Spearheaded by our Government Relations Committee, AAPL wrapped up its third year of legislative activity with some definite wins.

As we continue our grassroots mobilization efforts and build strategies for how and when we talk to policymakers, we wanted to provide you—our constituents—with a frank, no-holds-barred and transparent accounting of what’s happening and where we’re going from here.

First, let’s be honest. Almost no one cares about government relations until legislation affects them personally.

And you know what? That’s OK. You’re running a busy business in a booming industry. Until elected officials on Capitol Hill or state legislators propose something that’s going to cause your world to blow up, there’s not enough time in the day to put energy into pulling on yet another thread.

A Grassroots Approach

Grassroots mobilization is a winner for the industry, but it isn’t challenge-free.

There are billions of lobbying dollars floating around Capitol Hill. Although hiring lobbyists can be effective in many cases, the price tag to get any kind of traction is extremely high, especially since our interests/efforts are largely single-issue due to the size and exposure needs of our industry. Essentially (as others in the industry have found), you can spend a lot of money to get very little in return.

As we moved forward with legislative advocacy efforts, our gut told us we’d get further and gain the early wins we needed by focusing on low-risk, high-reward grassroots outreach. We were right. Grassroots advocacy has:

• Ensured we focus on what matters to our constituents (you!). If we can’t mobilize enough interest in outreach efforts, it’s a solid indication this isn’t the fight for us.
• Allowed us to begin building relationships and a name for ourselves and our constituents with legislators. When legislators can put a face to an organization or request, you start getting the kind of insider information that can redirect and reinform your entire strategy. See how this played out in our “issues” section that follows.
• Provided a platform for our constituents to tell their stories, making the legislation personal and the impacts believable. Framing issues and outcomes in context and having the message come from directly impacted constituents gives issues an immediacy and urgency they might otherwise lack (at least in the minds of policymakers).

Further, we were able to talk shop with staffers about a strategy for our overall approach during our annual Day on the Hill, confirming our gut was right on the previous counts and providing the following insights as well:

• Most Capitol Hill legislators will sit up and listen when their staffer’s phones start ringing off the hook and their inboxes start filling up, especially on niche issues.
• When these niche issues are shown to simultaneously impact multiple sectors (e.g., small business, local economies, local trade jobs, and housing), that really gets policymakers’ attention, regardless of their party affiliation.
• Targeted efforts, like organizing local constituents to start a grassroots campaign to contact their legislative representative when that representative is a potential swing vote, can be as effective as broader strokes in terms of the result desired.
• Broad grassroots campaigns are effective when the goal, in addition to achieving a particular result on an issue, is to educate policymakers and “become more known” in general.
• Doors may open more easily when you are respectful of staffers’ time, organized, and direct about your agenda. Remember, staffers talk, so reputations are immediate and sticky. (I personally found this to be true. I had more than one staffer say they remembered scheduling with me before COVID caused us to cancel AAPL’s 2020 Day on the Hill, and they allowed me to “jump the line” to get in front of key staffers for our 2021 meetings.)
• When your request is more than just “vote yes” or “vote no” on a bill, you will get much further with staffers. Proposing specific legislation (e.g., suggesting the policy language, referencing the statutes modified, and essentially doing the lion’s share of the legwork), produces a better result than making a nebulous, open-ended request.

Although adopting a grassroots approach has been a strong step toward achieving our goals, it has its challenges.

• Tracking ROI is next to impossible. How many people in our network called/emailed their representatives to Save Reg D? Was the subsequent removal of the pertinent sections so quickly after our mobilization due to our outreach, or were we lucky?
• Congress and state legislatures are insular and “Who’s Who.” If you’re not already known to them, gaining significant entry or figuring out where you and your issue stand can be difficult (made worse by partisan politics’ tradition of creating significant black boxes). That’s why so many organizations go the lobbyist route: It’s easier to pay someone who already has a foothold to talk for you.
• Money speaks. For grassroots efforts to connect with the money side of things, constituents need to (1) donate, (2) withhold donations, or (3) donate to the opposition. It’s indirect at best.

Although we are aware of these challenges, we have found true success with a grassroots approach. We have a 100% track record of wins since our first opposition effort, which was to prevent private lender mortgage licensing from coming to Florida in 2017. Grassroots is here to stay, even as we continue to look for ways to mitigate its limitations.

Why We Address State Issues

In 2021, we got involved with several state-level issues and directly prevented:

• New York from requiring a license to transact a business-purpose loan.
• Colorado from requiring a license to service (including self-servicing) business-purpose loans.

Although state issues may seem singular, we always emphasize the snowball effect such legislation has historically had: What is adopted in one state, especially when the issue concerns licensing, has a way of spreading. For this reason, we reach out to our entire network, even on state issues. Although your stake in an issue may be nonexistent, if we lose, it may not stay that way.

An Inside Look at Federal Issues

We also worked on several issues at the federal level, which we brought to our annual Day on the Hill, which was virtual this year. These issues have provided the basis for much of our learning and strategy going forward, so we’ve summarized them here—along with the key (and surprising!) insights and action items that have come from them.

Save Reg D. Our most important legislative battle to date came out of left field as part of the federal Responsibly Funding Our Priorities (RFOP) reconciliation package.

In late September, the House Ways and Means Committee approved a comprehensive tax bill that, among other tax-generating proposals, included numerous restrictions that would have effectively killed the universally popular “Regulation D.” Congress adopted Reg D in 1982 to facilitate capital formation, particularly for small businesses, while also protecting investors.

According to a 2020 Securities and Exchange Commission (SEC) report to Congress, since 2009, Reg D offerings have driven the success of America’s small businesses, with 64% relying on private placements to raise capital. Reg D has raised $13.576 billion over 242,070 offerings, while protecting investors with 93% of those offerings, including financially savvy accredited investors. Reg D offerings during that period saw only 221 related civic complaints submitted to the SEC.

Many of the RFOP proposals would have had far-reaching impacts, with certain provisions promising to upend any businesses that use self-directed IRA (SDIRA) funds under the status quo Regulation D provisions, including private lenders and funds.

Sections 138312 and 138314 of RFOP:

• Prohibited almost all SDIRA investment into private offerings.
• Prohibited SDIRA account holders from investing in a business if they or a family member is an officer of the business or they own less than 10% of the company. Current rules have no limitation on officer status and set the ownership threshold at greater than 50%.
• Required SDIRA account holders who presently have assets invested into private offerings and/or prohibited businesses to liquidate their positions within two years.

As a result, private lenders and funds would have faced significant hardship in finding new sources of capital, while simultaneously struggling to liquidate current IRA investments within the two-year time horizon when that capital is deployed into illiquid loans. Confidence in the industry’s continued viability would have nosedived, likely leading to a freeze on investment from other capital sources, similar to how the capital markets froze at the onset of the coronavirus pandemic.

These impacts would have rippled through ancillary and dependent industries—from the real estate investors that depend on private real estate loans and the local jobs those loan funds support to the housing market and end homeowner, tenant, or landlord.

With such far-reaching and unwelcome impacts not only to our own industry but also to small businesses nationwide, we expected far more publicity around the proposals. But they mainly earned attention only from IRA custodians, their clientele, and the American Association of Private Lenders’ network. Although we thought this was a good sign (maybe others knew something we didn’t), what we found during discussion with legislators and the bill’s sponsors about why these sections had made it into the bill only furthered our concerns.

What we found was a mix of misinformation on some of the facts behind the provisions, coupled with conflicting ideologies about why these sections belonged in the bill to begin with. This meant that any opposition effort needed to take a multi-pronged approach to change minds, further complicating our grassroots strategy.

Legislators on both sides of the aisle, regardless of their agreement with the bill in part or in its entirety, thought sections 138312 and 138314 raised tax money to fund the bill’s spend.

Republican staffers were surprised to learn these sections did not directly raise tax money and instead forced SDIRA investors to simply move their money from private to public offerings.

Democratic policymakers, meanwhile, seemed to feel the additional restrictions on SDIRAs would make the investment vehicle less palatable to wealthy individuals, who would then forgo putting money into SDIRAs entirely in favor of other (presumably taxable) opportunities.

Democratic policymakers anticipated IRA provisions, when passed together, would prevent high-net-worth individuals from abusing an investment vehicle meant to benefit the middle class.

Sections 138301 and 13802 of the RFOP attempted to directly prevent high-net-worth individuals from participating in tax-deferred investments by prohibiting further contributions and forcing early minimum distributions if the total value of their IRA and defined contribution plans exceeded $10 million. The idea that wealthy individuals were abusing the SDIRA system originated from a ProPublica article on the “Peter Thiel Effect,” which claimed Thiel turned his SDIRA account into a “$5 Billion Tax-Free Piggy Bank.”

Democratic legislators in our meetings thought sections 138301, 138302, 138312, and 138314 dovetailed nicely to make wealthy individuals’ investment into SDIRAs more hassle than it would be worth for tax planning purposes. However, sections 138312 and 138214 (the Regulation D-modifying provisions) would likely have a similar cooling effect for middle class account holders. Democratic bill sponsors also believed “middle class” SDIRA accountholders affected by the bill should not be investing in private offerings in the first place and needed more protection because they do not have the investment savvy to complete due diligence and make informed decisions.

Although this reasoning diverged from the bill’s stated purpose of raising taxes to help fund spending, we were able to articulate Reg D’s infinitesimal complaint rate of 0.001243% and the participation of financially savvy accredited investors in nearly every offering. Removing these opportunities, we explained, would hinder individuals’ ability to diversify their holdings outside of Wall Street while simultaneously paralyzing already COVID-impacted small businesses nationwide.

One week after our Day on the Hill meetings, a contact on Capitol Hill notified us that sections 138312 and 138314 were removed from the new draft of the bill, even while other IRA restrictions remained. That contact expressed surprise they were removed so quickly as the sections were widely (if erroneously) viewed as “non-tax-increase payfors” the bill needed.

While it is too soon to label this as a definite win due to the ideology motivating several of the provisions, as of the time of this writing, it appears our grassroots efforts had traction. Beyond our Day on the Hill meetings, our network placed hundreds of calls and sent emails to representatives about the potential unintended damage the bill would do to American small businesses.

HMDA and the CFPB. Our meeting with the Consumer Financial Protection Bureau (CFPB) leaders was full of surprises. It seems the 2018 Home Mortgage Disclosure Act (HMDA) updates that require private lenders to furnish Loan Activity Reports (LARs) for their non-consumer loans signaled to the CFPB that its purview had fundamentally expanded.

Previously, AAPL and industry leaders viewed HMDA’s 2018 implementation of a divergent definition of a mortgage loan as an oversight—a result of Congressional legislators’ less-than-detailed language/research when crafting the act. HMDA uniquely defines a mortgage loan as “an extension of credit that is secured by a lien on a dwelling.” The precedent—and more widely used definition (such as found in the Truth in Lending Act)—characterizes a mortgage loan as “any loan primarily for personal, family or household use that is secured by a mortgage …” thereby exempting business-purposes, non-consumer loans.

According to CFPB leadership (we’ve been unable to find a clear record or explanation of such mandate at consumerfinance.gov), the 2018 HMDA definition change means the CFPB is now charged with monitoring investment into communities, even when that investment is not via a consumer financial transaction. Meanwhile, the agency is not authorized to (and, therefore, does not) track most other types of community investment.

We entered the meeting hoping to reach consensus that, due to bad policy language, the CFPB was erroneously collecting data on business-purpose transactions that would in turn skew their consumer transaction reporting. While the discussion ruled that hope out, there were a few key takeaways:

1. CFPB leadership was amenable to the idea of revising/streamlining LAR fields to be more applicable to business-purpose loan transactions, allowing for cleaner data, clearer identification of consumer versus non-consumer transactions, and less burdensome reporting for lenders.
2. For the first time, our industry was able to create dialogue with CFPB leadership. This opens a path forward for continued change, such as the CFPB’s post-meeting Nov. 16 launch of an open comment period for HMDA to evaluate “institutional coverage and transactional coverage; data points; benefits of the new data and disclosure requirements; and operational and compliance costs.” All items were discussed in-depth during our meeting, but we can only speculate how much, if any, influence we had on the comment period’s launch/subject matter.
3. Knowing why the CFPB views business-purpose loans as falling within their mandate (beyond “the law says so”) allows us to enter future dialogue better equipped, insomuch that while the CFPB may wish to track community investment, the data it gathers is incomplete at best, while creating a significant operational burden for smaller lenders.

As of the time of this writing, our Government Relations Committee is working on the CFPB’s request to submit recommendations for revised LAR fields to our Bureau contact. We will also be responding to their public request for information.

Bankruptcy Regulation. We met with head staff from both the minority and the majority chairpersons of the Senate Judiciary Committee to discuss reforming Single Asset Real Estate (SARE) cases. SARE is a popular bipartisan effort to prevent abuse of the nation’s bankruptcy protections. It requires borrowers classified as SARE cases to fulfill heightened requirements to avoid case dismissal, and it ends foreclosure’s automatic stay because of active bankruptcy proceedings.

We requested the following action:

• Update the definition of SARE (11USC 101(51B)) to include 1-3 family residential real estate when the debtor is not an individual, or the property is encumbered by a non-personal/family use mortgage.
• Adopt legislation that requires debtors to self-identify as a SARE case (bankruptcy forms already include the checkbox to self-identify, but it is optional), with penalties for not doing so.
• Update 362(d)(3) to require an automatic hearing 14 days after petition filing, where the debtor must show why the automatic stay on foreclosure should remain in place. The hearing may be foregone if the debtor shows it has started to pay the non-default-rate interest; and, if a Chapter 11 filing, the debtor convinces the court they will file a reasonably confirmable plan within 90 days. Failure to file would automatically grant relief from stay.
• Adopt legislation that prevents a debtor from refiling for bankruptcy within one year of SARE case dismissal or relief from automatic stay.

Unsurprisingly, we received no pushback from the minority staffer on the Senate Judiciary Committee. The majority Judiciary Committee policymaker seemed open to our recommendations, with slight pushback on why the onus should be on the debtor to self-identify as a SARE case when the lender’s own due diligence documentation should prove SARE status in court.

Our explanation was that the issue is not that lenders lack due diligence/documentation of the debtor’s SARE status, but that requiring the courts to bear out the status when the debtor already knows their bankruptcy classifies as such (and self-identification requires only checking a box on bankruptcy filing forms they are already filling out) is a waste of court resources and ultimately places the debtor and lender in a worse financial position.

We also found the minority Judiciary Committee does not understand the motivation for why a debtor will file bankruptcy if they have no intent to follow through and/or will not be able to meet the timelines and documentation required. They agreed that delaying the inevitable ultimately places both debtor and lender in a worse financial position, but they couldn’t figure why a debtor would file bankruptcy in the first place.

This lack of understanding reaffirms one of the largest battles we face when advocating for lender-friendly legislation: Congress’s perception of borrowers as individuals needing additional protection and leeway due to a lack of financial savvy, and lenders as “big business” preying on the “little guy.” We are slowly turning the tide by emphasizing that in our sector, these are private loans made between two small businesses as core elements of their respective business models.

Our next step on this front is to craft specific policy language for our contacts on Capitol Hill so they can propose them to Congress. Although neither party is categorically opposed to our request (a win on its own!), because this is not a hot-button issue, legislators are unlikely to take any action unless we do the legwork for them.