Embracing Section 1071: A Win-Win for Banks and Borrowers

There are things I like to embrace. I have five kids and an amazing wife, and they know I am a hugger. I have some of the best life-long friends; they also know that I like to wrap my arms around them when we get together. But when you give me a banking regulation, I think most of us would agree that’s not something we want to get close to, let alone cuddle up with.

Then here comes the Small Business Lending Rule, or what you may call Section 1071. I admit, at first, I thought that this reg would be the downfall of lending. I was ready with all the standard quips of “It’s too complicated,” “It’s too vague to really make a difference,” and “Does the CFPB really understand what they’re doing?” After spending some time with the folks at the CFPB and better understanding what they are striving for, my view has totally changed. I believe that Section 1071 will help us as an industry as we look to expand the heart of the U.S. economy — small business.

I wanted to know whether I was alone in this thinking, so I asked some of my peers and clients their thoughts on what the Small Business Lending Rule will bring. Their insights include these positive impacts:

Consistency brings efficiency.

One of the key items we preach here at Baker Hill is that you need consistency to win the numbers game that is often tied to small business loans. One bank executive, from a Southeastern-based community bank shared that “[Section 1071] will help us improve both process and pricing consistency. We know we have some opportunity here, but this is finally forcing our hand to nail it down.” A win for the bank, in my opinion, because improved processes and pricing speak to stronger profitability!

Enhanced Customer Insights and Tailored Products.

Adhering to the Small Business Lending Rule involves collecting detailed data on loan applications, including information about the borrower's race, ethnicity, and gender. While this data must be handled with the utmost care and privacy, it can provide valuable insights into the diverse needs of different customer segments. A business lending product owner from a Northwestern regional bank told me, “1071 will allow banks to better monitor their portfolios for discriminant and/or disparate lending. Using the new data fields will allow them to use the data or lack of collected data to review the lending trends from a bank level and all the way down to the RM level in more detail.” Armed with this information, banks can create tailored financial products and services that better address the specific requirements of traditionally underserved communities.

Improved Risk Mitigation.

Section 1071 will shed light on who banks and credit unions lend to on a course of normal business. Sadly, those markets have historically been somewhat limited, but now the industry will have the ability to lend outside of those old circles. A key executive at an East coast bank said, “The rule will expand who we lend to and will create more diversity in our portfolio. This will result in strong risk management because of the expanded portfolio. This will change not only who do we lend to, but also how we will lend.” With this data, institutions can refine their risk models and make more accurate credit decisions, leading to reduced default rates and enhanced overall portfolio performance.

Additionally, the newfound insights into borrower demographics can help banks better understand economic disparities and systemic challenges faced by minority entrepreneurs. Armed with this knowledge, banks can proactively implement risk mitigation strategies, thereby fostering greater financial inclusion and stability within the communities they serve.

The Small Business Lending Rule presents an opportunity for banks and credit unions to redefine their role in promoting financial inclusion and supporting the growth of underserved communities — and ultimately the U.S. economy. Beyond mere compliance, embracing this regulation can unlock a multitude of benefits for financial institutions, their borrowers, and society as a whole. So, let’s wrap our arms around this regulation and make banking better.

Visit our guide for additional resources on the Section 1071 Small Business Lending Rule.

Author Bio

With more than 25 years of experience in the financial services industry, Mike Horrocks possesses a unique and extensive blend of financial expertise, technology skills, process redesign abilities and solution management experience. Horrocks’ background enables him to create go-to-market strategies for new solutions, help clients convert strategies into revenue generating initiatives and forecast market direction.

As the Vice-President of Product Management at Baker Hill, Horrocks’ responsibilities include the identification and development of new market opportunities in the business of lending, risk management, and analytics for financial institutions. Mike holds a MBA both in International Finance and Venture Technology Management from Indiana University and a B.S in International Finance from Brigham Young University.

Before joining Baker Hill, he held executive positions within several other organizations, including Experian, Profit Technologies, SAIC, Broadway and Seymour (FIS), Zions First National Bank and Zions Data Corporation.

Horrocks is a member of many associations including the Risk Management Association and Bankers Without Borders. In his free time, he enjoys traveling internationally with his wife and five children.