Like-Kind Exchange and Fixed Asset Conference. State of the Leasing Industry October 28, 2010

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1 Like-Kind Exchange and Fixed Asset Conference State of the Leasing Industry October 28, 2010

2 David Fenig Vice President Federal Government Relations Equipment Leasing and Finance Association 2

3 State of the Leasing Industry: Legislative and Regulatory Update ELFA Overview Legislative and Regulatory Overview-Taxation Legislative and Regulatory Overview- Financial Reform 3

4 Equipment Leasing and Finance Association Represents over 600 financial services companies and manufacturers in the $521 billion U.S. equipment finance sector. Members are engaged in the financing, utilization, and investment in capital goods through both lease and loan products. Members are the driving force behind growth in the commercial equipment finance market and contribute to capital formation. Business investment in equipment and software accounts for 8% of U.S. Gross Domestic Product (GDP) and the commercial finance sector contributes 4.5% to the GDP. 4

5 ELFA Members Independent leasing and finance companies Captive finance companies Commercial banks Diversified financial services companies Brokers and packagers Investment banks Service providers 5

6 Types of Capital Equipment Financed Commercial and corporate aircraft Rail cars and rolling stock IT equipment and software Vessels and containers Construction and off road equipment Medical technology and equipment 6

7 ELFA s Mission The forum for industry development best practices standards professional and business development The platform to advocate for the industry - policy - advocacy - media - standards-setting The principal resource for industry information - policy - market data - research - best practices - industry analysis 7

8 Who is the Equipment Leasing & Finance Association? Banks 26% $250M - $1.0B 12% Over $1.0B 8% Under $20M 35% $100M - $250M 15% Captives 15% Independent, Financial Services 59% $20M - $100M 30% ELFA Membership by Type of Organization and Annual Volume 8

9 Advocacy: Federal Government The ELFA has taken a leadership role on key priority federal government relations issues by creating and leading industry coalitions on taxation, financial regulation, transportation policy, energy, and federal leasing including: Federal Tax Committee Financial Services Regulations Subcommittee of the Legal Committee Air Rail and Marine Subcommittee of the Legal Committee Renewable Energy Working Group Federal Subcommittee of the Public Sector Finance Committee 9

10 Government Response to Economic Crisis TARP (Troubled Asset Relief Program) TALF (Term Asset-backed Securities Loan Facility) TLGP (Temporary Liquidity Guarantee Program) CPFF (Commercial Paper Funding Facility) Stimulus Program- American Recovery and Reinvestment Act of 2009 (P.L ) Financial Regulatory Reform-Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (P.L ) 10

11 11 Significant Legislation in Economic Stimulus Bill (P.L ) Unemployment Insurance (UI) extension with NOL 5 year carryback provision Healthcare Reform (P.L and P.L ) Unfinished Business in 2010 Tax extenders Estate tax Climate change Expiration of Bush tax cuts/ dividends/ capital gains HIRE Act (P.L ) Financial regulatory reform (P.L ) Small Business Jobs and Credit Act of 2010 (P.L ) 11

12 Major Changes in Tax Landscape in Provision (Current law) Obama FY2010 budget Income tax rates 10%, 15%, 25%, 28%, 33%, 35% 15%, 28%, 31%, 36%, 39.6% 10%, 15%, 25%, 28%, 36%, 39.6% Capital gains rates 0% and 15% Maximum 20% 2010 regime, except 20% rate on capital gain and dividend income that would be taxed at two highest rates under regular tax Dividends rates 0% and 15% Taxed as ordinary income (highest rate 39.6%) Estate tax 0% (may change mid-year, with congressional action) $1 million exemption, 55% rate Extend 2009 regime of $3.5 million exemption, 45% rate Marriage penalty Deduction for couples 200% of deduction for singles Deduction for couples 200% of deduction for singles repealed Deduction for couples 200% of deduction for singles made permanent Child tax credit $1,000 $ regime ($1,000) 12

13 13 Major Changes Starting in 2011 if Congress Does Not Act Reinstate 36% and 39.6% rates Increase capital gains from 15% to 20% Increase dividends tax rate from 15% to 39.6%) Reinstate full phase-out of itemized deductions Reinstate full phase-out of personal exemptions 13

14 Legislative and Regulatory Overview Taxation Bonus Depreciation Extension in ARRA and SBJA ARRA Investment Structures Using ITCs or Grants (Section 1603) Economic Substance/ Pre-Tax Profit requirement Eligibility and Timing Partnership Issues Foreign and Tax-Exempt Participation Leasing Issues Recapture Codification of Economic Substance Doctrine in Patient Protection and Affordable Care Act of 2010 (P.L ) pre tax profit test Extenders-Extension of Subpart F Active financing provision Guidance on "true leases" (e.g., re-leases, residual value guarantees and lessor transfers) to the Treasury/ IRS Annual "Business Plan." 14

15 Legislative and Regulatory Overview Financial Reform Consumer Financial Protection Bureau (CFPB) Securitization Market - Risk Retention Rules Syndications Market - Risk Retention Rules Systemic Risk Regulator/regulation of non-bank financial institutions and captive finance companies Equal Credit Opportunity Act (ECOA) 15

16 Consumer Financial Protection Bureau Scope of Consumer Financial Protection Bureau (CFPB) Title X definition of consumer an individual/agent/trustee or representative acting on behalf of an individual. Definition of consumer financial product or service / used primarily for personal family or household purposes Distinction between consumer and commercial transactions/nonapplicability of CFPB to small ticket transactions Consumer Leasing Act and Truth in Lending Act have specific exemptions for commercial transactions. 16

17 Risk Retention - Securitizations Act directs risk retention (skin in the game) for each category of ABS including a loan and a lease Applies to any loan or any asset Establishes a basic 5% risk retention rule Allows for less than 5% if there is a low credit risk with respect to the loan Allows for separate rules for securitizers of different classes of assets SEC must issue rules within 270 days after DOE Effective date: Two years after SEC issues rules for non mortgage backed securities classes 17

18 Risk Retention - Syndications House bill applied risk retention rules to creditors and securitizers Senate bill applied risk retention rules to securitizers only Act applies the risk retention rules to securitizers only rather than securitizers and creditors Act also permits the federal agencies to apply the rules to an originator who sells an asset directly or indirectly to a securitizer Application of provision to the range of portfolio sales is somewhat ambiguous/ raises regulatory issue going forward 18

19 Key Regulatory Issues on Risk Retention Address any loan or any asset standard Clarify time limit on originator risk retention Clarify that advance rate discount qualifies as risk retention Clarify no vendor risk retention 19

20 Systemic Risk Regulation for Non-Bank Financial Institutions Grants authority to require supervision and regulation of certain Nonbank Financial Companies Restricts Federal Reserve's systemic risk regulation to companies "predominately engaged in financial activities Defined as a company that earns at least 85% of its consolidated revenues or consolidated assets from financial services Exemption for companies earning less than 85% of its revenues from financial services Impact on wholly owned separate finance subsidiaries under "predominately engaged in financial activities standard 20

21 Systemic Risk Regulation Considerations Amount of leverage Amount and nature of assets Amount and types of liabilities held Dependence on short term funding Off balance sheet exposures Amount of credit provided to commercial and retail customers 21

22 Equal Credit Opportunity Act (ECOA) Requires gathering/retaining certain personal data of customers and applies to any application to a financial institution for credit Requirements mandate that lenders create a separate and parallel system for information recordation, maintenance and dissemination Costs of creating such a parallel system will be significant and may amount to millions of dollars for larger institutions Information maintained on this system will have to be extracted from the application and accompanying documents requiring lenders to incur additional costs of employees and related expenses 22

23 23 Questions? David Fenig Vice President Federal Government Relations Equipment Leasing and Finance Association