Applying for an SBA loan with a criminal record
Loans from the U.S. Small Business Administration (SBA) are a key resource for small businesses fighting to survive during this pandemic. SBA loans are generally loans provided by private lenders and guaranteed by the federal government. The $2+ trillion stimulus package (the CARES Act) signed into law today, includes more than $300 billion in funding for new SBA loans called the “Paycheck Protection Program,” some of which are eligible for forgiveness.
These loans are to be provided under SBA’s primary loan program, the 7(a) loan program, but they increase eligibility for 7(a) loans, extend their allowable uses, and allow for loan forgiveness, among other provisions. (See H.R. 748, sec. 1102; 15 U.S.C. 636(a)). Notably, a Paycheck Protection Loan may be used—in addition to already-allowable uses under 7(a)—for payroll support (including paid sick, medical, or family leave, and group health care benefit costs during leave), employee salaries, mortgage payments, rent, utilities, and any other debt incurred before February 15, 2020. See H.R. 748, sec. 1102. Further, for all 7(a) loans made between February 15, 2020 and June 30, 2020, loaned funds would be eligible for forgiveness if used for payroll costs (with a couple of exceptions), and certain other expenses to maintain “payroll continuity” during a four-month period. A business must submit certain documents to apply for forgiveness, and the forgiveness amount is reduced if the number of employees or their compensation has been reduced. Se H.R. 748, sec. 1106.
In this post, we explore considerations for people with a criminal record who wish to apply for a 7(a) small business loan, including the “Paycheck Protection Program” loans that will be funded through the CARES Act. We also discuss disaster loans for small businesses in areas severely impacted by the Coronavirus (COVID-19), which the SBA is already making available.
After reviewing existing SBA loan eligibility rules and vetting policies for 7(a) applicants, we have questions about the extent to which these new loans will be available to people with a criminal record. Generally, the SBA excludes any business with a principal who is on probation, parole, or similar form of supervision; or who is currently facing any charges. And while a closed criminal case is not automatically disqualifying, SBA requires that every 7(a) applicant’s principals be “of good character,” and conducts a character evaluation that for people with a felony conviction, certain misdemeanor convictions, or a recent case, requires a full FBI background check before loan funds may be approved. This evaluation specifically requires disclosure of expunged convictions and certain non-conviction records. Moreover, if a person has not completely satisfied a sentence “and other conditions of the court,” they are ineligible for a loan. Certain broad language in the CARES Act suggests that the SBA might not impose eligibility requirements that would apply to 7(a) loans in normal times, including ineligibility due to an open criminal matter or lack of “good character.” We hope that would be the case, 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. We will look for guidance from the SBA as to how it will interpret this language. [See the updates at the top of this post.]
7(a) Eligibility Criteria
Current SBA regulations and policies with respect to 7(a) loans and criminal history make a small business ineligible if the business has a principal who is incarcerated, under supervision, or facing charges. The agency also requires that such persons “must be of good character,” determined through a rigorous character evaluation process that includes close attention to an applicant’s past criminal record. The 7(a) statute allows the SBA to verify an applicant’s criminal background or lack thereof, including through an FBI background check. See 15 U.S.C. 636(a)(1)(B).
More specifically, current federal regulations provide that a business is ineligible for a 7(a) loan if the business has an “Associate” (a significant owner or person who manages day-to-day operations)1 who is “incarcerated, on probation, on parole, or has been indicted for a felony or a crime of moral turpitude.” 13 C.F.R. § 120.110(n). SBA policies clarify that this includes a person under a deferred prosecution, conditional discharge, order of protection, or on a sex offender registry, as well as anyone “currently subject to an indictment, criminal information, arraignment, or other means by which formal criminal charges are brought in any jurisdiction.” See SBA Standard Operating Procedure (SOP) 50 10 5(K)(B)(2)(III)(A)(13) (eff. April 1, 2019). (In 2015, the SBA changed the rules of its 7(m) microloan program to make people on probation or parole eligible to apply for a loan, but retained the ineligibility requirement for the basic 7(a) program.)
While a past conviction is not among the grounds for automatic ineligibility for a 7(a) loan, SBA policy also requires every Associate to be “of good character.” See id. The character evaluation process is described further below.
Though these eligibility criteria and “good character” requirements certainly apply to 7(a) loans in general, the text of the stimulus bill could be read to say that these requirements do not apply with respect to the Paycheck Protection loans:
See H.R. 748, sec. 1102. If this reading of this broad language is correct, the stimulus bill would waive other eligibility requirements that would normally apply to 7(a) loans, including ineligibility due to an open criminal case or lack of “good character.” We hope that would be the case, and will look for guidance from the SBA as to how they interpret this language now that the law has been enacted. [See the updates at the top of this post.]
7(a) Character Evaluation Process
For 7(a) loans in general, and potentially for Paycheck Protection Loans as well, the SBA conducts a multi-step character evaluation process to determine if an applicant’s Associates satisfy the “good character” requirement. See subsection 13 of SOP 50 10 5(K)(B)(2)(III)(A) (“Businesses with an Associate of Poor Character”) at p. 109.
First, an applicant and its Associates must submit to the lender SBA Form 1919, which includes three questions on criminal history. Question 17 asks if the person is presently facing charges, which would make them ineligible. Question 18 asks about arrests in the past 6 months. Question 19 asks, respecting “any criminal offense – other than a minor vehicle violation,” if the person has ever been convicted, pled guilty or nolo contendere, or been placed on pretrial diversion or any form of parole or probation, including probation before judgment. SBA policy makes clear that a person must answer “Yes” to these questions “even when the individual believes the record is sealed, expunged or otherwise unavailable,” and that “[t]here are no exceptions or waivers to this policy.” Lenders are required to keep this information private and confidential.
If a person answers “Yes” to Questions 18 or 19, the person must submit to the lender SBA Form 912 (“Statement of Personal History”), along with a “detailed written statement” describing the facts and circumstances of any responsive criminal matter, including dates, locations, charges, dispositions, sentencing, court conditions, as well as “court documentation” that sentencing and other court conditions (including “fines or penalties”) were satisfied. If any sentence “and other conditions of the court” have not been satisfied, the person is ineligible for a loan. See SOP 50 10 5(K)(B)(2)(III)(A)(13) at p. 111. Form 912 also states: “An arrest or conviction record will not necessarily disqualify you; however, an untruthful answer will cause your application to be denied and subject you to other penalties…”
After receiving the SBA Form 912 package, the lender may process the application and proceed with the loan if it determines that all reported criminal cases resulted in one of the following dispositions: (1) dismissal of the charges; (2) the reduction of any original felony charges to misdemeanors; or (3) conviction on one or more misdemeanor counts, if any conditions were met more than 6 months before the loan application, and the convictions do not involve a crime against a minor.
However, the lender may not proceed and the SBA must conduct a background investigation including an FBI fingerprint background check, and make a character determination, if any of the reported criminal cases resulted in: (1) a felony conviction; (2) a misdemeanor conviction within 6 months of the loan application or for a crime against a minor; or (3) charges filed with a final disposition entered within 6 months of the loan application. After the background check is completed, the SBA will “determine either that the Subject Individual has good character, or is not eligible for SBA financial assistance.” No specific standards are provided to guide this decision. See SOP 50 10 5(K)(B)(2)(III)(A)(13) at p. 113. A person may request reconsideration of a character determination within 6 months of the decision. Id.
In addition to 7(a) loans, the SBA is also already offering 7(b) 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.
[See our new post for more current information on disaster loans]
By statute and its own rule, SBA is barred from making 7(b) loans to anyone who has been “convicted, during the past year, of a felony during and in connection with a riot or civil disorder or other declared disaster.” But the application for a disaster loan requires that certain owners (any proprietor, general partner, limited partner who owns 20% or more interest, or owner of 20% or more voting stock) must disclose any arrests in the past 6 months, as well as any convictions, guilty or nolo contendere pleas, and placements on pretrial diversion or any form of parole or probation, including probation before judgement. The applicable SBA policy on disaster loans states that “[i]t is not in the public interest for SBA to extend financial assistance to persons who are not of good character,” and so it will perform a character determination of anyone disclosing any of the records described above. SOP 50 30 9(3.6) (effective May 31, 2018) at p.32. This character determination (described in detail here at Section 3.6) is similar to, but apparently less onerous than, the 7(a) character evaluation process described above.
In addition to the programs discussed in this post, this website provides more information on SBA’s various benefit programs.
*Note this post was updated on April 28, 2020.
1. An “Associate” is defined as “(i) An officer, director, owner of more than 20 percent of the equity, or key employee of the small business; (ii) Any entity in which one or more individuals referred to [the previous clause] owns or controls at least 20 percent; and (iii) Any individual or entity in control of or controlled by the small business (except a Small Business Investment Company (“SBIC”) licensed by SBA).” 13 C.F.R. § 120.10.
- Accessing SNAP and TANF Benefits after a Drug Conviction: A Survey of State Laws - December 6, 2023
- Comments on SBA proposal to eliminate criminal history loan restrictions - November 16, 2023
- Minnesota enacts four major record reforms in 2023 - October 18, 2023
- SBA takes one step toward fair chance lending, but needs to take another - September 7, 2023
- CCRC seeking a Deputy Director - June 13, 2023
- Biden Administration announces actions to promote reintegration - April 28, 2023
- SBA modifies criminal history restrictions in its loan programs - April 14, 2023
- DC enacts progressive new record-clearing law - April 6, 2023
- Pending federal reforms promise support for justice-affected entrepreneurs - March 9, 2023
- SBA proposes to ease criminal history restrictions in loan programs - January 19, 2023