nature.

New Jersey is also considering commercial loan disclosure requirements, and both Connecticut and North Carolina have introduced legislation that would lead to disclosure rules very similar to those that are coming for California and New York.

Why should I care if I don’t operate in those states?

California is the most populous state in the country, with the largest single economy, so decisions here in my home state tend to reverberate across the nation.  When coupled with New York, these two states account for nearly 18% of the population of the entire U.S. and an even larger percentage of the total economy, so these rules will matter if you seek to provide financing to businesses in those states.

Add in North Carolina, Connecticut, and other states (plus possibly the federal government) and you’re dealing with a fast moving regulatory bandwagon.

What are the challenges equipment finance will have in complying with the new laws?

Meeting California’s proposed requirements will be tedious, overly complicated and in some cases confusing. The documentation for any capitalized lease deal or loan that falls into this category must include details that equipment lessors are not used to including.

The most prevalent of these is the APR for the deal, which is common in consumer transactions involving essentially only term, rate, monthly payment, and residual (if any). But in commercial deals that may include early buy-outs or purchase options, variable terms, variable payments, extensions, and other contingencies, the calculation of APR is not a trivial exercise.

Notably, the proposed California regulations define APR by reference to federal Regulation Z, which is actually a consumer finance-oriented statute.

Any common misconceptions we should clear up here about new financial disclosure laws?

Unfortunately, the most common misconception in our industry continues to be that we are not affected by consumer regulations; we only provide funding for commercial transactions.  The reality is changing, and the imposition of these consumer-oriented financial disclosure requirements on transactions as large as $500,000 is perhaps the strongest indication yet that we are no longer insulated by the famous words we are all familiar with – “this equipment will be used solely for commercial or business purposes and not for personal, family, or household purposes.”

What’s The Alta Group’s involvement in helping companies respond to financial disclosure laws? 

Although Alta is not a law firm, we provide practical advice and insight for our clients concerning these regulatory and compliance matters from a business point-of-view.  We are also contributing to overall industry knowledge of financial disclosure laws.  For example, I wrote a snarky explainer on the proposed California regulations for the Monitor 101+ issue coming out in a few weeks.  (That article was based on an earlier version of the proposed regulation, but the newer version released in August is similar enough that the discussion is helpful in understanding what’s in store.)

I will also be chairing a session for the upcoming ELFA Convention in October on hot legal topics that will include the latest updates on financial disclosure regulations from a panel of industry legal experts.

Paul Bent is senior managing director of The Alta Group and leader of its Legal Services practice.