*UPDATE (7/7/20):  “SBA throws in the towel and Congress extends the PPP deadline”

In response to COVID-19, Congress created the Paycheck Protection Program (PPP) and expanded the Economic Injury Disaster Loan (EIDL) program, appropriating hundreds of billions of dollars across these programs to assist small businesses affected by the pandemic and economic crisis.  As we have been pointing out in this space over the past five weeks, the Small Business Administration (SBA), which administers both programs, has imposed broad restrictions on access to relief based on arrest or conviction history, restrictions that were neither required nor contemplated by Congress.^[1]

Until now, attention has been focused on small business owners unfairly denied PPP relief based on their record.  Members of Congress and major organizations have written in opposition to PPP regulations and policies that impose barriers based on a record, and dozens of media outlets have covered the issue.  But the EIDL disaster relief program has largely gone under the radar, in part because the SBA has not published guidance about how it is treating EIDL applicants with a record.

In a new development, documents posted anonymously on Reddit last week, and published by Law360 on May 3, purport to be internal SBA guidance for reviewing EIDL applications.  The documents instruct agency staff to deny relief to applicants if they have ever been arrested, unless the arrest was for a misdemeanor and occurred more than 10 years ago.  These leaked documents, also covered in detail by Entrepreneur this morning, would suggest that behind the scenes the SBA is imposing even greater record-related restrictions on COVID-19-related disaster relief than on PPP loans.

Upon review, we believe that this new information about the record-related standards being applied by the SBA to EIDL loans is likely correct.  We have heard from readers who were denied EIDL relief after SBA staff asked them questions over email about their arrest history, questions that correspond exactly to those in the leaked documents.  An SBA spokesperson, given an opportunity to correct the record if it needed correcting, declined to confirm or deny the information.

We have never see a government program in the United States with such broad and arbitrary restrictions based on criminal history.  The purported EIDL guidance is devoid of nuance: it instructs staff to deny relief based on arrest history regardless of offense and regardless of whether the arrest resulted in prosecution, much less conviction.  The look-back period is limitless for felony arrests and a full decade for misdemeanor arrests.  The guidance inevitably produces unwarranted disparities: a person with a decades-old felony arrest that was never charged, or whose arrest resulted in an acquittal, is treated more severely than someone with a more recent misdemeanor conviction.  Finally, the guidance cannot be squared with existing published SBA policies, as discussed below.

In normal times, a sweeping and secretive restriction on disaster relief would be problematic.  In this global public health and economic crisis, it is inexcusable.

The standards in the leaked SBA guidance are inconsistent with applicable laws, regulations, and agency policies.  Existing statutes and regulations governing the 7(b) disaster loan program, of which EIDL is a part, only require the SBA to deny disaster loans if an otherwise eligible applicant has been convicted in the past year of a felony related to a riot, civil disorder, or other declared disaster.

However, a close look at the SBA’s policy statement on disaster loans suggests that the leaked documents may represent a shortcut through an existing vetting process during the present exigency.

The published EIDL policy statement (§ 3.6) requires disqualification if the “applicant or principal owner is presently on parole or probation following conviction of a serious criminal offense.”  Further, because “[i]t is not in the public interest for SBA to extend financial assistance to persons who are not of good character,” the agency will make a “character determination” in the event “any adverse information develops concerning the character or background of a disaster loan applicant.”  This adverse information might develop from a three-part question about criminal history in the SBA disaster loan application forms, including for COVID-19-related EIDL relief, a question requiring a “yes” or “no” answer to the entire section:

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)?

The policy statement provides if an applicant answers “yes” to this wide-ranging criminal history question, they must disclose the details of their record on a Form 912: Statement of Personal History.  Based on that information, the SBA will determine if a fingerprint sample is required.  The policy mandates fingerprints only if the person had a felony conviction more than a year ago in connection with a riot, civil disorder, or disaster, but it permits them in other cases.  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.”  After all necessary information is collected, the SBA “completes its character evaluation” and finds the person eligible or ineligible.  The criteria applied for this final decision are not disclosed.

Presumably, this policy statement is still legally applicable to EIDL, but the SBA seems to be skipping steps in the process to simply deny relief to anyone who might be subject to a fingerprint sample in ordinary times, instead of fashioning a rule appropriate to these extraordinary circumstances.  To anyone familiar with the widespread recent efforts to encourage reintegration, it is a bit shocking to see the inner workings of a federal agency pulling in the opposite direction.

^[1] The only statutory record-related restriction for these programs is a half-century old exclusion from EIDL of persons convicted in the last year of a felony “during and in connection with a riot or civil disorder.”  See Department of Housing and Urban Development (HUD) Act of 1968, P.L. 90-448 § 1106(e).