SBA’s bumpy guidance on criminal history requirements for stimulus loans

*UPDATE (5/20/20): New efforts to channel federal relief to small business owners with a record”

*UPDATE (5/6/20):  We have a new article about a purported leak of the SBA’s internal guidance for denying disaster loan (EIDL) relief based on a record.

The U.S. Small Business Administration (SBA) oversees an array of government-backed loans that are key resources for small businesses fighting to survive during this pandemic.  The recently-enacted stimulus bill authorized more than $300 billion in new SBA loans, many of which are eligible for forgiveness.  We published a post about this on March 27: “Applying for an SBA loan with a criminal record.”  But in the past week, the SBA has issued confusing and frequently changing guidance regarding stimulus loan eligibility for people with a criminal record, a group that includes as many as one in three adults.  In the last week, the SBA has issued criminal history guidance for the Paycheck Protection Program on three separate occasions, each time with more restrictive eligibility rules, and it is not clear when guidance will be finalized.

The most recent guidance, issued just today, disqualifies from financial assistance a business with: 1) an owner of 20% or more of the equity who is currently subject to criminal charges, incarceration, probation, or parole; or 2) “any owner” who has, in the last five years, been convicted of any felony, or pled guilty or nolo contendere to felony charges, or been placed on pretrial diversion or any form of parole or probation, including probation before judgement, based on felony charges.

These developments are troubling given the urgent need for relief and the considerable barriers that people with records already face in the economy even in the best of times.  In this post we discuss the past week’s developments on this issue.  We also provide information about COVID-19 disaster loans.

Stimulus Package

Last Friday, the President signed into law the CARES Act, a $2+ trillion stimulus package, which included more than $300 billion in funding for new SBA loans, now called the “Paycheck Protection Program.”  These Paycheck Protection Program loans are authorized under SBA’s primary loan program, the 7(a) loan program, but the stimulus bill increases eligibility, extends allowable uses for the loans, and allows for loan forgiveness, among other provisions.  (See H.R. 748, sec. 1102; 15 U.S.C. 636(a); our previous post).

The SBA’s preexisting regulations and policies for the 7(a) loan program make a small business ineligible if the business has a principal who is incarcerated, under supervision, or facing charges; in addition, such persons “must be of good character,” determined through a character evaluation process that examines some or all of an applicant’s criminal record.  In our previous post, “Applying for an SBA loan with a criminal record,” we discussed in detail these preexisting criminal history requirements, but also indicated that the text of the stimulus bill could be read to say that these preexisting  requirements would not be applied with respect to the Paycheck Protection Program loans.  See H.R. 748, sec. 1102.  In the past week, the SBA has issued three different sets of guidance which would apply some of the preexisting requirements, and impose new grounds for disqualifying people with a past criminal record.  The most recent guidance, issued today (April 3), would even disqualify people who have been arrested but never convicted.

March 31 Guidance 

On March 31, the SBA released a sample application form for Paycheck Protection Program loans, which included questions regarding criminal history, to be answered by small business owners with greater than 20% ownership stakes.  A “Yes” answer to either question would be disqualifying:

  • Are you presently subject to an indictment, criminal information, arraignment, or other means by which formal criminal charges are brought in any jurisdiction, or presently incarcerated, on probation or parole?”
  • Within the last 7 years, for any felony or misdemeanor for a crime against a minor, have you: 1) been convicted; 2) pleaded guilty; 3) pleaded nolo contendere; 4) been placed on pretrial diversion; or 5) been placed on any form of parole or probation (including probation before judgment)?

In describing this guidance, the Washington Post appeared to interpret the latter question to call for responses only about crimes against a minor, whether misdemeanor or felony.  However, another plausible interpretation of this ambiguously-worded question is that it called for responses concerning either 1) any felony; or 2) a misdemeanor crime against a minor.  However the first phrase was interpreted, this guidance proposed to disqualify not only based upon conviction, but also based on a non-conviction record such as a guilty plea or placement on pretrial diversion.

April 2 Guidance

On April 2, the SBA posted on its website an Interim Final Rule for the Paycheck Protection Program.  (This rule not yet been published in the Federal Register.)  This interim final rule states (p. 7):

You are ineligible for a PPP loan if, for example:

i. You are engaged in any activity that is illegal under federal, state, or local law …. iii. An owner of 20 percent or more of the equity of the applicant is incarcerated, on probation, on parole; presently subject to an indictment, criminal information, arraignment, or other means by which formal criminal charges are brought in any jurisdiction; or has been convicted of a felony within the last five years;

Thus, the Interim Final Rule makes two changes to the guidance provided by the March 31 sample application form.  First, this rule changes the second disqualification discussed above (“Within the last 7 years, for any felony or misdemeanor for a crime against a minor…?”) to a disqualification if a person “has been convicted of a felony within the last five years.”  Second, the new rule applies to owners of 20% or more of the business (as opposed to greater than 20% in the sample form).

April 3 Guidance

On April 3, the same day that Paycheck Protection Program went live, the SBA published a new Paycheck Protection Program borrower application form which described the grounds for criminal history-based disqualification even more broadly than the Interim Final Rule.  Specifically, the new application form asks two questions regarding criminal history, with a “Yes” answer to either one resulting in disqualification:

  • Is the Applicant (if an individual) or any individual owning 20% or more of the equity of the Applicant subject to an indictment, criminal information, arraignment, or other means by which formal criminal charges are brought in any jurisdiction, or presently incarcerated, or on probation or parole?
  • Within the last 5 years, for any felony, has the Applicant (if an individual) or any owner of the Applicant 1) been convicted; 2) pleaded guilty; 3) pleaded nolo contendere; 4) been placed on pretrial diversion; or 5) been placed on any form of parole or probation (including probation before judgment)?

While the Interim Final Rule would disqualify an “owner of 20 percent or more of the equity” who has been “convicted of a felony within the last five years,” the application form dramatically expands this to disqualify “any owner” who has, in the last five years, for any felony, been convicted, pled guilty or nolo contendere, or been placed on pretrial diversion or any form of parole or probation, including probation before judgement.

This second more sweeping disqualification surely must be a mistake, since it imposes a stricter rule on “any owner” (disqualified for any conviction or many non-conviction dispositions) than on an owner of 20% or more (disqualified only if currently serving a sentence).  Moreover, a decision to disqualify owners based on their having ever been placed in a diversion program is especially troubling: it doubles down on OPM’s widely-criticized proposal earlier this year, which was later withdrawn, to simply ask—and not necessarily disqualify—federal job seekers and contractors if they have been placed on diversion in the last 7 years.  SBA’s decision to disqualify someone who has been discharged from probation or parole, but was placed on it within the last 5 years, is also head-scratching.

Since the Paycheck Protection Program is already live, we hope the SBA will clarify matters as soon as possible, and that it will at the very least return to the standard under the existing 7(a) program that disqualifies only those currently serving a sentence or facing charges.

Disaster loans

[5/6/20: For more current information, see our new article about a purported leak of the SBA’s internal guidance for denying disaster loan (EIDL) relief based on a record.]

In addition to the Paycheck Protection Program, the SBA is also offering COVID-19 Economic Injury Disaster Loans for qualifying small businesses that have suffered substantial economic injury and are located in a Coronavirus (COVID-19) declared disaster area; and pursuant to the CARES Act, small business owners in all U.S. states, Washington D.C., and territories are eligible to apply for a Economic Injury Disaster Loan advance of up to $10,000.  See H.R. 748, sec. 1110.

There is a new online portal for COVID-19 Economic Injury Disaster Loans, but this portal does not allow non-applicants to see what the SBA asks about criminal history.  On April 4, a reader informed us that the criminal history inquiry for disaster loans is even more restrictive than that for the Paycheck Protection Protection: it is a three-part question, which requires a “yes” or “no” to the entire section (not question by question):

a. Are you presently subject to an indictment, criminal information, arraignment, or other means by which formal criminal charges are brought in any jurisdiction? b. Have you been arrested in the past six months for any criminal offense? c. For any criminal offense – other than a minor vehicle violation – have you ever been convicted, plead guilty, plead nolo contendere, been placed on pretrial diversion, or been placed on any form of parole or probation (including probation before judgment)?

It is not clear if a “yes” answer to this question is disqualifying, or if there will be an individual character evaluation, as under preexisting policies.  See SOP 50 30 9(3.6) (effective May 31, 2018) at p. 32.  If a “yes” answer is disqualifying, it is astounding that the SBA would completely disqualify anyone who has ever been convicted, pleaded guilty or nolo contendere, been placed on pretrial diversion, or been placed on any form of parole or probation, for ANY type of offense other than a minor vehicle violation.  We have never seen such a sweeping mandatory disqualification based on a criminal record, in any area of the law, if that is the case here.  It also bears noting that in many jurisdictions “pretrial diversion” is something that the prosecutor determines without any input from a court, and does not require any admission of guilt.  See MPC: Sentencing (2017), which distinguishes between §6.04 Deferred Adjudication (requires some admission of facts) and §6.03 Deferred Prosecution (no admission required).

By statute and rule, SBA is barred from making 7(b) loans to persons who have been “convicted, during the past year, of a felony during and in connection with a riot or civil disorder or other declared disaster.”  But its policy on disaster loans disqualifies an applicant if the “applicant or principal owner is presently on parole or probation following conviction of a serious criminal offense.  However, [the government] will consider approving an application submitted by partnerships, corporations, and LLEs, where the apparent bar to eligibility was committed independently of any official act for the business and the individual will divest all direct and indirect interest in the business.”  SOP 50 30 9(3.6) (effective May 31, 2018) at p. 32.

In addition, the policy calls for the SBA to make an individual character determination, stating that “[i]t is not in the public interest for SBA to extend financial assistance to persons who are not of good character,” and “[i]f any adverse information develops concerning the character or background of a disaster loan applicant or principal owner, as disclosed on SBA Form 912, ‘Statement of Personal History’, or from any other source (e.g. SBA application), SBA must make a determination as to the applicant’s character before a loan can be approved.”  Id.  If a person answers yes to the criminal history question, a “Form 912: Statement of Personal History” is required.  Id.  Based on that form, the SBA will determine if a fingerprint sample is required.  Id.  If the record disclosed “is both minor in nature and was committed more than 10 years ago, fingerprints may not be required to continue processing.”  Id.  Fingerprints are required if the person had a felony conviction from more than a year ago in connection with a riot, civil disorder, or declared disaster.  Id.  Finally, the SBA makes a character evaluation and decision.  Id.

*Note: This post was updated on April 28, 2020.