Why Section 1071 Matters and Where Verification Counts
If you’re lending to small businesses, you’ve likely heard about Section 1071. It’s part of the Dodd-Frank Act, and after years of legal back-and-forth, the Consumer Financial Protection Bureau (CFPB) is moving forward with it, albeit with more pushback and rule revisions still underway.
At its core, Section 1071 requires lenders to collect and report detailed data about credit applications from small businesses, including demographic and ownership information. The goal is to increase transparency and fairness in business lending, especially for women- and minority-owned businesses.
For lenders, this creates a new layer of operational and compliance responsibility—and that’s where innovative verification processes can make a big difference.
What’s Changing Under Section 1071?
The rule expands what lenders need to track and report when evaluating small business credit applications. That includes:
- Whether the business is minority-owned, women-owned, or LGBTQI+-owned
- The race, ethnicity, and sex of the principal business owners
- Business size, structure, and gross annual revenue
- Application decision details, including credit terms offered
It’s a lot of data. And because it’s tied to regulatory compliance, accuracy matters.
Non-compliance with Section 1071 can lead to significant penalties and reputational damage. Therefore, lenders must build their data strategy now, starting with the most critical foundation: knowing who you’re lending to.
Where Verification Becomes Essential
Section 1071 isn’t just about collecting data—it’s about getting it right and proving you did your due diligence. This is where verification services become your trusted ally, not the check-a-box kind. Still, documented, defensible verifications that support your underwriting and compliance efforts give you confidence that you’re on the right track.
Here’s where it counts:
1. Verifying identity and business ownership
When you’re required to report on demographics and ownership, vague or mismatched records can create real issues. You need to know the business and its principals are who they say they are. That includes matching names to EINs, verifying SSNs through SSA-89 forms, and flagging inconsistencies before they become problems.
2. Documenting actual income and revenue
Stated income alone doesn’t cut it anymore. With 4506-C IRS transcripts, you can confirm a business’s income straight from the source. That gives your underwriting team solid data to work from and supports better risk assessment, especially in high-fraud segments.
If you’re selling into the secondary market or facing tight compliance reviews, verified income can help protect your institution.
3. Reducing fraud risk before funding
Small business lending has become a target for bad actors. Fraudulent documents, fake businesses, and synthetic identities aren’t uncommon, especially in fully digital applications. However, with layered verification, lenders can spot red flags early, significantly reducing the risk of fraud and ensuring more secure lending decisions.
4. Creating audit-ready documentation
You need records demonstrating how and when information was verified, and those processes align with internal policy and regulatory expectations. This level of preparation ensures that you’re always ready for a CFPB exam or selling a loan portfolio, as verification provides the necessary paper trail.
A More Innovative Way to Move Forward
Verification makes compliance easier, reduces your margin for error, and supports stronger lending decisions overall. It also enhances your institution’s reputation and increases investor confidence.
While the exact timeline for enforcement may shift, the direction is set: more transparency, documentation, and accountability.
Lenders who anticipate these changes now will be in a far better position later, not just to meet the rules but to lend more confidently.
Key Takeaways
- Lenders must now collect and report demographic and application data.
- SSA-89 and 4506-C transcripts help lenders confirm borrower identity and income with defensible, third-party data.
- Mismatched or unclear records can lead to reporting errors and compliance risk.
- Verifying borrower and business legitimacy reduces exposure to fraudulent applications.
- Now is the time to strengthen documentation practices and better prepare for CFPB exams, loan sales, and future regulatory shifts.
Ready to transform your lending experience? Contact us to get started and ensure efficiency and reliability in your loan approval processes.
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