Section 1071: Guide to the New Small Business Lending Rule

Starting in 2025, your lender may be required to ask you a few questions about your small business during the loan application process. This new small business lending rule—known as Section 1071—is designed to increase transparency and promote economic development.

Your participation in this new regulatory obligation is voluntary, and no one deciding on your financing request will have access to your responses. Here are answers to some common questions about Section 1071, including why this data is being collected and how it'll be used. Reach out to your banker to get more specifics on the effective timeline.

The purpose of Section 1071

The Dodd-Frank Act, through Section 1071, requires lenders to gather and report data on the demographics of small business loan applicants. The purpose of the 1071 regulation is to create a dataset that may help identify unmet needs and opportunities to expand access to capital, ultimately supporting the growth of small businesses within local communities.

"Small business growth is critical on so many levels," explains Rohit Chopra, director of the Consumer Financial Protection Bureau, or CFPB, the agency that issued the new compliance rule. "More money gets invested locally. More workers are hired locally. Students who graduate can find opportunities locally. Rural cities and towns, in particular, often center their local economy around small business growth."

Who will receive this survey?

Any small business applying for credit will receive the voluntary survey by email. The 1071 regulation relies in part on the US Small Business Administration's description of a small business, which is any business with $5 million or less in gross annual revenue for its preceding fiscal year. Nonprofits and governmental entities are excluded from this definition.

Applications for most forms of small business funding will fall under this new rule, including business loans, lines of credit, credit cards, merchant cash advances, lease transactions with a nominal purchase option and credit products used for agricultural purposes. Lease or rental agreements that don't transfer ownership are excluded, as are any loan pre-qualifications, re-evaluations and extensions of existing approvals.

Can you opt out of Section 1071 data collection?

When you receive an email requesting the data, you may opt out at that time. Choosing to opt out of sharing your data won't delay or affect your credit decision.

What kind of data will be collected?

Covered lenders are required to report basic data about submitted loan applications, such as when and how the potential borrower applied. They also must report information that's part of the credit application, such as credit type, purpose of the loan, fee structure, the amount applied for and the amount approved or denied.

Additionally, they'll be asked to collect basic demographic information for each loan applicant. Remember, this information is collected to help increase lending to underserved businesses.

Types of reportable information they'll need to gather include:

• Number of principal owners
• Number of workers
• Length of time in business
• Gross annual revenue
• Ownership demographics, including gender, race and LGBTQ+ status
• Ethnicity, race and gender of principal owners

It's important to reiterate that none of this data will be visible to anyone deciding on a credit request. You can view a full list of reportable data in the CFPB's executive summary of the new rule.

Will all lenders request this data?

The final 1071 regulation applies to a variety of financial institutions that lend to small businesses—as long as they process at least 100 covered loan types in each of the 2 preceding calendar years. Under this definition, First Citizens is considered a covered financial institution for both our loan and equipment financing originations.

Will Section 1071 data collection affect your loan application?

Section 1071 data points won't be visible to anyone making a decision on your loan request, and they won't impact any credit judgments.

When does Section 1071 take effect?

Section 1071 compliance deadlines are staggered based on the number of covered transactions a lender originates. The earliest deadline financial institutions must begin collecting data is July 18, 2025. However, there are several legal challenges to the Section 1071 ruling in progress, and this and other deadlines may be pushed back.

The bottom line

The true impact of Section 1071 will become apparent over the coming years as the analysis of collected data and targeted support for small businesses result in more initiatives across the country. Remember, when small businesses grow, they help our communities prosper.

Working with a business banker can also help you navigate the new CFPB small business lending rule and understand how it impacts your business needs.