Upcoming Data Reporting Requirements Could Shape Small Business Lending’s Future

Main Street businesses represent the backbone of both the American economy and their local communities.

And with the news on Tuesday (April 16) that Rapid Finance has teamed up with Galileo Financial Technologies on a small business financing solution, small business lending is top of mind for financial institutions and FinTech platforms alike.

After all, the nation’s 33 million small businesses employ nearly half of all private sector workers in the U.S. and account for the majority of new job creation, yet they frequently find themselves in need of working capital solutions — particularly against the backdrop of today’s macroeconomic challenges.

This, as the deadline approaches for compliance with small business data collection requirements for the Equal Credit Opportunity Act (ECOA), as mandated by Section 1071 of the 2010 Dodd-Frank Act (DFA).

Oct. 1, 2024, is the final date by which covered financial institutions must begin collecting data regarding certain business credit applications and report them to the Consumer Financial Protection Bureau (CFPB) in order to comply with the final rule.

The new regulatory reporting rules are designed to increase transparency in small business lending, as well as promote economic development and combat unlawful discrimination in financing outcomes.

Compliance with Section 1071 will require certain lenders to collect and report to the CFPB information about the small business credit applications they receive, including geographic and demographic data, lending decisions and the price of credit.

Whenever new regulations are set to be implemented, it is crucial for financial organizations impacted to plan ahead in order to ensure their compliance.

Read also: Open Banking Allows More SMB Data to Be Used in Financing Decisions

Ensuring Compliance With Upcoming Data Collection Requirements

Section 1071 of the 2010 Dodd-Frank Act (DFA) places extensive disclosure, data collection, data reporting and data firewall requirements on financial institutions for certain transactions made to small businesses, which are defined as those with a gross annual revenue of $5 million or less in the applicant’s prior fiscal year.

Per the CFPB, the final rule on reporting applies to a variety of entities that engage in small business lending as long as they satisfy the origination threshold. These entities include, but are not limited to, depository institutions (i.e., banks, savings associations and credit unions), online lenders, platform lenders, community development financial institutions, lenders involved in equipment and vehicle financing, farm credit system lenders, commercial finance companies, merchant cash advance providers, governmental lending entities and nonprofit lenders.

Not every financial institution is required to collect and report data on lending decisions. Lenders only need to comply with Section 1071 if they originated at least 2,500 covered originations in both 2022 and 2023.

If a financial institution is required to collect data for 2024, it must report that data to the CFPB by June 1, 2025. Any originations below the 2,500 threshold means the financial institution responsible for them is off the compliance and data reporting hook — at least for now.

Onward from Oct. 1, 2024, financial institutions will need to determine if they are covered organizations on an annual basis. The purposes of the new requirement are centered around facilitating enforcement of fair lending laws and enabling the identification of business and community development needs and opportunities for women-owned, minority-owned and small businesses in the U.S.

Already, the marketplace is responding with solutions designed to streamline the collection and reporting requirements for lenders. On Thursday (April 11), Finastra announced the launch of its Small Business Data Collection module, which enables banks to easily comply with Section 1071 reporting.

Read more: Small Businesses Seek Capital From Innovative Lending Solutions

Data is Reshaping the Small Business Lending Landscape

Underscoring what the potential impact of Section 1071 could be across the lending ecosystem, PYMNTS Intelligence has estimated only about 8.5% of small and medium-sized businesses (SMBs) have said they’d found working capital loans from banks were readily available. Conversely, 11% said loans were perceived as being available from online vendors. More than half of respondents said coming into 2024 that they would consider tapping new financing. Of the companies mulling new financing, the data show that more than 26% would consider using an online lender, while about a third would use a large national bank.

“It’s not simple for small businesses to get a loan, even if it’s a small loan,” Galileo Financial Technologies Chief Product Officer David Feuer told PYMNTS in an interview posted in October. “Banks are becoming increasingly sophisticated in their use of data … to make intelligent decisions about who to make their offers to.”

Of the key takeaways in PYMNTS Intelligence’s “SMB Borrowing Dynamics: Trends, Tools and Decision Drivers,” a report completed in collaboration with U.S. Bank, one of the more prominent was that the smaller the business, the less interested it seems to be in using credit, with borrowing costs listed as a concern for 34% of all SMB executives surveyed.