Empowering Small Businesses: How Section 1071 Can Spark Financial Health for All

*​​​This article was sponsored by Jack Henry™. All views, language, and endorsements expressed in this are solely those of the author and do not necessarily reflect the views or endorsements of the Financial Health Network.​ 

Small businesses don’t just fuel the economy – they’re the dreams and livelihoods of millions of Americans. 

Small- to medium-sized businesses (SMBs) employ 46.4% of the private workforce, generating opportunities across communities. Yet SMBs often face financial challenges, especially in securing credit and capital. A recent report shows 44% of small businesses struggle to access affordable financing, limiting their growth and preventing them from meeting unexpected needs. 

Section 1071 of the Dodd-Frank Wall Street Reform and Consumer Protection Act presents a timely opportunity to foster a stronger, more inclusive financial ecosystem  – not only by supporting fair lending, but also by improving the financial health of SMBs.

Section 1071: Supporting Fair Access to Credit for Underrepresented Groups

Section 1071 requires financial institutions to collect and report data on credit applications from SMBs. Its goal is to enforce fair lending laws and address disparities in the availability of credit for women-owned, minority-owned, and small businesses. This regulatory change applies to any financial institution that originates at least 100 qualified credit transactions over two consecutive years. Compliance timelines extend from 2025 to 2027, depending on origination volumes​.

This data collection is crucial because it highlights the gap in financial resources available to underrepresented groups. Currently, women and minorities own a smaller percentage of SMBs, with only:

• 20% of small businesses owned by racial minorities. 
• 14% owned by Hispanics.
• 6% owned by veterans.
• 43% owned by women​.

With the data insights gathered due to Section 1071, community banks, regional banks, and credit unions will be empowered to address these gaps intentionally and equitably.

How 1071 Compliance Can Benefit Your Financial Institutions

By meeting Section 1071 requirements, financial institutions are doing more than simply complying with regulatory mandates. They’re gaining an opportunity to strengthen relationships with SMBs and enhance trust. 

Many minority-owned businesses, in particular, have turned to non-bank fintech lenders in recent years due to a perceived lack of accessible options at traditional banks and credit unions​. During the pandemic, these fintechs helped fill a significant gap by offering automated underwriting systems that made it easier for underserved groups to access funding.

This shift offers a valuable lesson: By implementing more inclusive lending practices, financial institutions can make themselves more attractive to these business owners and, in turn, improve SMB financial health. 

Automated decision-making tools, similar to those used by fintechs, could help minimize disparities in loan approvals, making credit more accessible without adding portfolio risk. These tools can streamline processes to help institutions meet the needs of a broader market base, ensuring fairer access to capital.

Moving Forward: Steps To Support SMB Financial Health

To meet the growing needs of SMBs, especially those owned by traditionally underserved populations, providers can consider these strategies alongside their Section 1071 compliance.

1. Enhance data practices: Section 1071 provides a unique opportunity to collect and analyze data on SMB credit applications and analyze it to better meet the needs of underrepresented groups. This data can help institutions create more inclusive lending practices and tailor products that support financial health for diverse SMB segments.
2. Invest in automation for lending: Automation can be a powerful equalizer. According to research, automated lending processes used by fintechs have shown promise in reducing bias and supporting fairer lending decisions​. By adopting similar technologies, institutions can expedite loan approvals, reduce biases, and streamline customer service for SMBs.
3. Focus on early relationships: By improving digital account opening processes for SMB deposit accounts, providers can establish connections with these businesses sooner. This early relationship often creates a foundation for future lending, as SMBs are more likely to approach financial institutions they already trust when they need financing.
4. Increase visibility and support for SMB owners: Section 1071 makes it easier for community banks, regional banks, and credit unions to identify and attract SMB owners who may have previously been overlooked. Offering targeted financial education, personalized loan products, and flexible terms can help these businesses thrive and feel valued. As SMB financial health improves, so does the community’s economic vitality.

Why SMB Financial Health Matters to Every Financial Institution

While not all financial institutions are required to comply with Section 1071, the spirit of the legislation serves as a reminder of their critical role in promoting equity and economic stability. Strengthening SMB financial health leads to a more resilient economy – as financially stable businesses create jobs, boost local markets, and support the broader community. In short, by improving access to capital, institutions can make a meaningful difference in the lives of SMB owners, employees, and their families.

Need help navigating Section 1071 compliance or want to explore ways to support SMB financial health? Contact Jack Henry – we’re here to help.