Are you prepared for the significant changes brought up by the CFPB 1071 rule? Well, for your information, on March 30, 2023, the Consumer Financial Protection Bureau (CFPB) finalized its rule under Section 1071of the Dodd-Frank Act, marking a keen moment for the financial institutions involved in the small business lending process. This is not just another regulation but a mandate that requires lenders to collect and report a wide array of data on small business loan origination systems, including sensitive demographic information about the borrowers in real-time.
Additionally, the main goal of the CFPB 1071 rule is to promote fair lending practices, identify and address potential differences in access to credit, and ultimately promote economic growth for all small businesses, especially those that are owned by minorities, women, and LGBTQIA+ individuals. With this, a new level of accountability and transparency with small business loan software is expected from every financial institution that is offering credit to small businesses.
Understanding the CFPB 1071 Rule
The main objective of the CFPB 1071 rule goes far beyond only data collection. Moreover, it is designed to fundamentally reshape the landscape of small business lending by promoting fairness and transparency. This rule also aims to strengthen the enforcement of fair lending laws, ensuring that all small businesses have an equitable opportunity to access the capital required to thrive in the market.
Furthermore, there have also been raised concerns about the potential biases in the small business lending, which particularly impact the minority-owned, women-owned and LGBTQIA+-owned businesses. Hence, by mandating the collection of the detailed demographic and loan processing information, the CFPB strives to highlight such potential differences, making them addressable and visible.
Key Requirements
Data Collection
One of the most crucial and transformative aspects of the CFPB 1071 rule lies in its stringent data collection requirements. This rule also mandates that lenders gather all the essential information for every credit application, such as underwriting, that is received from the small business. This isn’t only about the basic loan processing details, such as the amount requested or even the purpose of the loan. Essentially, this rule extends to collecting demographic information about the principal owners of the applicant's small business through machine learning.
This includes ethnicity, sex and race. Moreover, the particular requirement is designed to help identify potential patterns of discrimination and even ensure transparent access to credit across various demographic groups. Furthermore, the method of collecting sensitive demographic data is essential and subject to specific guidelines. Lenders must offer loan borrowers the opportunity to self-identify this crucial information. They can’t compel an applicant to provide it, nor can they infer it.
Reporting Obligations
It isn't enough for the lenders to collect all the information; they must also send it to the CFPB annually. This is not just a one-time thing; it is something financial institutions must cover consistently to ease their workflows. Once they begin gathering all the data, including detailed information about small business loan origination software applications, like the loan ecosystem, action is taken, denial reasons, and crucially, who owns the business must be put together and sent to the CFPB every year.
Furthermore, this annual report is very essential as it aids the CFPB in completing its job of looking at how the loans are disbursed and even leads them to find any kind of unfair patterns and make decisions that help all the small businesses make the decision-making to grow and thrive together.
As there’s ample data involved, manual reporting highly reports to be impractical and prone to errors. This raises an absolute necessity for sophisticated small business loan software. The SBA loan platform is prepared for data capture and has strong reporting capabilities. Furthermore, lenders usually rely upon small business loan software to streamline their annual submission process, ensuring accuracy and timeliness, ultimately enhancing the customer experience.
Record Retention
Beyond collecting and reporting data, the CFPB 1071 Rule also emphasizes keeping good records. Financial institutions are not only sending their data off but must also hold onto proof that they are following the rules. This further includes maintaining a copy of their "small business lending application register," a detailed log or record of every small business loan application they receive. Moreover, this evidence of compliance must be kept for at least three years.
Compliance Deadlines
Tiered Implementation
It is evident that the CFPB 1071 rule isn't a one-size-fits-all regulation when it comes to when lenders need to start complying. Instead, the CFPB has to set up a tiered implementation system, which means that different lenders have different start dates to collect the required data, depending on how many small business loans they make per year.
Tier 1 - For the Busiest Lender (2,500 or more loans annually)
Suppose the financial institution is very active in small business lending software, meaning that they originated a lump sum of 2500 or more covered the small business loans in both of the last two full calendar years. In that case, they are in the first group to comply. For such high-volume lenders, data collection started on October 1, 2024. This means that they should have already been actively gathering all the required information on every new small business loan portfolio since that date.
Tier 2 - For Moderately Active Lenders (500 to 2499 loans annually)
The next group includes lenders who are quite still active but not as high volume as Tier 1. Such financial institutions originated between 500 and 2499 and covered small business loan onboarding in each of the two preceding calendar years. Moreover, for such providers, the data collection started on April 1, 2025, giving them a few extra months compared to the busiest lenders.
Tier 3 - For Less Active Lenders (100 to 499 loans annually)
Finally, Tier 3, the smallest group of covered lenders, originates between 100 and 499 covered business loans in each of the two preceding calendar years and has the most time to prepare. Their data collection begins on January 1, 2026, and hence, with such an extended timeline, such institutions have more limited resources and, at the same time, need more time to adapt to this regulatory change. Even with such a later date, getting the right small business loan software in place and ensuring all the staff members are trained enough before January 2026 is essential for a smooth transition into compliance.
Leveraging Technology for Compliance
Importance of Small Business Loan Software
Efficiency and Accuracy
One of the most crucial reasons small business loan software is so essential is its ability to boost accuracy and efficiency. Just imagine trying to manually track over 20 specific data points for every small business loan application and then compiling the entire information into a massive report, ensuring that no sensitive data is seen or witnessed by the wrong person. It would be such a nightmare of paperwork and prone to potential errors.
Hence, small business loan software further automates the entire complex data collection, cash flow, and reporting process. It guides the users through what essential information is needed and, at the same time, tries to pull the data directly from the other systems, which can even flag missing and incorrect entries. With this automation, efforts and time that were traditionally involved get reduced.
Security
The CFPB 1071 rule ensures the collection of very sensitive information, like ethnicity, race, and sex of the small business owners. Now, it is quite important to protect this data, not only for compliance purposes but also for maintaining customer trust. Hence, this is where the security features of small business loan software become crucial. Good SBA lending software will have all the string security measures that are built in, such as strong encryption. If such security features are missing from the software, it would further lead the lenders to face serious credit risks of data breaches and privacy violations and even lead to severe regulatory penalties.
Scalability
As a particular financial institution grows or its regulations evolve, the demand for its systems changes significantly. This is where the scalability of small business loan software proves its worth. Strong software isn't only designed keeping in mind today's needs but also built to adapt to the financial institution's future growth. Hence, whether a lender goes from handling hundreds or even thousands of applications annually to handling the increased volume of data, scalable small business loan software will be able to handle the increased volume of data.
Features to Look For
Data Collection Modules
The most essential feature to look for in small business loan software is its robust data collection modules. These are parts of the software designed specifically to capture all the essential information. This means that it should have clear fields for all 20+ data points mandated by the CFPB.
Reporting Tools
Once all the data is collected, the next step is to send it to the CFPB in a very specific manner. This is where the robust reporting tools within the small business loan software become essential. Such tools should automatically compile the entire collected data from the loan application into reports that precisely match the formats as required by the CFPB.
On the contrary, the manual collection of such reports would be frustrating, time-consuming, and prone to errors. Therefore, practical reporting tools in the small business loan software seamlessly streamline such a complex process, ultimately reducing the credit risk of penalties.
Audit Trails
Transparency and accountability are key components of CFPB 1071 compliance, and this is where the audit trail comes in. An audit trail is essentially a detailed log within the small business loan software related to data entries and even modifications. This means that every time a piece of data is entered or accessed, the system records who did it, what they did, and when they did it.
Conclusion
Today, it is clear that the CFPB 1071 rule is not just a fleeting change but a foundational change in how small business lending decisions should be conducted. For any financial institution that falls under this rule, taking proactive measures is no longer an option but an absolute necessity.
So, are you ready to ensure your financial institution is fully prepared for CFPB 1071 compliance and beyond? Don’t just wait for the deadlines to hit.
Invest now in cutting-edge small business loan software that is packed with robust reporting and unwavering security. Contact us today for a personalized demonstration!
Frequently Asked Questions About Small Business Loan Software
1. How does small business loan software help collect sensitive owner information and keep it separate (the "firewall")?
Small business loan software makes it easy to collect owner details like race, ethnicity, and sex by guiding applicants. More importantly, it keeps this sensitive information separate from the loan officers who make decisions, so it can't accidentally influence whether a loan is approved. This is the "firewall."
2. Can our current loan system be updated for 1071, or do we need new small business loan software?
It depends on how new and flexible your current system is. Some can be updated with new features for 1071 compliance. Others might be too old or complicated, meaning you'll need new, specialized small business loan software to handle all the latest rules correctly. It's best to check with your current software provider.
3. What reporting features should we look for in small business loan software for 1071?
Look for small business loan software that automatically creates the exact reports the CFPB needs. It should gather all the loan and owner data and put it in the correct format, ready to send. Good software will also help find any mistakes before you send the report.
4. How does small business loan software help us be fairer in lending beyond just collecting data?
Good small business loan software isn't just a data collector. It can show you patterns in your lending data, like if certain groups are less likely to get loans. This helps you spot and fix potential unfairness, making your lending practices more equitable and transparent.
5. What are the typical costs and timeframes for getting new 1071-ready small business loan software?
Costs and times vary greatly. A simple system might be ready in a few weeks or months, while a complex one for big lenders could take much longer (up to a year). Costs range from monthly fees for cloud-based systems to large upfront payments. You need to get clear quotes and understand all the costs involved when planning for your small business loan software.
