SBA eases some criminal history barriers and faces litigation

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

After Congress authorized hundreds of billions of dollars for small business relief during COVID-19, the Small Business Administration (SBA) imposed restrictions on applicants with an arrest or conviction history.  We have written much in recent weeks about how these barriers, neither required nor contemplated by Congress, impede access to the two major relief programs for small businesses, nonprofits, and independent contractors: the Paycheck Protection Program (PPP) and the Economic Injury Disaster Loan (EIDL) program.

Following the introduction of a bipartisan Senate bill to roll back most of these barriers, Treasury Secretary Steven Mnuchin agreed on June 10 to revise the PPP restrictions.  On Friday, June 12, SBA issued new regulations and application forms to ease some of the barriers in the PPP.  The changes are more limited than the proposed Senate bill, and continue to reflect an SBA overreach in its approach to loan applicants with criminal records, at a time when we are nearing the June 30 closing date to apply for this much-needed assistance.

Meanwhile, two lawsuits have been filed against the SBA in federal court in Maryland, asserting that the SBA’s criminal history restrictions are beyond the agency’s authority, arbitrary and capricious, and contrary to the text of the CARES Act.  The first lawsuit, filed on June 10, is brought by The New Civil Liberties Alliance on behalf of a corner store in Hagerstown, Maryland, which was denied PPP assistance based on its owner’s 2004 felony conviction, for which he is on parole.  The second lawsuit, filed on June 16 by the ACLU, Public Interest Law Center, and Washington Lawyers’ Committee for Civil Rights and Urban Affairs, also asserts that the restrictions fall hardest on minority businesses due to the impact of over-criminalization on communities of color.  The suit is on behalf of the owner of an electrical contracting business on parole for a 2012 drug conviction, a graphic designer with pending misdemeanor charges, and a nonprofit that provides job and entrepreneurial training for currently and formerly incarcerated individuals.  None of the business owner plaintiffs in these two lawsuits would be eligible under the SBA’s new policies, which we analyze below.  (Further information on the lawsuits is also below.)

The new SBA policies announced last week reduce the range of past felony records that are disqualifying.  The original policies (reflected in an April 15 Interim Final Rule and the original PPP application form) disqualified “any owner” of an applicant who had, in the last five years, for any felony, been convicted, pled guilty or nolo contendere, or who had been placed on pretrial diversion or any form of parole or probation, including probation before judgement.

The new policies exclude a smaller set of past felony records, with additional focus on offenses that are arguably more relevant to federal financial assistance.  Per the new regulation, an applicant is now disqualified based on a past felony record, if, within the last 5 years, “an owner of 20 percent or more of the equity of the applicant,” has been convicted of any felony involving “fraud, bribery, embezzlement, or a false statement in a loan application or an application for federal financial assistance,” or within the last year, convicted of any other felony.  But the PPP application form, revised on June 12, again goes further than the rule, extending exclusion to applicants with “any owner” who, for the above offenses during the specified time periods, “1) been convicted; 2) pleaded guilty; 3) pleaded nolo contendere; or 4) been placed on any form of parole or probation (including probation before judgment).”  Further, the new application form leaves in place the existing disqualification of applicants with an owner of 20% or more of the equity who is “currently subject to criminal charges, incarceration, probation, or parole.”

These new policies purport to rescind the previous disqualification of people who were placed in “pretrial diversion,” based on a commitment to do so made by Sec. Mnuchin to Senator Cory Booker.  An SBA bulletin states: “The application also eliminates pretrial diversion status as a criterion affecting eligibility.”  In fact, on June 11, the SBA had already struck the words “pre-trial diversion” from the previous application form.  But, evidently inconsistent with the Secretary’s commitment, the SBA will continue to disqualify people for felony records associated with bare guilty pleas and probation before judgment, which are often elements of pretrial diversion programs.  Further, the catch-all exclusion of anyone “currently subject” to charges or supervision certainly includes many people participating in pre-trial diversion programs, including for misdemeanor charges.  And it appears to extend to the business owner plaintiffs in the two Maryland lawsuits.

Finally, it is not clear if the above changes will apply to EIDL disaster loans, which have been subject to undisclosed and seemingly arbitrary and evolving criminal history restrictions.

The SBA’s easing of some restrictions to the Paycheck Protection Program appears to be a modest improvement in the agency’s treatment of applicants with a record, but efforts in Congress would go considerably further.  We hope that those legislative efforts will be pursued, since even as modified the SBA’s policies fall considerably short of compliance with the CARES Act.


The ACLU’s press release announcing its suit can be found here:

The complaint can be found here:

A video on the filing can be found here:

The NCLA’s press release announcing its suit can be found here:

The complaint can be found here: