5 Ways A New Bank Lending Law Will Benefit Small Businesses

5 Ways A New Bank Lending Law Will Benefit Small Businesses

Small businesses employ nearly half the country’s workforce, creating 64% of all new jobs. Yet these vital drivers of economic growth often face hurdles in securing the capital they need to prosper, especially small businesses owned by women and people of color.

Early last year, the Consumer Financial Protection Bureau (CFPB) finalized rule 1071, which increases transparency for small business lending. While the law has faced challenges from the courts and Congress and is currently awaiting the outcome of a Supreme Court decision, lenders believe that 1071’s implementation is inevitable.

1071 will illuminate banks’ lending decisions, helping small businesses access the capital they need to thrive. Companies focusing on regulatory compliance for banks are laying the groundwork to help lenders ensure that small businesses’ financial needs are met. Let’s explore how 1071 will benefit small businesses.

1. Offer regulators, small businesses, and the public a complete overview of small business lending: 1071 will require banks to report on small business lending if they have made 100 or more loans in each of the previous two years. According to the CFPB, this covers 95% of all such loans. Banks and other lenders must report demographic data about loans made to small businesses owned by women and minorities. Data points will need to be collected, including credit type, the amount requested, reasons for denying a loan, pricing, and location. Implementing 1071 will deliver a comprehensive picture of the small business lending landscape.
2. Expanding access to credit: Armed with information about their small business lending, banks will be able to address the credit needs of their community. Banks may discover that they’re not adequately supporting minority-owned businesses. They might target more of these customers, increasing access to credit and better serving qualified borrowers.
3. Hold non-bank lenders up to scrutiny: 1071 will apply to both bank and nonbank lenders. As the CFPB notes, nonbank and online lenders have taken up an increasing share of small business financing at approximately $550 billion a year. At the same time, these “alternative lenders” are not held up to the same regulatory scrutiny as their banking peers. 1071 will level the playing field between bank and nonbank lenders.
4. Encourage economic development: When politicians call small businesses the backbone of the U.S. economy, they’re not merely paying lip service to an ideal. Small businesses account for 44% of our country’s GDP. Yet many communities suffer from economic underdevelopment and a lack of decent jobs. 1071 gives lenders a nudge in promoting economic development for communities nationwide.
5. Eliminate discriminatory lending practices: The data collection and reporting requirements of 1071 will eliminate disparities in lending for specific demographic groups, promoting fairer and more equitable treatment of borrowers. If regulators discover a lender has treated groups differently in offering credit, they’ll have the chance to rectify their lending practices.

Small business owners need access to capital to thrive. 1071 will encourage banks and other lenders to offer credit to more small businesses through its regulatory requirements. It will also make credit decisions more equitable and fair. To ensure compliance with the new 1071 rule, check out our comprehensive 1071 small business compliance software at www.ncontracts.com.