Over the past two years, CCRC has been studying the restrictions imposed by the U.S. Small Business Administration on loans to small businesses owned by justice-affected individuals. Many of those same restrictions, which are grounded in an operating policy that recipients of federal assistance have “good character,” also apply by formal rule in the SBA’s business development program under 8(a) of the Small Business Act.

For more than half a century, the so-called “8(a) program” has earmarked federal contracts for businesses owned by socially or economically disadvantaged individuals, and it has been a key driver of community development in urban areas. But the program’s “good character” test has historically excluded from participation many if not most business owned or managed by individuals with a criminal history. The 8(a) program also has satellite programs, including ones offering preferential treatment to businesses owned by women and veterans, though it is less clear whether these programs have similar criminal history restrictions.

Recently, Congress returned responsibility for certifying program eligibility for veteran-owned business from the VA to the SBA, and the SBA has now published proposed certification rules for public comment. These proposed rules offer a first chance to speak to the SBA’s “good character” requirement.

CCRC worked with the Washington Lawyer’s Committee for Civil Rights to draft comments on the proposed rule that are critical of the SBA’s vague and open-ended test of business owners’ “character” that results in disqualification of many deserving individuals from this and other federal programs administered by the SBA. Those comments, which are joined by 24 other organizations, were filed on August 5 and are available here.

The comments commend the SBA’s proposal to extend eligibility for certification to veteran business owners who are on probation or parole, or incarcerated.  However, they express concern that these individuals – along with others with a criminal history who have fully served their sentences — may be arbitrarily excluded from a program specifically intended to benefit them:

The proposed removal of categorical exclusions for those on parole, probation, or who are incarcerated is an important step. However, the Proposed Rule’s continued use of “good character,” as well as the absence of any substantive or procedural criteria to guide decision-making, will continue to deny certification to individuals with significant business ability who otherwise could effectively and responsibly perform federal government contracts and contribute to the development of their communities.

The comments are also critical of the SBA’s “disjointed approach to ‘good character’ determinations in its various programs,” noting that the approach taken in the proposed rule may be inconsistent with rules and operating policies in other SBA programs that also exclude business owners with a criminal history throuigh “good character” determinations.

The comments urge the SBA to abandon entirely the “undefined and potentially invidious
‘good character’” test, and instead to adopt “an evidence-based, transparent, and objective method of assessing the intersection between criminal record and effective contract performance.”

Promulgation of clear standards and procedures in a formal rule will serve the interests of both the SBA and applicants for certification, as well as the national interest in reintegration of justice-affected individuals.

The comments suggest that the SBA look to recent state reforms in occupational and professional licensing statutes, in which states have rooted out similarly vague statutory terms such as “good moral character” or restrictions applicable to crimes of “moral turpitude.”

Instead of using such ill-defined terms, licensing reforms have required assessment of candidates on a case-by-case basis guided by clear standards and processes that examine whether, among other things, a conviction is directly related to the occupation or profession, how much time has passed since the conviction, and evidence of mitigating circumstances and subsequent rehabilitation.

CCRC’s work in connection with this comment to the SBA is directly related to its larger “Fair Chance Lending” project, on which it is partnering with the University of Michigan’s Ford School of Public Policy.  There will be more in this space about that project in weeks to come.