Q1: It means the first: it only requires the changes to be small. It is the same as saying:
Changes only need to be small to make the proposal acceptable.
Q2: The modal "need" generally means the same thing as the non-modal "need", showing obligation; it is just another grammatical way of using the word.
On the topic of "need" as a modal verb, it is not generally used in everyday speech, but it isn't very uncommon in formal speech and writing. It is usually accompanied by a negative word or phrase or used in a question, like the following:
Need he leave?
He need not leave.
No one need come.
Note that "need not" can be contracted to "needn't", and "don't" or "doesn't" aren't used.
Modal "need" has no simple past, but a form of the past can be used with "needn't have" which is used to indicate unnecessary events.
She needn't have brought an umbrella. (Perhaps it didn't rain)
Note that you can't use modal "need" with -ing forms.
His beard doesn't need shaving.
NOT *His beard needn't shaving.
Using "need" with "only" like this is another way to use modal "need", but in general it should not be used in situations not previously mentioned.
They need to go home.
NOT *They need go home.