Over the next few years, small business lenders will be required to collect more demographic data from small business loan applicants as part of Section 1071 of the Dodd-Frank Act. Also known as the Small Business Data Collection Rule, the goal is to promote fair and equitable access to credit for small businesses, including for women-owned, minority-owned, and LGBTQI+ businesses.
The information gathered by lenders will be analyzed to understand whether lenders are treating similarly situated small businesses fairly by offering them comparable pricing, terms, and options regardless of race, gender, ethnicity, and gender identity.
What demographic data will be collected?
Lenders will collect new data points from small business borrowers, asking whether a small business is women-owned, minority-owned, or LGBTQI+-owned. They will also ask about the applicants’ principal owners’ ethnicity, race, and sex.
Do I have to answer demographic questions?
Small business lenders will ask you to answer demographic questions, and you aren’t required to answer them – and lenders aren’t allowed to discourage you from answering them or force you to answer them. They can only report the answers you provide, not report based on their visual observations.
Regulators will be taking a closer look at lenders that report an unusually large number of applicants that failed to provide the information.
Will my answers about demographics impact my loan decision?
No. Lenders are prohibited from including this sensitive information in decision-making, and there are safeguards lenders must put into place to prevent it from happening. While these safeguards are designed to mitigate risks, compliance monitoring remains critical to ensure fair lending practices.
I doubt my small business lender discriminates. Why do they need to collect our demographic data?
Most lenders don’t mean to discriminate, but their policies and procedures can have unintended consequences that affect certain groups of borrowers more than others.
For example, a lender might require a minimum loan of $150,000 for all small businesses, which could unintentionally exclude certain protected borrowers if they have lower loan amount needs. Loan officers might offer better loan terms and pricing to their friends. This could mean that borrowers with similar backgrounds or social circles get better deals than others with similar financials. Similarly, a marketing department might focus on specific zip codes with lots of business owners, unintentionally leaving out other areas where protected classes of borrowers live.
Even though these practices aren’t meant to discriminate, they can hurt minority-owned, women-owned, and other small businesses.
That’s where collecting and analyzing small business data through Section 1071 comes in. By analyzing this data, lenders may uncover potential differences in how loan applicants or borrowers are treated and assess whether certain practices need to be modified to ensure fairness.
Will my data be made public?
No. While a small business lender’s aggregate data may be made available, your data will not include identifiable details like names, business names, or addresses.
Which institutions are required to comply with 1071?
Generally speaking, if your lender (including banks, credit unions, online lenders, and finance companies, among others) originated more than 100 small business loans over the past two years, it needs to comply with 1071. However, motor vehicle dealers are exempt.
What types of loans are covered under the final rule?
The new rule applies to small business loans, lines of credit, business credit cards, online credit products, and merchant cash advances. It includes refinancing and covers extensions, renewals, and changes to existing transactions if they involve requesting more credit, such as increasing a credit line or borrowing more money on an existing loan.
When will 1071 take effect?
1071 data collection requirements will be phased in with the largest lenders allowed to begin to collect data on July 18, 2024. Medium-size lenders can begin January 16, 2025, and the smallest small business lenders can start October 18, 2025. That first year is a practice period. They are required to begin collecting after one year.
How to prepare?
Implementing Section 1071 requirements can be complex, and small business lenders may benefit from using specialized compliance software to ensure a smooth transition. Tools like Ncontracts’ 1071 lending compliance software can assist in streamlining data collection and reporting. By automating key aspects of compliance, lenders may be able to reduce administrative burdens and avoid potential pitfalls in meeting the new standards. Ncontracts software also provides monitoring and analytics features that aim to help institutions identify and address disparities, supporting fair lending practices while striving to stay compliant with Section 1071 regulations.
Disclaimer: The content in this article is provided for general knowledge. It does not constitute legal advice, and readers should seek advice from qualified legal professionals regarding particular cases or situations.
Published By: Aize Perez
