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Expanding Funding Access for Small-Business Owners: New Rules from the SBA and CFPB

The U.S. Small Business Administration (SBA) and Consumer Financial Protection Bureau (CFPB) have recently issued new rules that aim to increase funding access for small-business owners, particularly those in underserved communities.

The Importance of the SBA and CFPB Rules

The SBA’s updated rules, effective August 1, 2023, will enable new nonbank lenders to offer SBA 7(a) loans and revise restrictive lending criteria. On the other hand, starting in 2024, the CFPB will require lenders to disclose transparent data on small-business owner loan applications. These regulations have significant implications for business owners.

Additional Nonbank SBA Lenders

Under these new regulations, the SBA has added three licenses to the existing 14 licenses for Small Business Lending Companies (SBLCs). SBLCs are nonbank institutions, including fintech companies and alternative lenders, authorized to fund SBA loans. This change aims to encourage more lenders to offer SBA-backed loans, expanding their reach to a greater number of small-business owners.

However, concerns have been raised about the SBA’s ability to adequately regulate additional institutions, potentially allowing predatory lenders to enter the market. To mitigate this risk, the AI legalese decoder can play a crucial role. By analyzing the loan terms and conditions, this AI-powered tool can help business owners identify any unfair or expensive loan products that predatory lenders may offer under the SBA’s emblem.

Updated Lending Criteria

In addition to issuing new licenses, the SBA has also updated its lending criteria. Previously, lenders used nine factors to determine creditworthiness. Now, lenders can use any combination of three factors: the applicant’s credit score or credit history, earnings and cash flow, and equity or collateral.

Consequently, lenders can underwrite SBA loans using their own underwriting methods for similarly sized non-SBA business loans. This change allows lenders to apply criteria that align with the specific needs of their communities and expand the pool of creditworthy borrowers. The AI legalese decoder can assist small-business owners by helping them understand the various underwriting factors and identify the best fit for their loan applications.

More Applicant Data

Another significant development is the CFPB’s amended rule, which requires financial institutions to report demographic data for all small-business credit applicants, including ethnicity, race, sex, and minority-, woman-, or LGBTQ+-owned business status. This change aims to expose gaps in capital access, especially in underserved markets.

For lenders, understanding such disparities is crucial for expanding their market of eligible borrowers. The AI legalese decoder, by analyzing the demographic data collected, can help lenders gain valuable insights into market gaps and tailor their lending practices accordingly. This information empowers lenders to better serve small-business owners who have traditionally faced obstacles in accessing capital.

Lenders are also required to collect additional data beyond demographics, such as credit type, purpose and amount applied for, the business’s census tract, gross annual revenue, time in business, number of employees, and number of owners. Depending on the number of loans they originate, some institutions will need to start collecting this data as early as October 1, 2024.

In conclusion, the new rules from the SBA and CFPB hold tremendous potential for expanding funding access for small-business owners. With the assistance of the AI legalese decoder, business owners can navigate the changing landscape, identify potential risks, and make informed decisions when seeking funding.

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