Comments on SBA proposal to eliminate criminal history loan restrictions

On November 14, CCRC filed comments on the SBA’s proposal to roll back criminal history restrictions in its federally guaranteed business and disaster loan programs. (The SBA’s proposal is described in our post on September 15.)  We were joined with the Washington Lawyers Committee on Civil Rights and Urban Affairs and the National Community Reinvestment Coalition, and with more than sixty other organizations concerned with fair chance lending for justice-impacted entrepreneurs. A preliminary summary of comments posted is at the end of this post, and a fuller summary will be published next week.

Our comments are generally supportive of the SBA’s proposal. Their salient points are these:

  • The SBA has concluded, based on existing empirical research, that there is no defensible justification for continuing to inquire into a loan applicant’s criminal history. Specifically, there is “no evidence of a negative impact on repayment for qualified individuals with criminal history records in any American business loan program.” Accordingly, the existing regulations “reflect an outdated, inaccurate structural bias against individuals with criminal history records.” The Consumer Financial Protection Bureau has reached a similar conclusion. 
  • The proposed changes in the rules will be particularly beneficial for communities of color that have been adversely affected by the current rules because of systemic racism embedded in the criminal law system. A history of discrimination against Black and Hispanic business owners demonstrates the importance of ensuring that there are not unnecessary restrictions barring justice-impacted individuals from accessing capital and ultimately building wealth for themselves and their communities.
  • Reducing barriers to successful entrepreneurship is aligned with the SBA’s mission of strengthening the economy. As the SBA noted, “entrepreneurship provid[es] an important and distinct avenue for economic stability” for justice-impacted individuals given the “persistent stigma from employers who may decline to hire people with criminal history records.”
  • The SBA has proposed not only to revise its formal rules, but also to omit from application forms inquiries about business owners’ criminal history.  Last spring, it revised its Standard Operating Procedures to discontinue the requirement that applicants reporting a prior felony conviction submit to an FBI background check and undergo a “character determination” by the SBA. Statistics cited by the SBA in its proposed rule appear to show that the unexpected prospect of referral to the FBI for investigation may have discouraged many justice-impacted business owners from completing the application process.  

While generally commending the SBA’s proposal, we also urge the agency to reconsider its decision to continue categorical ineligibility for a business if any one of several owners is incarcerated, even if other owners are fully able to managing the business successfully:  

We understand that this remaining criminal history restriction is based on an assumption that a confined person will likely “lack the ability to manage and execute day-to-day business operations,” and therefore be unable to satisfy the statutory requirement that SBA-guaranteed loans be “of such sound value or so secured as reasonably to assure repayment.” While this assumption may have some validity in the case of sole proprietors who are incarcerated, the collateral consequence that the SBA proposes to retain applies to any 20% owner of a business. Thus, a business owned and operated by several individuals could be disqualified based on one owner’s imprisonment, even if the other owners were fully able “to manage and execute day-to-day business operations.” 

For example, we can imagine a situation where a family-owned business could be effectively managed by four family members who were not incarcerated, even if the fifth family member owner was.  Accordingly, we question whether it makes sense, in terms of the statutory concern for “sound value,” to retain this consequence as a categorical basis for ineligibility. To disqualify an entire business because of the circumstances of one of its several owners appears unnecessary and punitive.

We propose that the SBA consider loosening the categorical exclusion to allow case-by-case decisions when some owners of the business who are not in prison are fully capable of managing the business and securing the value of the loan, even though one owner may be serving a prison sentence. If the disqualifying circumstances of one owner can disqualify the entire business without regard to practicalities, this consequence appears rooted in unwarranted assumptions about an individual’s “just deserts” as opposed a concern for the “sound value” of the loan.

Finally, while we recognize that the proposed rules revisions are a significant change, we urge the government to go further and to encourage private lenders to follow suit. We believe that the SBA’s regulations can set the standard for private lenders, noting that “some financial institutions look to SBA’s rules in forming their own internal policies on lending to business applicants with criminal histories.” Accordingly, we urge the SBA to do more to explicitly and directly encourage intermediary lenders not to discriminate against those with criminal records. The commentary to the proposed regulation states that the SBA does not intend to affect a lender’s ability to conduct criminal history background checks according to their own policies, as long as a policy complies with the Equal Credit Opportunity Act and other applicable laws. However, we think that the SBA would do better to encourage lenders to revisit their own practices regarding the use of criminal history in light of SBA’s finding that “there is no evidence of a negative impact on repayment for qualified individuals with criminal history records in any American business loan program.” That is, we believe that the SBA should encourage lending institutions to limit disqualification based on criminal history to cases where an applicant is unable to provide assurances of sound value because they are incarcerated.

Preliminary summary of comments posted:

Almost all of the 18 published comments – including seven that were not signed – supported the SBA’s effort to open access to federally guaranteed loans to entrepreneurs with a criminal history.

One commenter joined our recommendation that incarceration of an owner – including one of several owners – should not be grounds for automatic disqualification.

Several commenters, noting the SBA’s specific recognition that lending institutions could continue to apply their own record-based disqualification standards in deciding who would qualify for a federally guaranteed loan, urged the SBA to provide additional guidance and standards to ensure its new policy posture would influence if not prevail in the marketplace.

For example, a comment filed by the Small Business Majority, which CCRC joined, specifically urged the SBA for additional clarity on the impact of lifting these restrictions as they flow down to lending institutions, in the hope that “the proposed rule will create a domino-effect among banks and other lending institutions to reevaluate their underwriting standards to reflect our 21st century economy:”

Since the banking system has historically discriminated against marginalized communities, we encourage the SBA to work with and uplift institutions that are willing to reassess their underwriting standards (or already have) to mirror the changes in this proposed rule. This would enhance the impact of this rule on the small business ecosystem.  

We expect to publish a summary of the comments received shortly after Thanksgiving, and hope to organize a conference in the spring to discuss how lending institutions can implement the SBA’s new policy on considering an owner’s criminal history.