Have Questions About the Small Business Lending Rule? We Have the Answers.

The Small Business Lending Rule (SBLR), also known as the section 1071 rule, is a significant development in the financial industry aimed at improving transparency and fairness in small business lending.

That’s why we sat down with several of our bank clients to discuss how their teams are navigating the new rule, what they expect will change, and much more. But first, we’ll cover some basics behind the rule.

What’s the backstory of the 1071 rule?

The CFPB issued a final rule on March 30, 2023, to implement section 1071 of the Dodd-Frank Act, which amends the Equal Credit Opportunity Act (ECOA). This rule requires financial institutions to collect and report data on credit applications for small businesses, including those owned by women or minorities.

The primary objectives of this rule are twofold:

1. Facilitating enforcement of fair lending laws
2. Enabling communities, governmental entities, and creditors to identify business and community development needs and opportunities for women-owned, minority-owned, and small businesses

What’s the timeline for compliance?

Due to legal challenges, the CFPB has extended the compliance deadlines for the small business lending rule and it’s set to be enforced in phases, depending on the size of the institution. The new compliance dates are as follows:

- Tier 1 institutions (highest volume lenders): July 18, 2025

- Tier 2 institutions (moderate volume lenders): January 16, 2026

- Tier 3 institutions (smallest volume lenders): October 18, 2026

At a high-level, what does 1071 entail?

Data Collection and Reporting: Covered financial institutions must collect and report specific data points on small business credit applications to the CFPB.

Privacy Protection: The rule addresses privacy interests and the publication of section 1071 data, including measures to shield certain demographic data from underwriters and other persons.

Recordkeeping: Financial institutions are required to maintain records related to the collected data.

Impact on Financial Institutions & Small Businesses

Understandably, 1071 is major regulatory change, so we sat down with several bankers to discuss what it will mean for lending operations and how bank staff engages with its customers.

1. How has the Small Business Lending Rule impacted small business customers and their perception of a financial institution's ability to serve their needs?

The implementation of 1071 will mean increased data collection at the start of the lending process. While this change may initially seem more cumbersome to small business owners, it's crucial to educate them on the long-term benefits. The extensive data collection will enable financial institutions to better understand and meet the unique needs of small businesses, particularly those owned by women and minorities in the future.

Banks are deeply invested in the local businesses that help their community thrive economically and lending is a key part of enabling that. The intention of 1071 is to ensure the financing needs of those small businesses are met, across all demographics.

2. What are the major challenges in preparing for 1071, and how can banks address them?

The strategy a bank will take depends on the size of the institution. Smaller banks, especially those just within the compliance threshold, may face significant challenges in adapting to the new requirements given their limited staff and resources.

For instance, banks that have fewer commercial lenders often have the same people collecting an applicant’s information making the credit decision. These banks may need to bring in more talent to separate those functions to comply with the rule.

The good news is that these smaller institutions can watch and learn from the larger institutions that must comply earlier. Larger institutions are focused on meeting customer expectations while also remaining compliant, which often means being as automated as possible. After all, small business customers want an application process that’s easy, convenient and quick.

However, 1071 requires more demographic data to be collected with small business loan applications and this may make applicants, as well as lenders uncomfortable. One of the ways around this is by using scripts. A script or outlined talking points gives relationship managers guidance on how to answer and anticipate concerns or questions from customers. It also provides a way to explain why relationship managers are asking these questions.

Additionally, having software in place, such as a loan origination system, makes compliance with 1071 much easier. For banks that rely on manual processes, collecting and managing all the data needed for 1071 would be infinitely more challenging with spreadsheets alone, compared to software that can help automate and track the data.

3. How can banks use SBLR 1071 to enhance services or innovate products for borrowers?

The SBLR is prompting many banks to reassess their lending processes, with a focus on automation to improve efficiency. By reassessing lending workflows and even the products offered through the lens of 1071, banks can identify gaps in both their processes and product offerings. Long-term, 1071 could present an opportunity to develop more tailored financial products for small businesses, improve overall service quality as well as responsiveness to business needs.

4. What potential changes or revisions to SBLR 1071 are anticipated?

While the CFPB has already adjusted the compliance timeline, further refinements may occur based on industry feedback and real-world implementation experiences. Financial institutions should stay informed about potential updates to the rule and any changes in enforcement practices.

The Small Business Lending Rule represents a significant shift in small business lending practices. While it presents challenges, particularly for smaller financial institutions, it also offers opportunities for innovation and improved service to small businesses.

By embracing technology, enhancing customer communication, and focusing on the rule's underlying goals of fairness and transparency, financial institutions can navigate these changes more effectively and continue to support the growth of small businesses.

Author Bio

Baker Hill empowers progressive financial institutions to increase revenue, reduce risk, and drive more profitable relationships.

Streamline business, consumer direct and indirect lending with our common origination platform. Understand profitability and risk at every level with our sophisticated business intelligence and analytics. Monitor and maintain a healthy financial portfolio with our statement analysis, exception, and risk management solutions.

Explore our solutions below for more information on how to generate sustainable growth, minimize risk and increase profitability.