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 Accordingly, the existing regulations “reflect an outdated, inaccurate structural bias against individuals with criminal history records.”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.

Minnesota enacts four major record reforms in 2023

Thanks to a series of criminal-justice reforms enacted earlier this year, Minnesota has burnished its reputation as a national leader in reintegration and criminal record reform.  In a year in which there have been far fewer criminal record reforms than in the recent past, Minnesota’s performance stands out for the variety and breadth of relief granted, in many cases automatically. Here are the four major new laws:

  • Expungement was made automatic for both non-convictions and a range of conviction records, effective January 1, 2025
  • The pardon process was entirely overhauled to make this relief more available, and expungement for pardoned convictions was made automatic
  • Felony disenfranchisement was limited to periods of actual incarceration
  • A law legalizing adult possession of cannabis made expungement automatic for a broad range of cannabis convictions.

These four major new authorities are described below. We expect that the Minnesota legislature’s exemplary performance in enacting these important new provisions will be in for further recognition in our annual round-up of new record reforms.

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SBA proposes to remove criminal record restrictions in loan programs

On September 15, the SBA published for comment a series of rule changes eliminating criminal record restrictions in all of its various federally guaranteed business and disaster loan programs, including rules making business owners ineligible for loans if they are on parole or probation or under indictment.  Application forms and procedures will no longer inquire about a business owner’s criminal history, with one exception: Owners and principal employees who are “actually incarcerated” will remain ineligible. Comments on the proposed rule must be filed by November 14, 2023.

The proposed new rule follows the agency’s removal last spring of “character” as a loan criterion in the 7(a) and 504 programs, and its amendment of the applicable Standard Operating Procedures (SOP) to eliminate the “character determination” through which business owners with a felony record had been denied access to federally guaranteed loans.  These earlier changes were described in our post of September 7.

The comments accompanying the proposed rule revision explain that it is “narrowly tailored to reduce barriers to access for qualified justice-impacted small business owners.” While the SBA will no longer verify an applicant’s criminal history (other than the fact of current incarceration) the rules changes do affect a lending institution’s ability to do so, “in accordance with their own policies, provided they do so in a manner that complies with the Equal Credit Opportunity Act and other relevant laws.”

Significantly, in proposing these new and important regulatory changes, the SBA relies upon empirical research to emphasize that criminal history has not been shown to have any negative impact on creditworthiness:

Importantly, SBA reviewed the relevant research and found no evidence of a negative impact on repayment for qualified individuals with criminal history records in any American business loan program. This lack of data demonstrates that continuing to rely on this restriction for that purpose would contradict the available evidence and although the restrictions may have been originally put in place with the goal of protecting program performance, the lack of data suggests continuing to rely on this restriction would reflect an outdated, inaccurate structural bias against individuals with criminal history records.

 

The SBA again relies upon research in stressing the policy benefits of its regulatory changes:

Specifically, research demonstrates that employment increases success during reentry and decreases the risk of recidivism, with entrepreneurship providing an important and distinct avenue for economic stability given persistent stigma from employers who may decline to hire people with criminal history records.

It is refreshing to see this federal policy grounded in factual research instead of unfounded assumptions about the risk of extending opportunities to justice-affected individuals, as so many other federal policies are.

At the same time, we remain concerned that, without the SBA acting in a screening capacity, lending institutions will themselves conduct background investigations of loan applicants, and apply record-related restrictions that mirror those previously applied by the SBA, or perhaps ones even more restrictive.  We noted in a post last spring, in connection with the SBA’s deletion of “character” as a loan criterion:

[T]he 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.

 

We expect to post further analysis of these important proposed SBA actions.

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.

CCRC seeking a Deputy Director

The Collateral Consequences Resource Center is seeking an enterprising and committed individual with strong technical skills to serve as its Deputy Director. The incumbent will work with the Executive Director in all aspects of CCRC’s program, and will have primary responsibility for maintaining the Restoration of Rights Project (RRP), including its various derivative reports for which CCRC is best known. The RRP is a unique national inventory of laws and practices relating to restoration of rights and criminal record relief in each U.S. jurisdiction, which attracts thousands of visits to the CCRC website each day. Keeping the RRP current in real time requires strong research skills, patience and attention to detail in analyzing complex statutes, and a passion for issues relating to restoration of rights after arrest or conviction.

In producing the annual reports on new legislation and issue-specific analyses of current trends, the Deputy Director will have an incomparable opportunity to guide the development of public policy in this important emerging area of the law.  The incumbent will participate in other aspects of CCRC’s work, including the development of policy on federal programs that support entrepreneurs with a criminal history, and will have opportunities to publish scholarly articles and participate in academic conferences.

CCRC was established in 2014 to promote public engagement on the myriad issues raised by the collateral consequences of arrest or conviction.  It provides technical assistance to advocates and lawmakers in support of state reform efforts, participates in court cases challenging specific collateral consequences, and collaborates with other organizations in reporting on such issues as court debt as a barrier to record clearing and exclusion of convicted individuals from jury service. In addition to maintaining the Restoration of Rights Project, CCRC provides technical assistance to advocates and lawmakers in support of state reform efforts, participates in court cases challenging specific collateral consequences, and collaborates with other organizations in reporting on such issues as court debt as a barrier to record clearing. Most recently, through its Fair Chance Lending Project, CCRC has advocated for the elimination of criminal record restrictions in federally guaranteed small business loans and federal contract set-aside programs.

A fuller description of CCRC’s work and of the Deputy Director position is here.

The CCRC Deputy Director is a full-time remote position and may be particularly attractive to individuals seeking a flexible work schedule.  Compensation is negotiable depending on experience. An early start date is desirable, and a limited-term tenure may be possible.

TO APPLY:  Submit the following materials to margaretlove@pardonlaw.com

  • Cover letter
  • Resume
  • Writing sample
  • List of three references

Applications will be accepted on a rolling basis until the position is filled.

Biden Administration announces actions to promote reintegration

America is a nation of second chances. Our nation must provide people who have been incarcerated meaningful opportunities for redemption and rehabilitation. America was founded on fresh starts, new possibilities, and the belief that every person deserves to be treated with dignity and respect. Yet, for people returning home to their communities from jail or prison, obstacles often stand in the way of turning this promise into a reality.

Bipartisan elected officials, faith leaders, civil rights advocates, and law enforcement leaders agree that our criminal justice system can and should reflect core values that promote safer and stronger communities, such as tackling the root causes of crime, improving individual and collective outcomes, and ensuring taxpayer dollars are delivering the highest degree of public safety and equal justice.

That’s why, today, the Biden-Harris administration is releasing an evidence-informed, multi-year Alternatives, Rehabilitation, and Reentry Strategic Plan to strengthen public safety by reducing unnecessary criminal justice system interactions so police officers can focus on fighting crime; supporting rehabilitation during incarceration; and facilitating successful reentry. The plan builds upon President Biden’s Safer America Plan – his comprehensive strategy to prevent and combat gun crime and violence – and outlines more than 100 concrete policy actions to improve the criminal justice system and strengthen public safety by leveraging data, research, and proven successful strategies from state and local governments across the country.

The Strategic Plan supports justice-involved persons and promotes public safety by utilizing a whole-of-government approach through which the Biden-Harris administration will:

  • Expand access to health care;
  • Secure access to safe and affordable housing;
  • Enhance educational opportunities;
  • Expand access to food and subsistence benefits;
  • Create and enhance job opportunities and access to business capital;
  • Strengthen access to banking and other financial services; and
  • Reduce barriers to the ballot box for eligible persons.

Read more

SBA modifies criminal history restrictions in its loan programs

We have written at length about the broad criminal history restrictions imposed by the U.S. Small Business Administration in its business loan and disaster assistance programs. These restrictions, which first came to the public’s attention during the pandemic, have limited the availability of federally guaranteed bank loans to small businesses in developing communities, and stymied efforts to close the racial wealth gap through minority entrepreneurship. The SBA’s restrictive lending policies have never been justified by empirical evidence linking criminal history and creditworthiness, and may raise issues under the federal Equal Credit Opportunity Act.  It now appears that those policies are under review within the agency.

Several weeks ago we reported on the SBA’s proposal to amend its rules on lending criteria to eliminate language that the agency has relied on for many years to support policies restricting federally guaranteed loans based on a business owner’s criminal history. In commenting on the proposed rule, we expressed the hope that this rule change would augur and end to the SBA’s consideration of  criminal history as an independent basis for denying credit.

The SBA’s proposed amendment became final on April 10. While we remain guardedly optimistic that the new rule will have the hoped-for effect where the SBA’s own policy and practice is concerned, at the same time the agency’s comments accompanying the final rule seem to signal an expectation that banks will still consider a loan applicant’s criminal history in deciding whether to make a loan even if the agency does not. It appears that we will have to wait for the agency to issue implementing procedures and revised application forms before the full effect of this rule change can be assessed. [See the note at the end of this comment for subsequent SBA changes in its operating procedures.]

The final SBA rule covers a variety of subjects related to its guaranteed loan programs — notably expanding the range of financial institutions that will be authorized to make SBA loans.  But its key provision from CCRC’s perspective is its omission of the words “character” and “reputation” from the lending criteria specified in 13 CFR 120.150(a). It is this language that has been relied on in SBA operating policies to limit eligibility for both business loans and disaster assistance to business owners who have a criminal history.  This is because the SBA’s operating procedures have in past years required loan applicants to have “good character,” defined exclusively in terms of an applicant’s criminal history.  (The SBA imposes similar criminal history restrictions in its federal contract preference program, where they are similarly justified in terms of an applicant’s necessary “good character.”)

In comments describing the new rule, the SBA explains why it relies on a “good character” standard: “For SBA, ‘character’ is used to determine whether an individual may have past criminal history or activities that may pose a risk to repayment ability.” 88 Fed. Reg. 21077. This is not the first time that the SBA has proposed that “past criminal history” may present an independent credit risk. See Defy Ventures v. U.S. Small Bus. Admin., 469 F. Supp. 3d 459, 476 (D. Md. 2020)(“The SBA explained that the criminal history exclusions were based on ability to repay . . . and potential for misuse of funds.”).

While the SBA’s comments express a preference for “objective measures” in assessing credit risk that result in “less variability” than criteria like character and reputation that are “subject to individual interpretation,” at the same time they propose that “SBA Lenders may continue to make their own credit decisions based on the criminal background of an applicant and its associates.” 88 Fed. Reg. 21077.

Stepping back to assess the effect of the new rule, 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.

We do not know whether, left to their own devices, private lenders would disqualify loan applicants based on criminal history alone, or what standards lenders will apply without the guidance and protection afforded by the SBA “good character” policies.  There does not appear to be any industry-wide standard to guide banks and other financial institutions in their business lending policies, though we hope they are beginning to consider these issues.

The SBA also took the opportunity in these comments seemingly to reaffirm its existing rule making a business ineligible for a federally guaranteed loan if any 20% owner is on probation or parole, in prison, or has unresolved criminal charges.  Id., citing 13 C.F.R. 120.110(n).

It remains to be seen if the SBA will take further actions to facilitate borrowing by justice-affected entrepreneurs, notably what guidance will offer to its approved lenders in their “credit decisions based on the criminal background of an applicant.”  At present, the SBA’s operating procedures now include broad inquiries about loan applicants’ past criminal history and mandatory FBI background investigations, but no formal standards for its “good character” determinations. Until we see whether and how the SBA plans to amend the administrative mechanisms through which it has historically enforced its own criminal history restrictions, we cannot determine the full implications of its elimination of “character” as a formally applicable loan criterion, including what standards banks will be encouraged to apply in considering criminal history as an independent measure of creditworthiness.

NOTE, 7/25/23: Since this analysis was published in April, the SBA issued revised operating procedures (SOPs) governing its 7(a) and 504 loan programs that omit the “character determination” that has in the past acted to winnow out many otherwise qualified loan applicants. This new SOP is to be effective August 1, 2023.

In addition, shortly after the “affiliation” file became final, the SBA indicated an intention to propose yet another rule governing its small business loans, to eliminate most inquiries about criminal history on the application form, instead asking “a straightforward question on incarceration and verifying the response using a third-party database check.” The SBA described this change in policy as “continu[ing] to allow SBA lenders to follow their own policies on criminal background checks.” As of July 25, 2023, the SBA had not issued this proposed additional rule, and the application forms for 7(a) loans containing extensive inquiries about criminal history had not been amended.

On May 16, 2023, the chairs and ranking members of small business committees in the House and Senate wrote to the Administrator of the SBA asking her to “pause” the new rule until a new head of the SBA’s office responsible for implementing the new rule could be appointed. We understand that as of July 25 no response to this letter had been received.

DC enacts progressive new record-clearing law

Until last month, the District of Columbia had one of the most complex and restrictive record relief laws in the country. D.C.’s sealing law even applied the same burdensome petition-based procedures, extended waiting periods, and onerous burdens of proof to non-conviction records that applied to convictions. In testimony before the D.C. Council in 2021, CCRC’s Margaret Love noted: “Compared to states across the country, DC’s record relief laws are very prohibitive and unusually complex.” CCRC’s Reintegration Report Card published in March 2022 commented that “the restoration laws in the District of Columbia are noteworthy for a remarkable study in contrasts: D.C. has extraordinarily progressive laws in civil areas like voting, employment, housing, and occupational licensing, and among the most regressive laws in the Nation in every category of criminal record relief, likely reflecting the heavy hand of the federal authorities that are responsible for most prosecutions under the D.C. Code.”

Last month, everything changed. The Second Chance Amendment Act of 2022 (D.C. Law 24-284, codified at D.C. Code § 16-801 et seq.), which became final after the required period of congressional review on March 16, 2023, gave the District one of the broadest record-clearing laws in the country, including both petition-based relief for all but the most serious violent felony convictions, and automatic relief for misdemeanors and non-conviction records.  D.C. now becomes the 11th U.S. jurisdiction to enact a “clean slate” law that applies to both conviction and non-conviction records.

The new D.C. record-clearing law is the product of more than two years of hard work by the D.C. Council and a broad coalition of advocacy groups in the District. When coupled with the District’s progressive civil restoration laws referenced above, this new law propels DC from middle-of-the-pack to the top tier of jurisdictions in the Nation where fair treatment of justice-affected individuals is concerned. It will certainly advance DC’s candidacy for Reintegration Champion of 2023.

Though D.C. Law 24-284 is enacted, it is unfunded, which means it cannot be used. Currently, the FY24 Budget Support Act of 2023 set the effective date for the Second Chance Act as 1/1/26 for most of the law and 10/1/29 for the automatic sealing provisions.

The new law’s specific provisions are described in greater detail below, and in the DC profile from CCRC’s Restoration of Rights Project.

The new D.C. law provides for petition-based sealing for all non-conviction records at disposition, for all misdemeanors after a five-year waiting period, and for all but a specified group of the most serious felony convictions after an eight-year waiting period.  The waiting period begins following completion of all aspects of the sentence, except that it does not require payment of fines and other court debt. The law also facilitates procedures: e.g., not all eligible records need be sealed at the same time, as under the old law, and there are no “disqualifying offenses” that could extend the waiting period even for non-conviction records.

It also eases standards, particularly for sealing non-conviction records: it deleted a provision allowing the court to consider “the weight of the evidence against the person” and any priors sealings of arrest records.  It specifically directs the court in all cases to consider “The community’s interest in furthering the movant’s rehabilitation and enhancing the movant’s reintegration into society through education, employment, and housing.” As noted, D.C.’s existing sealing law extended to same burdensome procedures and standards to non-conviction records that applied to sealing of convictions.

The new law makes sealing automatic beginning in 2027 for non-conviction records, and for most misdemeanor convictions after a 10-year waiting period. It also provides for automatic expungement of marijuana convictions effective January 1, 2025, and for expungement by petition on grounds of actual innocence. Provisions in existing law authorizing expungement for victims of human trafficking and sealing for juvenile defendants were not changed.

D.C. now joins the 19 states that have enacted automatic record-clearing relief for arrest records and other non-convictions.  More than half of these state laws have been enacted in the three years since publication of CCRC’s Model Law on Non-Conviction Records, which advocated for automatic expungement of all non-conviction records, including records with no final disposition, except for pending matters. Like CCRC’s model law, which was cited as authority by several parties during the hearings before the D.C. Council, the new D.C. law recommends restrictions on accessing, inquiring about, and commercially disseminating non-conviction records.

Sealed records are placed in a non-public file but remain available to law enforcement, courts, prosecutors, licensing agencies, public employers, and schools and child care facilities, to be used “for any lawful purpose.” Sealed records may also be used in civil litigation relating to the arrest or conviction, and may be made available to others “upon order of the Court for good cause shown.”  An individual whose record has been sealed may deny the arrest or conviction “for any purpose”, without penalty of perjury or other provision of the law for giving a false statement. This appears to be a change from the 2006 law, which required testimony about prior arrests and convictions “in response to an inquiry from one of the entities expressly authorized to access the records.” In other words, while certain entities may gain access to sealed records, the subject of the record may lawfully deny its existence without penalty.

The 2022 law imposes certain requirements on “criminal history providers” that provide criminal history background screening reports, requirements that mirror those provided by the federal Fair Credit Reporting Act.  It requires providers to provide the subject of a background report with a copy of the report and identify the source of the report, and to use at least two identifiers (e.g., birthdate and name); prohibits reporting records that have been sealed, expunged or set aside; and pohibits reporting information that has not been updated within 30 days of the report.  Complaints of a violation of these provisions may be filed with the DC Office of Human Rights (but not in court), and fines are specified for violations.

There are still ways that D.C.’s sealing law could be improved.  For example, there appears to be no good reason why sealed non-conviction records should remain available to employers and licensing agencies, and in most states they are not. Automatic relief should be extended to all convictions now subject to sealing by petition, and the waiting periods for both petition-based and automatic relief seem excessive by standards in recently enacted record-clearing laws.  See CCRC’s 2022 report on waiting periods, Waiting for Relief: A National Survey of Waiting Periods for Record Clearing (February 2022).  But those caveats aside, the new law represents the most substantial progress in record clearing of any U.S. jurisdiction since 2018, when North Dakota and New Mexico enacted a broad sealing scheme for the first time.  Congratulations to the D.C. Council!

 

 

 

 

Pending federal reforms promise support for justice-affected entrepreneurs

Word is getting around about pending reforms that would make federal support for small businesses more widely available to entrepreneurs with a criminal history. Notably, the U.S. Small Business Administration has recently taken steps to reduce or remove entirely criminal record-related restrictions in its loan and contracting programs.  These are steps that CCRC has been urging ever since the SBA’s restrictive policies first came to public attention during the pandemic.

An article by Michael Friedrich published today by Arnold Ventures (AV) describes a number of reforms recently proposed or adopted by the SBA that will eliminate arbitrary program barriers based on criminal history that are unrelated to any established risk. These reforms should encourage more justice-affected business owners to seek SBA support for their entrepreneurial ventures in the form of federally guaranteed loans or federal contract set-asides for “socially and economically disadvantaged” businesses.

The AV article points out that the near-exclusion from these programs based on criminal history “frustrate[s] federal efforts to contribute to economic development in disadvantaged communities, often the same low-income communities of color that have suffered the most during the era of mass incarceration and tough-on-crime policies.”    

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SBA proposes to ease criminal history restrictions in loan programs

On October 23, 2022, the U.S. Small Business Administration published for comment a rule that would significantly expand the availability of federally guaranteed loans to entrepreneurs with a criminal history. This rule, if finalized, could also transform the SBA’s role in support of urban community development.

The proposed rule, titled ”Affiliation and Lending Criteria for the SBA Business Loan Programs,” 87 FR 64724 (Oct. 23, 2022), eliminates language in the SBA’s formal lending criteria that the agency has relied on for many years to restrict loans to justice-affected business owners.

We have written at length over the past several years about the broad record-based restrictions in the SBA’s lending and contracting programs, restrictions that first became controversial during the pandemic, and that have never been justified by evidence of a link between criminal history and credit risk.

While the proposed SBA rule covers a variety of subjects, its key provision from CCRC’s perspective is its omission of the words “character” and “reputation” from the criteria for small business loans in 13 CFR 120.150(a). It is this language that has been relied on for the “good character” policies in the SBA’s operating procedures affecting both business loans and disaster assistance. In turn, these procedures define “good character” exclusively in terms of a person’s criminal history.

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