After Congress authorized hundreds of billions of dollars for small business relief during COVID-19, the Small Business Administration (SBA) by rule and by policy imposed restrictions on applicants with an arrest or conviction history.  As we have documented, these SBA barriers, neither required nor contemplated by Congress, unlawfully impeded access to the Paycheck Protection Program (PPP) and the Economic Injury Disaster Loan (EIDL) program.  Over many weeks, the Administration stubbornly defended those barriers.  Finally, facing a bipartisan chorus of criticism including from members of Congress, and lawsuits in federal court, the Administration threw in the towel.

On June 12, shortly after the SBA eased some of the PPP restrictions, lawsuits were filed in federal court by several Maryland business owners challenging those restrictions.  On June 24, SBA further relaxed its PPP barriers, this time in a far more significant fashion, notably making the business owners who had sued the SBA eligible.  But the latest policy change came with less a week before the June 30 application deadline.

Then, just one day before the deadline, a federal judge ruled that the SBA’s criminal history restrictions on PPP, except for the June 24 policy change, were likely unlawful.  The court extended the deadline to apply, but only for the small business owners who had sued.

In a dramatic finale, Congress extended the PPP application deadline to August 8 for everyone.  This extension, signed into law on July 4, gives business owners made eligible under the June 24 policy a meaningful opportunity to learn about their eligibility and complete the application process.  A good outcome all around, thanks to the many people who refused to take no for an answer!

Specifically, the federal court held that the SBA’s criminal history exclusions issued in April 15 and June 12 regulations were likely arbitrary and capricious because they “contain no explanation for the criminal history exclusion.”  In contrast, the court found that the June 24 regulation “provides a reasoned explanation for a more limited criminal history exclusion.”  The more limited exclusion excludes applicants who answer yes to either of the following questions, per the current application form:

5. Is the Applicant (if an individual) or any individual owning 20% or more of the equity of the Applicant presently incarcerated or, for any felony, presently subject to an indictment, criminal information, arraignment, or other means by which formal criminal charges are brought in any jurisdiction?

6.  Within the last 5 years, for 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, for any other felony, has the Applicant (if an individual) or any owner of the Applicant 1) been convicted; 2) pleaded guilty; 3) pleaded nolo contendere; or 4) commenced any form of parole or probation (including probation before judgment)?

“I am grateful for a legal outcome that gives me a chance to apply for this loan instead of excluding me unfairly because of my former incarceration,” said Sekwan Merritt, one of the plaintiffs, owner of Lightning Electric.  “It is critical for business owners like myself to have the same opportunity to get this crucial funding.”

“The SBA must not repeat this injustice in any future aid programs, and we hope that the clear message sent by today’s ruling will insure that they won’t,” said Claudia De Palma, staff attorney at the Public Interest Law Center.  “The ruling rightly calls the SBA’s previously broad exclusions of business owners with criminal records unlawful,” said ReNika Moore of the ACLU.  “The SBA must do away with policies that exclude Black and Brown entrepreneurs.”

Experience in the past three months has shown how counterproductive such policies can be.  People turn their lives around and start small businesses, only to be shut out of emergency assistance programs with little or no explanation.

These restrictions also result in disparate racial impacts, given longstanding institutional racism in the criminal justice system.  A study conducted by three economists and published by University of Michigan Institute for Social Research, looked at data from seven states and found that the SBA’s original PPP criminal history exclusions had a disparate impact, with Black and Hispanic men, and Black women, experiencing higher than average exclusion from PPP eligibility.

Looking ahead to what small business owners with records may expect from the SBA in the future, we will work to ensure that SBA does not forget the lessons learned during the past three months.  At a minimum, the SBA should accord the same treatment to applications from people with criminal records under future stimulus programs, as well as the regular 7(a) and 7(b) small business loan programs, as it is now willing to accord them in the final stage of PPP applications.  We will continue to work for the elimination of all categorical bars based on criminal record for small business funding, occupational licenses, and other government benefits.  But for this stage, it was a good outcome all around thanks to the many people who would not take no for an answer!