Applying for an SBA loan with a criminal record

*NEW: Applying for SBA COVID-19 relief with a criminal record in 2021 (March 8, 2021)

Loans from the U.S. Small Business Administration (SBA) are a key resource for small businesses fighting to survive during this pandemic.  SBA loans are generally loans provided by private lenders and guaranteed by the federal government.  The $2+ trillion stimulus package (the CARES Act) signed into law today, includes more than $300 billion in funding for new SBA loans called the “Paycheck Protection Program,” some of which are eligible for forgiveness.

These loans are to be provided under SBA’s primary loan program, the 7(a) loan program, but they increase eligibility for 7(a) loans, extend their allowable uses, and allow for loan forgiveness, among other provisions.  (See H.R. 748, sec. 1102; 15 U.S.C. 636(a)).  Notably, a Paycheck Protection Loan may be used—in addition to already-allowable uses under 7(a)—for payroll support (including paid sick, medical, or family leave, and group health care benefit costs during leave), employee salaries, mortgage payments, rent, utilities, and any other debt incurred before February 15, 2020.  See H.R. 748, sec. 1102.  Further, for all 7(a) loans made between February 15, 2020 and June 30, 2020, loaned funds would be eligible for forgiveness if used for payroll costs (with a couple of exceptions), and certain other expenses to maintain “payroll continuity” during a four-month period.  A business must submit certain documents to apply for forgiveness, and the forgiveness amount is reduced if the number of employees or their compensation has been reduced.  Se H.R. 748, sec. 1106.

In this post, we explore considerations for people with a criminal record who wish to apply for a 7(a) small business loan, including the “Paycheck Protection Program” loans that will be funded through the CARES Act.  We also discuss disaster loans for small businesses in areas severely impacted by the Coronavirus (COVID-19), which the SBA is already making available.

After reviewing existing SBA loan eligibility rules and vetting policies for 7(a) applicants, we have questions about the extent to which these new loans will be available to people with a criminal record.  Generally, the SBA excludes any business with a principal who is on probation, parole, or similar form of supervision; or who is currently facing any charges.  And while a closed criminal case is not automatically disqualifying, SBA requires that every 7(a) applicant’s principals be “of good character,” and conducts a character evaluation that for people with a felony conviction, certain misdemeanor convictions, or a recent case, requires a full FBI background check before loan funds may be approved.  This evaluation specifically requires disclosure of expunged convictions and certain non-conviction records.  Moreover, if a person has not completely satisfied a sentence “and other conditions of the court,” they are ineligible for a loan.  Certain broad language in the CARES Act suggests that the SBA might not impose eligibility requirements that would apply to 7(a) loans in normal times, including ineligibility due to an open criminal matter or lack of “good character.”  We hope that would be the case, given the urgent need for relief and the considerable barriers that people with records already face in the economy even in the best of times.  We will look for guidance from the SBA as to how it will interpret this language.  [See the updates at the top of this post.]

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Will restrictions on banking jobs be relaxed for people with a record?

More than two dozen organizations dedicated to improving employment opportunities for people with a criminal record have written to the FDIC urging that it give regulated financial institutions greater latitude to hire qualified people without having to ask the FDIC’s permission.  The occasion is the FDIC’s proposal to reduce to a formal rule its longstanding policy on employment of convicted individuals by banks, a proposal that suggests the FDIC may be open to giving banks more hiring autonomy by relaxing several controversial provisions.  For 20 years, the FDIC has kept a tight grip on banks, requiring them to obtain a waiver before they may hire anyone with a record even in an entry-level non-professional position.  In operation, this policy has been an effective bar to bank employment for most people with a conviction record (and even for some who have never been convicted).

The letter, organized by the National Employment Law Project and the Leadership Conference on Civil and Human Rights, points out that FDIC’s exclusionary policy is not required by its enabling statute, and urges the agency to bring its policy on hiring waivers into line with national efforts to further reintegration, in several different ways, some of which are discussed below.  The letter cites the bipartisan federal Fair Chance Act and corresponding reforms in states across the country (as reported by CCRC), as well as many letters from bank industry leaders urging the FDIC to relax its rigid policy that has frustrated efforts to diversify the financial sector’s work force.

The comment below provides some background for the FDIC’s proposal, and comments on where some relaxation of its present policy is likely.  It concludes with a note about the generally confusing and inconsistent treatment of state relief mechanisms like expungement and pardon in federal laws and regulations, suggesting that this is an area sorely in need of further study and proposals for reform.

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COVID-19: State-by-state resources on how to use the pardon power

At this time of pandemic, we have been following the discussions of how jail, prison, and immigration detention conditions are highly concerning, including the very useful collection of links provided by Professor Doug Berman, the demands published by advocacy organizations, and the collection of policy responses by the Prison Policy Initiative.  We agree that every available legal mechanism must be enlisted to secure the release of prisoners and detainees who pose little or no threat to public safety, and whose health and safety are themselves severely threatened by their enforced captivity.  This includes the great constitutional powers given to governors and pardon boards.  We therefore commend our newly revised pardon resources to advocates and policy makers to support their advocacy and action.

While our pardon-related research focuses primarily on how the power is used to restore rights and status to those who are no longer in prison, much of our information about how the pardon process is structured and operates is relevant to how the power might be used (or is already being used) to commute prison sentences during the pandemic.  Our revised pardon resources are part of a major revision of the CCRC Restoration of Rights Project, not only to make sure its information is current in light of the many recent changes in the law, but also reorganizing and revising its resources for clarity and easier access.  In the process, we have updated and revamped our state-by-state material on how the pardon process operates in each jurisdiction, noting that the process has become more regular and productive in a few states in the past several years.

Our 50-state pardon comparison is organized into four sections:

  • Section 1 provides a chart comparing pardon policy and practice across jurisdictions.
  • Section 2 lists jurisdictions by frequency and regularity of their pardon grants.
  • Section 3 sorts jurisdictions by how the administration of the power is structured.
  • Section 4 provides state-by-state summaries of pardon policy and practice, with links to more detailed analysis and legal citations.

We hope this information will be helpful to advocates across the country as we work to keep all people safe and healthy, including those in our prisons and jails.

Legalizing marijuana and expunging records across the country

*NEW: Marijuana legalization and expungement in early 2021

As the legalization or decriminalization of marijuana has now reached a majority of the states, the expungement of criminal records has finally attained a prominent role in the marijuana reform agenda.  Laws to facilitate marijuana expungement and other forms of record relief, such as sealing and set-aside, have now been enacted in more than a dozen states.  Most of these laws cover only very minor offenses involving small amounts of marijuana, and require individuals to file petitions in court to obtain relief.  But a handful of states have authorized streamlined record reforms that will do away with petition requirements and cover more offenses.  In the 2020 presidential race, Democratic candidates have called for wide-ranging and automatic relief for marijuana records.

Given these important developments that we expect will continue in the present legislative season, we have put together a chart providing a 50-state snapshot of:

(1) laws legalizing and decriminalizing marijuana;

(2) laws that specifically provide relief for past marijuana arrests and convictions, including but not limited to conduct that has been legalized or decriminalized; and

(3) pardon programs specific to marijuana offenses.

We hope this tool will help people assess the current state of marijuana reform and work to develop more expansive, accessible, and effective record relief.

As of this writing, 26 states, D.C., and one territory have legalized or decriminalized marijuana to some degree.  Eleven states and D.C. have done both.  Seventeen states and D.C. have enacted expungement, sealing, or set-aside laws specifically for marijuana, or targeted more generally to decriminalized or legalized conduct.  Four states have pardon programs for marijuana offenses.  Our 50-state chart documenting these laws is available here.  We will update this chart to cover new legislative developments as they occur.  For example, just this week both chambers of the Virginia legislature passed a bill that would decriminalize possession of small amounts of marijuana and limit access to records of such offenses.

This comment describes some of the history of marijuana decriminalization, legalization, and expungement reforms, recent trends, and the current state of the law in this area.  It attempts to provide evidence for what Professor Douglas A. Berman recently described as the “linking and leveraging” of the marijuana reform and expungement movements.

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Automatic expungement falls short in Canada

The John Howard Society of Canada has a new post about a failed piece of Canadian legislation that would have provided automatic expungement of criminal records in that country.  The post describes the effort to remedy the shortcomings of the current “one-at-a-time” record-clearing system, which it says is expensive (more than $600 to apply), bureaucratic, and “systematically works against poor and marginalized people.”  As an example, it documents Canada’s serious “takeup” problem with its recent efforts to clear cannabis possession convictions: “despite the government’s claims of an enhanced process to grant pardons for cannabis possession now that it is legal, only a handful of the 250,000 or so Canadians with such records have received pardons so far.”

The post also discusses our report documenting U.S. expungement reforms in 2019, noting that while the problem of criminal records in this country is “much greater” than it is in Canada, we seem to be making better progress in dealing with it.

We reprint the introduction to the post below, and link to the piece.

Expunging criminal records

February 26, 2020

Last year Senator Kim Pate introduced a bill that would provide automatic expungement of criminal records in Canada.  Under this bill, criminal records would automatically be sealed after a certain amount of time had elapsed following a criminal sentence unless there had meanwhile been a new criminal charge or conviction.

Expungement of criminal records is important because a criminal record has many harmful effects for a person’s entire lifetime, even decades after the end of their sentence.  It is important to keep in mind that 3-4 million Canadian adults, or about 1 in 8, has a criminal record of some kind.  Wherever you live in Canada, you likely have neighbours with a record.  But, as another post on this blog showed, most people never commit a second crime, and this likelihood declines with every year that passes.

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