There’s a popular saying that goes, “the devil is in the details.” That could certainly be said to describe Section 1071 of the Dodd-Frank Act and how it can — and will — adversely impact small business owners and the community banks that support them.

Congress’ intent was to find ways to increase lending opportunities to small business borrowers. The act itself requires Congress to adopt regulations overseeing the collection of small business lending data. Section 1071 specifically requires financial institutions to compile, maintain and submit to the Consumer Financial Protection Bureau certain data in connection with credit applications made by small businesses, including women-, minority- or LGBTQI+-owned small businesses.

At the Pennsylvania Association of Community Bankers, we support and empower our community banks to help them ensure local businesses thrive and succeed. We know community banks originate about 70% of small-business loans. These financial institutions are heavily invested in the success of their local communities. By supporting small businesses, they help stimulate local economic growth, which in turn benefits the bank. These banks have a deep understanding of their local markets and economies. They often develop close relationships with local small-business owners, enabling them to better assess the creditworthiness of these businesses.

Decision-making processes at community banks are often more streamlined and localized. They often can tailor loans to meet the specific needs of small businesses and provide flexible terms.

While the bureau's 1071 regulation aims to promote fair lending practices and increase transparency in small-business lending, community bankers are concerned about several aspects of the new regulation that pose challenges for small lenders and borrowers.

The collection of detailed demographic information about business owners raises privacy concerns. Small-business owners might be hesitant to provide sensitive personal information, fearing potential misuse or data breaches.

In early 2023, a Pennsylvania community bank CEO testified during a congressional hearing that the disclosure of loan information — including how much money was requested and the purpose of the loan — is not something a small business borrower wants to be made public. Disclosing this information could put small businesses at a competitive disadvantage, such as revealing a planned business investment or expansion. There are also questions about data access and how it will be maintained and secured.

Unlike other types of loans, small-business loans are not one-size-fits-all; they are tailored to meet the specific needs of the business.

There is also the additional burden placed on the data collection requirements mandated by Section 1071. Most community banks will need to absorb additional system and personnel costs associated in compliance with the rule.

These costs would likely be passed on to the borrower, leading to further bank consolidation — meaning even fewer community banks to serve these small businesses.

The bureau recently extended the date by which small-business lenders must comply with the new 1071 rule. Nonetheless, community bankers are urging it to start over and draft a new rule that does not breach the privacy of small-business customers or expose their business strategy or trade secrets. They also want a rule that is easy to follow to allow community banks to continue supporting their small-business customers that keep our communities strong and vibrant.

Tara Mead is the director of communications and marketing for Pennsylvania Association of Community Bankers. The association, headquartered in Harrisburg, represents the interests of Pennsylvania-based community banks.