2026 CLFP Recertification
Educational Content: Navigating Defaults: Strategies for Risk Mitigation in Equipment Finance
Default is not a new concept in the equipment finance industry. It is a reality that every equipment finance company needs to be prepared to manage. A variety of departments can often feel the pulse on trends and potential issues within an organization, which makes cross-functional communication on adverse trends key. These conversations can help establish risk parameters and identify any necessary adjustments to mitigate potential losses.
The primary goal with any default situation is to minimize legal fees and write-offs while maximizing recoveries. Strong portfolio management is one tactic to help in these situations. Regular monitoring of contracts and ongoing credit reviews can help identify potential at-risk accounts early, allowing for timely intervention. This often includes an asset management review of the collateral involved. The approach a company takes can vary depending on the type of financing structure. For example, a Fair Market Value (FMV) lease will have a different asset management approach than an Equipment Finance Agreement (EFA). Understanding changes in valuations as well as how assets are used within various industries or regions will ensure accurate and realistic assessments. Proper asset valuation at origination has a direct impact on recovery outcomes in the event of default.
Establishing and maintaining acceptable reserves for potential losses on a portfolio is another way a company can remain profitable in the event of unforeseen defaults. Continually monitoring and adjusting these reserve levels can ensure the company stays aligned with its financial goals.
Equally important for an equipment finance company is a clear understanding of lawful and effective collection techniques. As you may recall from the CLFP Handbook, the Fair Debt Collections Practices Act (FDCPA) governs the debt collection practices for personal/consumer debt. The FDCPA sets forth a myriad of restrictions regarding the practices that debt collectors may use in their efforts. Recently, California passed a law extending debt collection rules to certain commercial transactions of $500,000 or less. Under California law, certain commercial transactions originated after July 1, 2025, will now fall under the protection of the Rosenthal Fair Debt Collections Practices Act (RFDCPA), which will apply to debt collectors as well as creditors. One of the main differences between the FDCPA and the RFDCPA is that the RFDCPA applies to those collecting on their own debts (i.e., creditors).
While the RFDCPA will not apply to debtors who are commercial legal entities (i.e., corporations or limited liability companies), it will apply to any personal guarantors of those companies, as well as to individuals who incur commercial debt. This is an expansion of the restrictions set forth by the FDCPA, specifically prohibiting certain methods of collection that could be deemed harassing or threatening. Some additional requirements under the RFDCPA may include providing a validation of debt letter or a statute of limitations disclosure. The few exceptions to the RFDCPA include debts that are not yet delinquent and combined debts exceeding $500,000 with a debtor (i.e., the total of all combined contracts). At this time, the RFDCPA is only applicable to debtors residing in California or contracts governed by California law; however, it remains to be seen if other states follow suit.
Default mitigation is an ongoing process that requires proactive communication and informed decision-making. By staying ahead of regulatory changes, maintaining strong portfolio oversight, and fostering internal collaboration, equipment finance companies can effectively minimize losses and navigate the complexities of contract defaults with confidence.
For more information on this topic, please review Chapter 9 – Portfolio Management in the CLFP Handbook (10th Edition).
SOURCE: