Applying for federal disaster assistance with a criminal record

In addition to its lending and other programs in support of small businesses, the U.S. Small Business Administration provides long-term low-interest loans under Section 7(b) of the Small Business Act directly to individuals, businesses, and nonprofits in declared disaster areas. The current devastation wrought by Hurricane Ian in Florida — the subject of a dedicated new page on the SBA’s website — reminded us of some research we published two years ago, at the height of the pandemic, about how people with a criminal record were faring under the SBA’s COVID-related disaster relief program.  The answer initially was “not well.”

Our research indicates that neither FEMA (emergency aid) nor the USDA (farm loans) impose criminal record restrictions on disaster assistance.  But the SBA does.  What’s more, the SBA’s restrictions are not formalized in a regulation but buried in operating procedures.

The criminal history restrictions on SBA economic injury disaster loans (EIDL) under the CARES Act were initially even more restrictive than those that applied to its PPP relief, and they too were never formalized in a rule. The PPP restrictions were rolled back in response to public outcry and lawsuits, and the following year the COVID-related EIDL policy was also rolled back to disqualify the same limited population as the PPP itself (people in prison or on probation or parole, with pending felony charges, or with recent financial fraud and related convictions).  However, criminal record restrictions in the SBA’s general non-COVID lending programs, including its general disaster assistance programs, were not affected.

Now that the SBA’s disaster assistance programs are no longer administered under the exceptional and well-publicized approach of the pandemic-related authorities, we thought it would be timely to take another look at how those programs — presumably including the one that specifically applies to Hurricane Ian relief — are available to people with a criminal record.    

At the outset, it is worth noting that the federal government delivers immediate emergency aid to victims of disasters through FEMA, which appears not to ask about criminal record in any of its programs. FEMA refers individuals to the SBA for longer term assistance for physical and economic injury, but will resume some aid if someone is ineligible for an SBA disaster loan.  We don’t know how often this occurs, or what the process is for interagency coordination in such cases. A person will seek out an SBA disaster loan after the immediate stages of a disaster, to rebuild property or compensate for lost business income.

By statute and rule, SBA is barred from making 7(b) disaster loans to persons who have been “convicted, during the past year, of a felony during and in connection with a riot or civil disorder or other declared disaster.”

But the SBA’s operating policy on disaster loans is far broader than this narrow formal bar. In addition to barring assistance to anyone on parole or probation, the policy states the general principle that “It is not in the public interest for SBA to extend financial assistance to persons who are not of good character.” SOP 50 30 9 (3.6) (effective May 31, 2018) at p. 32.

Like its policy on business lending, the SBA’s disaster assistance policy measures a person’s “good character” exclusively in terms of whether or not they have a criminal record.

The SBA’s policy on disaster assistance disqualifies at the outset anyone who is “presently on parole or probation following conviction of a serious criminal offense.” Moreover, if an applicant discloses a prior criminal record in response to questions on the obligatory SBA Form 912, “Statement of Personal History”, the SBA must “make a determination as to the applicant’s character before a loan can be approved.” A potentially disqualifying record includes not only convictions but also diversions and guilty pleas and any form of probation at any time in the past, as well as unpaid fines and fees.  A detailed explanation about the records must be provided, and an application for disaster assistance can be processed without an FBI background check only if the disclosed criminal activity “is both minor in nature and was committed more than 10 years ago.” Otherwise, an FBI background check must be completed. (It is worth noting that the analogous SBA operating policy that applies to bank lending requires a background check only if the disclosed criminal activity is more serious than a misdemeanor.) Finally, after the background check is completed the SBA will make a determination of whether the person is “of good character” and therefore deserving of assistance. 

The SBA’s practice of conducting background checks more broadly for disaster loans than for general small business loans is notable, especially in light of the lack of specific authority in the applicable authorizing statute. If minor criminal conduct (including misdemeanors and diversions) occurred within the previous ten-year period, or if criminal conduct is judged not to be “minor in nature” (a category not defined in publicly available documents as far as we can tell), it must be the basis of a fingerprint background investigation and may be the occasion for disqualification based on “unsatisfactory character.” That strikes us as a very tough standard to apply to disaster assistance, and will have particular applicability in urban settings that tend to have a large number of people with a criminal record.

We plan to conduct further research into how the SBA is currently applying the restrictions in its operating policy on disaster assistance to those with a criminal record, and we welcome communications from anyone who has had relevant experience in this regard.