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

After Congress authorized hundreds of billions of dollars in funds for small business relief during COVID-19, the Small Business Administration (SBA) imposed restrictions on applicants with an arrest or conviction history.  These barriers, neither required nor contemplated by Congress, impede access to the two major relief programs for small businesses, nonprofits, and independent contractors during the COVID-19 crisis.  The two programs are the newly created Paycheck Protection Program (PPP) and the ramped-up Economic Injury Disaster Loan (EIDL) program.

Three developments within the past week signal major pushback against or the possible reversal of at least some of these burdensome restrictions, which unfairly deny relief to worthy applicants.

First, at least 65 organizations submitted five public comments in opposition to the SBA’s criminal history restrictions for PPP relief.  Our organization joined 25 other groups in submitting a comment asking the SBA to rescind or modify the regulation on legal and policy grounds, citing recent court decisions that suggest the SBA may lack authority to impose record-based disqualifications at all.

These comments are the most recent expression of what has become a wave of bipartisan opposition to the SBA’s exclusionary policies, and growing coverage of the issues in the press.  We have been collecting relevant documents on our small business relief resource page.

Second, Treasury Secretary Steven Mnuchin signaled in a recent conversation with key Senators that he may be open to easing restrictions on PPP applicants with felony records from the last five years.

Third, the HEROES Act, passed by the House on Friday, includes provisions that would significantly constrain the SBA’s authority to deny applicants based on a record of arrest or conviction in both the PPP and EIDL programs.  If enacted into law, these provisions would mark a turning point in how federal law deals with discrimination based on criminal record.

We discuss these developments in detail after the jump. 

Public Comments Urge SBA To Rescind its Restrictions

The SBA’s Interim Final Rule for the Paycheck Protection Program has come under scrutiny during the public comment period, which concluded on Friday.  Collectively, more than 65 organization wrote five comments in opposition to the criminal history exclusions.

The Interim Final Rule makes ineligible for PPP relief any individual who owns 20% or more of the equity of a business and is presently incarcerated, on probation, on parole, or subject to charges.  Additionally, the regulation as supplemented by the PPP application form makes ineligible any owner of a business if they have in the last 5 years, for a felony: 1) been convicted; 2) pleaded guilty; 3) pleaded nolo contendere; 4) been placed on pretrial diversion; or 5) been placed on parole or probation.

The first public comment, filed on behalf of a diverse bipartisan group of organizations, including our own, calls on SBA to rescind or modify its “needlessly restrictive and unfairly discriminatory” rules.

The comment highlights that many people with a record, facing challenges in securing employment, have established their own small businesses and hired many employees with a record.  “Driving them out of business will result in a severe impact on employment of a population that is already disadvantaged in the workplace.”  The comment also points out the particularly adverse impact on business owners and employees of color, “arrested and convicted at disproportionately high rates due to institutional racism, ensuring that business owners of color will be disproportionately excluded from critical economic assistance.”

Finally, the comment articulates how the SBA’s exclusions are contrary to the intent of Congress in enacting the CARES Act, which calls for relief on an emergency basis and includes a specific provision that “any business concern … shall be eligible” for relief if it has the requisite number of employees.  The comment argues that the SBA’s rules are not only at odds with the CARES ACT, but also “inexplicably depart from prior [SBA regulations] and are unsupported by any explanation.”

The comment cites three recent federal court decisions to suggest that the SBA may lack statutory authority to impose the exclusions at issue:

• A federal court in Michigan found unlawful a different SBA rule that made certain categories of businesses ineligible for PPP—including banks, lobbying firms, certain private clubs, and sexually oriented businesses providing “prurient” products. See DV Diamond Club of Flint, LLC, et al. v. United States Small Business Administration, et al., No. 20-CV-10899, 2020 WL 2315880, at *1 (E.D. Mich. May 11, 2020).  The court held that because Congress made PPP funds available to “all” small business that satisfy the eligibility requirements in the CARES Act with respect to number of employees, the SBA’s more restrictive eligibility rules (drawn from exclusions in preexisting SBA policies) unlawfully exceed the statute.  This reasoning would seem to apply equally to the SBA’s criminal history exclusions.
• Two federal bankruptcy courts, one in New Mexico and one in Texas, held that the SBA’s decision to exclude bankrupt debtors, an exclusion not in the CARES Act, was arbitrary and capricious, and in excess of statutory authority. See In re: Roman Catholic Church of the Archdiocese of Santa Fe, No. 18-13027 T11, 2020 WL 2096113 (Bankr. D.N.M. May 1, 2020); In re Hidalgo County Emergency Service Foundation, Case no. 19-20497; Adv. pro. No. 20-2006, 2020 WL 2029252 (Bankr. S.D. Tex., Apr. 25, 2020).

The comment urges the SBA to immediately remove the ineligibility for persons charged with a crime: “Punishing individuals who have not been convicted of wrongdoing in a court of law is fundamentally unfair and jeopardizes the economic well-being of thousands of employers and employees.”  The group urges the SBA to rescind the 5-year ineligibility period for individuals convicted of a felony, placed on pretrial diversion/probation/parole for a felony, or currently on probation or parole.  To the extent the SBA has authority to restrict eligibility for PPP beyond the criteria in the CARES Act itself, they should be limited to felony convictions for financial fraud from the past 3 years, subject to an individualized assessment and waiver.

A second comment by the Institute for Justice Clinic on Entrepreneurship illustrates the real world impacts of the SBA’s rules and policies, which may “arbitrarily wipe out” all that entrepreneurs with criminal histories have built: businesses that employ workers, create wealth, and provide goods and services to their communities.  The comment articulates the importance of entrepreneurship for those with criminal histories and describes the stories of individuals who started small businesses.

A third comment by Citizens for Juvenile Justice and 37 other organizations emphasizes language in the CARES Act that directs the SBA to prioritize relief for “socially and economically disadvantaged individuals,” which the comment argues includes persons with criminal records.  Excluding a class of persons simply based on involvement in the criminal justice system, or unadjudicated allegations, “is not only contrary to law, it is wrong,” and “perpetuate[s] long-standing forms of racial and ethnic discrimination.”

A fourth comment by Americans for Prosperity (filed under a related regulation) argues that the SBA’s criminal history exclusion is “contrary to the text, structure, and purpose of the CARES Act,” raises due process concerns as applied to those only charged with crimes, and “is poor public policy with an overbroad sweep that harms otherwise deserving small businesses and their employees.”

Finally, the National Center for Transgender Equality filed a comment asserting that the SBA’s rules are not based in the statute and should be revised to reflect only statutory eligibility requirements.

Possible Administrative Change

In April, Treasury Secretary Steven Mnuchin defended the SBA restrictions, stating that the Administration would not voluntarily change them.  But on May 13, the New York Times reported that Senator Cory Booker had raised with Mnuchin the issue of regulations barring some people with records from getting PPP loans.  According to a Senate aide, Mnuchin was “receptive to easing the restrictions” on applicants with felony records from the last five years.

The HEROES Act Would Constrain the SBA

Even if the SBA does not amend its policies, Congress may force its hand.

In April, 16 members of Congress issued letters criticizing the SBA’s criminal history exclusions, including a bipartisan letter by Senators Rob Portman and Ben Cardin, a joint letter by Reps. Joyce Beatty and Joe Kennedy III, a letter by Senator Jeffrey Merkley, and a letter by Rep. Cedric Richmond and 10 other members.

This past Friday, the House enacted the HEROES Act, which includes language drawing on Reps. Joyce Beatty and Joe Kennedy III’s Fair Chance for Small Business Relief Act, which would explicitly curtail the SBA’s authority to deny PPP and EIDL relief based on criminal history.

As to PPP relief, the bill would allow the SBA to deny a loan if an owner of 20 percent or more equity was convicted of felony financial fraud or deception in the previous 5 years.  However, other criminal history would not disqualify an applicant unless such an owner is currently incarcerated.  See H.R 6800, Sec. 90001(j).  This provision would significantly roll back the PPP exclusions discussed above, and analyzed in greater detail in previous postings collected on our small business relief resource page.

As to EIDL relief, the HEROES Act would require that the SBA’s application forms include a statement making clear that an applicant for these disaster advances and loans is not ineligible “solely because of the applicant’s involvement in the criminal justice system.”  See H.R 6800, Sec. 90009.  Currently, it appears that the SBA is denying COVID-19-related EIDL relief to applicants who have ever been arrested for a felony or who have been arrested for a misdemeanor in the last 10 years.  We read the HEROES Act provision to prohibit the SBA from denying disaster relief to any otherwise eligible person based upon their criminal record, an even broader restriction than would apply to the PPP program.

While the HEROES Act in its entirety is unlikely to become law in its current form, if these two provisions make it through the next round of negotiations in the Senate, they would dramatically expand access to critical relief for many small business owners, nonprofits, and independent contractors that the SBA has unfairly been excluding in the past.  They would mark a breakthrough in the federal government’s approach to securing fair treatment for people with a record.  While last year’s Fair Chance Act was an important step in opening doors to federal agency and contractor employment by limiting background inquiries in the early stages of hiring, this would be the first time in decades that Congress has directly prohibited record-based discrimination in a major government benefit program.  We will have more to say on that subject if and when the law is enacted with these provisions in it.