SBA takes one step toward fair chance lending, but needs to take another
The U.S. Small Bujsiness Administration has taken several recent steps that promise to make federally guaranteed loans available to business owners with a criminal history. This is an important policy issue we’ve been following for several years, and it appears there may at last be a breakthrough. How big a breakthrough remains to be seen.
Following up on its omission of “character” and “reputation” as criteria for 7(a) loans, discussed in this post, the U.S. Small Business Administration issued new Standard Operating Procedures (SOP) for its 7(a) small business loan program. Effective August 1, 2023, the new SOP omits all mention of “good character” as a requirement for loan qualification. This means that applicants with a criminal history who apply to a bank for a federally guaranteed loan will no longer be put through the SBA’s onerous “character determination” process. (Applicants on parole or probation, or in prison, remain ineligible to apply under 13 CFR 120.110(n).)
At the same time, the issue of prior criminal history appears to remain relevant in deciding whether to make a loan, since applicants for 7(a) loans (including Community Advantage loans) must still complete Form 912, which contains very broad questions asking about an applicant’s criminal history. Questions 7 and 8 on this form ask about pending charges and recent arrests, while Question 9 asks whether the applicant has engaged in any criminal conduct at any time in which there was a disposition:
Q. 9: For any criminal offense – other than a minor vehicle violation – have you ever: 1) been convicted; 2) pleaded guilty; 3) pleaded nolo contendere; 4) been placed on pretrial diversion; or 5) been placed on any form of parole or probation (including probation before judgment)?
Applicants responding affirmatively to any of these questions are instructed to “include dates, location, fines, sentences, misdemeanor or felony, dates of parole/probation, unpaid fines or penalties, name(s) under which charged, and any other pertinent information. . . .”
When asked to supply detailed information about such a broad range of criminal matters, no matter how minor or dated, loan applicants may reasonably assume that those matters will be considered – either by the SBA or by the bank that will actually be making the loan — and may be grounds for declination. The only difference now is that it isn’t clear HOW those matters will be considered or by whom, since the new SOP omits the “character determination” process in earlier editions of the SOP. And those in need of business capital will likely still be deterred from applying.
We think it fair to assume that, despite the SBA’s amendment of the regulation to omit “character” as a loan criterion, and its amendment of the SOP to omit the “character determination” process, any “criminal offense” reported by an applicant (including misdemeanor convictions and diversions, and unpaid fines or financial penalties) may still be considered in deciding whether to make a loan. Even if the SBA itself doesn’t intend to consider an applicant’s criminal history, the agency continues to helpfully collect the information so that the lending bank can consider it.
As we noted in a post last spring, “the good news is that it appears the SBA will no longer bar banks from making loans to otherwise qualified applicants based on their criminal history. The less good news is that the agency seems to expect banks and other lending institutions to step into the void and apply their own restrictions on loans based on an applicant’s criminal history.” Indeed, one can imagine that a bank that otherwise does NOT feel it necessary to inquire into or consider an applicant’s criminal record in its other lending practices, will now feel some obligation to do so because 1) it no longer has the SBA to act as a screen, and 2) the SBA may expect it to use the information it has collected.
In short, we are not at all sure how much progress has been made by removing the loan criterion “character” from the regulations, and the character determination process from the SOP, as long as the broad inquiries about criminal history remain as part of the application process.
What we really need, therefore, is for the SBA to take another step to limit the criminal matters that will serve as the basis for declining a loan, by simply not asking about them. We believe this next step is most likely the “proposed rule” that is the subject of a letter sent to the SBA Administrator on May 16 by the chairs and ranking members of the small business committees in the House and Senate, asking for a “pause” in issuing the rule. Of course, we are interested in knowing whether the new proposed rule does in fact place limits on inquiry about criminal matters and, if it does, what the reasons are for the requested pause.
We are also interested in knowing whether the SBA will simply pass the buck to the lending banks who either already have or who will soon develop their own policies on criminal background checks if the SBA will no longer serve as a screen.
The same issues about criminal record restrictions are raised by the 8(a) program administered by the SBA, which unlike 7(a) includes rules on a broad range of criminal matters, but which like 7(a) uses Form 912. We expect we will have a chance to discuss these restrictions before long in the context of the 8(a) program.
- SBA takes one step toward fair chance lending, but needs to take another - September 7, 2023
- CCRC seeking a Deputy Director - June 13, 2023
- Biden Administration announces actions to promote reintegration - April 28, 2023
- SBA modifies criminal history restrictions in its loan programs - April 14, 2023
- DC enacts progressive new record-clearing law - April 6, 2023
- Pending federal reforms promise support for justice-affected entrepreneurs - March 9, 2023
- SBA proposes to ease criminal history restrictions in loan programs - January 19, 2023
- Oklahoma and California win Reintegration Champion awards for 2022 laws - January 17, 2023
- The Frontiers of Dignity: Clean Slate and Other Criminal Record Reforms in 2022 - January 10, 2023
- Marijuana legalization and record clearing in 2022 - December 20, 2022