SFNet’s Advocacy Committee members have been on the frontlines this past year working to effect the best possible outcomes for the industry as a whole.

The COVID pandemic pushed SFNet’s already active advocacy program into overdrive in 2020 and the past year has kept our advocacy volunteers just as busy. As we work to find the balance between economic health and personal well being, the SFNet team has had to quickly mobilize at times to respond to a diverse array of issues, from concerns around damaging flaws in the Economic Injury Disaster Loan (“EIDL”) program to the ongoing saga of state financial disclosure bills.

Chair of SFNet’s Advocacy Committee, Hamid Namazie of McGuireWoods, said, “The Secured Finance Network’s Advocacy Committee is actively working to address legislative and regulatory challenges, some old, some new, but all of significance to the SFNet community of lenders and borrowers. We are thankful for the time, commitment and expertise of our members to enable us to connect with key decision makers to offer valuable insights. We are in the challenging position of needing to point out the unintended consequences of well-meaning bills.”

Federal-Level Efforts

Rich Gumbrecht, SFNet CEO provided further details: “On the federal level, the Committee has been working tirelessly, communicating with legislators and meeting directly with senior SBA officials to express the concerns SFNet members have about structural and practical deficiencies in the EIDL program.  We are also addressing the recently resurrected CFPB Section 1071 regulations, which could prove to be unduly burdensome to the vast majority of small and mid-sized finance companies that provide credit to small businesses.”

In 2020, SFNet engaged a federal lobbyist, Lon Goldstein of GPS, who commented on SFNet’s 2021 federal efforts: “SFNet has continued to build Washington relationships and increased its advocacy efforts in 2021. This was critically important with the election of President Biden, who brought a new team of policymakers to DC. The Biden Administration and Congress have sought our views on a number of matters of importance to the industry. SFNet will continue to work with all stakeholders to advance our policy goals.”

SFNet has been drawing attention to misuses of the EIDL program that unfairly impact secured lenders, create challenges for borrowers and put tax payer dollars unnecessarily at risk. “SFNet has submitted letters to the SBA and met with both SBA officials and legislators concerning this matter, particularly regarding subordination incongruities,” said Steven Gold of Allied Financial who has been involved in SFNet’s EIDL efforts. SFNet will continue to advocate for the best outcome for the SFNet community, especially considering that the SBA has recently increased the limit for an EIDL loan to $2 million.

In September 2020, SFNet issued an alert pertaining to CFPB Section 1071, requesting members respond to CFPB’s invitation to comment. The measure could prove to be unduly burdensome to the vast majority of small and mid-sized finance companies that provide credit to small businesses. With the assistance of SFNet members serving on the 1071 Subcommittee, SFNet submitted a comment letter requesting specific exemptions for relevant asset classes.

Brett Garver of Moritt Hock & Hamroff, who wrote an article informing the community about the issues surrounding CFB 1071, said, “While many market participants, especially larger banks and other heavily regulated institutions, have become familiar with the many restrictions and regulations imposed under the Dodd-Frank Act, one provision in particular has been largely dormant since its passage and has the potential to affect virtually anyone providing financing of any kind regardless of size or type of financing. Section 1071 of the Dodd-Frank Act amended the Equal Credit Opportunity Act (ECOA) to require financial institutions to compile, maintain, and submit to the CFPB certain data on applications for credit for women-owned, minority-owned, and small businesses. The stated purpose of 1071 was to support enforcement of fair lending laws and to help communities and governmental entities expand opportunities for women-owned, minority-owned, and small businesses. Until recently, 1071 had received limited attention and no rules had been adopted for

its implementation or enforcement, but in February 2020, the CFPB settled a lawsuit which sought to compel it to undertake the rulemaking required by 1071. The CFPB soon after began the rulemaking process and just issued proposed regulations at the end of the summer – which at least for now, include an exemption for certain forms of factoring.” As of this writing, the subcommittee working on this issue was reviewing the regulations and preparing to submit its next round of comments to CFPB.

“As drafted, 1071 could have a sweeping and burdensome impact on almost every business engaged in extending of credit. Beyond the mere burden of collecting the data, there are extensive areas of concern which include data privacy and penalties for non-compliance, among others,” Garver added.

Gumbrecht commented on SFNet’s progress at the Federal level and beyond: “We’ve made great strides in educating legislators and regulators on the federal and state level. They are now more aware of our industry at large and understand that when liquidity is paramount, we play a crucial role in continuing to deploy capital to the middle market when others may not. These are important investments that will build our influence over time.

Lawmakers have invoked SFNet’s positions in Federal hearings and we find most officials are eager to learn more about the industry and its positive economic impacts. The California DFPI recently requested we supply them with a presentation illustrating the intricacies of our industry that would be difficult to comprehend in a 30-minute call.”

State Disclosures Challenges

On the state level, SFNet continues to work with local legislators in New York and California to simplify and favorably amend proposed regulations regarding new commercial financial disclosure laws. In 2018, California became the first state to pass such a law and the Department of Financial Protection and Innovation is still working on final regulations. “SFNet submitted its comment letter to the third set of proposed regulations in August of 2021. We also met virtually with representatives of DFPI to reinforce our concerns. They appear to be receptive to certain of our requests. We are now waiting to see if there will be any further changes or if this third set of regs is the final,” said Namazie.

In New York, several direct conversations have been held with both then-Governor Cuomo’s office and the New York Department of Financial Services. The original bill applied to deals of $500,000, just like California. The bill was then amended to apply to deals of $2.5 million and above. SFNet’s subcommittee put in many hours responding to DFS and creating a proposed factoring disclosure form to assist NY DFS in its rulemaking.

In a memorandum filed with the New York disclosures bill, then-Governor Cuomo acknowledged SFNet’s and other’s opposition to the measure noting that “there is no strong consensus as to the best approach in how to compare various products.” He also stated: “I have secured an agreement with the legislature to make certain technical changes to this bill to better provide clarity…”.

Jon Helfat, SFNet’s co-general counsel, has played an integral part in SFNet’s federal and state advocacy initiatives. “The new statute requires non-regulated commercial lenders, including asset-based lenders and factors, that propose to lend $2.5 million or less to New York-based borrowers to make certain uniform disclosures in their proposals including an Annual Percentage Rate. SFNet’s Advocacy Committee was successful in pushing the effective date of the statute to January of 2022, providing SFNet the ability to work with New York’s regulatory and enforcement body to adopt rules that allow ABL lenders and factors to meaningfully comply with the statute. Right now, it is unknown if the statute will, in fact, take effect in January, considering the comment period runs until November,” he said, “but we are pushing for further extensions.”

New York’s DFS published the first draft of proposed regulations in September 2021. SFNet continues to work with State rule makers in an effort to effect manageable enforcement measures for disclosure legislation.

Populist-driven disclosure bills were reconsidered but forestalled in NJ and introduced in Connecticut and North Carolina in 2021. SFNet hired a lobbyist in Connecticut and formed a subcommittee. These efforts contributed to the bill being “killed,” at least for now. In North Carolina, SFNet utilized its member network, ultimately receiving feedback that the bill would not move forward.

“Our tracking systems coupled with the breadth of SFNet’s membership and contacts allows us to quickly gather a diverse team to review these disclosure bills as they pop up and to have direct contact with government decision-makers at key stages of legislation development,” said Gumbrecht.

Cross-Border

This past August, SFNet submitted comments to the Financial Stability Board (“FSB”) in connection with FSB’s project to evaluate out-of-court workouts (“OCWs”) as a tool to help financially distressed companies. The FSB is an international body that monitors the global financial system and makes recommendations designed to promote international stability. FSB’s members are the Ministers of Finance, Governors of Central Banks and other major economic and regulatory officials of 24 countries, as well as senior officials of other international organizations.

“A strong work-out culture (in which lenders and their financially distressed borrowers use OCWs as a less costly and more efficient alternative to formal bankruptcy proceedings) is a well-established feature of the U.S. lending environment. However, the laws of many countries discourage OCWs by requiring directors of a distressed company to initiate a formal bankruptcy proceeding for the company upon becoming aware of the company’s insolvency. In some countries, directors can even be criminally liable for failing to do initiate an insolvency proceeding promptly,” said Richard Kohn of Goldberg Kohn, who is chair of SFNet’s International Finance & Development Committee.

SFNet’s comments were highly supportive of the use of OCWs, contending that a legal environment that encourages OCWs increases the likelihood that domestic businesses will survive in troubled economic times.

This advocacy initiative was the result of a joint effort by SFNet’s Co-General Counsel, SFNet’s International Finance & Development Committee (in particular the chairs of the Committee’s task forces on Advocacy and Monitoring Legal Developments) and SFNet’s staff.

Regulatory Matters

SFNet has developed a strong relationship with the Office of the Controller of the Currency (OCC) to increase understanding of industry trends and relevant controls. “Issues such as pandemic-related policy adjustments and leveraged lending guidelines were addressed by an OCC representative at our Asset-Based Capital Conference,” notes Gumbrecht. “We continue to share industry data and work together on issues like Basel III and IV LGD implications and prospective updates to the OCC ABL Handbook.”

Informing the Community

A key objective of SFNet’s efforts is to provide members with updates and relevant analysis of the various programs so they are able to anticipate what is coming and make informed business decisions. SFNet’s publishes Advocacy Alerts in its daily e-newsletter, TSL Express. In April, several members who have been in the trenches working to achieve the best outcomes for the industry, participated in SFNet’s webinar “State Financial Disclosure Legislation: What You Don’t Know May Hurt You.”

SFNet’s Advocacy Committee members have coordinated with like-minded organizations when appropriate, such as the ELFA, AFA and LSTA. “There is strength in numbers. We welcome the opportunity to form alignments with other associations when we are both working towards common goals,” said Gumbrecht.