Tag: CARES Act

Forum on governmental barriers to small business financing for people with a criminal history

We are delighted to announce a program where a panel of experts will discuss the barriers faced by small business owners and managers with a criminal history in obtaining government-sponsored loans. This virtual program will take place on November 18 from 12:00-1:15pm (EST), and is sponsored by the Georgetown Center for Business and Public Policy as part of its Georgetown on the Hill series. Register for the event here. The program–which we helped organize along with Georgetown’s PIVOT Program–will focus on the broad criminal history restrictions in rules and policies of the U.S. Small Business Administration. These policies came to the public’s attention in the early days of the pandemic, when thousands of small businesses were denied PPP and other relief authorized by the CARES Act. While many of these restrictions were eventually rolled back in response to widespread criticism, similar restrictions in the SBA’s general lending programs remain, restrictions that influence state and private lending as well. The program on November 18 will explore the origins, scope, and justification for these restrictions. Panelists include a former high-ranking SBA official, a small business owner who successfully challenged the PPP restrictions in court, a scholar who has argued that the SBA restrictions contravene civil rights law, and the CCRC’s Deputy Director David Schlussel, who contributed to the bipartisan campaign in the spring of 2020 that led the SBA to abandon many of its exclusionary policies. We hope that everyone interested in collateral consequences, notably those related to access to business capital, will register for the program. The Georgetown announcement describing the program is reproduced below. Understanding Governmental Barriers to Small Business Financing for People with a Criminal Record Date: Thursday, November 18, 2021 – 12:00pm to 1:15pm Location: Zoom Seminar (register for link) New businesses are a key driver to economic growth, but individuals seeking to start these businesses face a number of challenges. For individuals with a criminal history these challenges of establishing and growing a new business increase dramatically. Indeed, a particularly stifling series of federal regulations and policies are currently in place that impose broad criminal history restrictions on access to government-sponsored business loans. Last year, the U.S. Small Business Administration (SBA) imposed broad criminal history restrictions on COVID-19 relief, leading to criticism from the public and members of Congress. Successive decisions by the Trump and Biden Administrations rolled back of most of these restrictions on emergency relief, but similar policies remain in the SBA’s general lending programs. Given that about one third of adult Americans have an arrest or conviction record, of whom a disproportionate percentage are people of color, it is important to reconcile this population’s limited access to government-sponsored business capital with the emerging public policy of encouraging reintegration and second chances. At this Georgetown on the Hill event, a panel of experts moderated by Crystal Francis, Program Manager, Georgetown University Pivot Program, will discuss the economic and social impact of these restrictive policies in a forum with Q&A. Panelists will consider the issues that arose when the policies were applied to pandemic relief funds; the possible correlation between criminal history and creditworthiness; and the elements of a “fair chance” approach to business lending. Panelists include: Taja-Nia Henderson, Professor of Law, Rutgers University Law School Sekwan Merritt, Entrepreneur and Owner, Lightning Electric, a Baltimore-Based Electrical Contractor Chris Pilkerton, Chief Legal and Regulatory Strategy Officer for the Accion Opportunity Fund, and former Cabinet member and head of the U.S. Small Business Administration David Schlussel, Deputy Director, Collateral Consequences Resource Center This forum is part of the Georgetown Center for Business and Public Policy’s Georgetown on the Hill series at which we convene policymakers, academics, and industry experts to discuss important economic policy issues of the day. Read more

Applying for SBA COVID-19 relief with a criminal record in 2021

Last Updated: September 9, 2021 In December 2020, Congress authorized additional COVID-19 financial relief for small businesses and nonprofits, available through the Small Business Administration (SBA). The SBA’s two primary programs for COVID-19 financial relief are the Paycheck Protection Program (PPP), which provides forgivable loans to small businesses and nonprofits to help keep their staff employed during the crisis; and the COVID-19 Economic Injury Disaster Loan (EIDL) program, which provides advances and loans to small businesses and nonprofits that experience a temporary loss of revenue due to COVID-19. After the first COVID-19 relief bill, the CARES Act, funded these programs in March 2020, the SBA imposed broad criminal history restrictions on applicants. In the face of pressure, the administration relaxed those restrictions several times over the course of the following months.  In March 2021, the Biden Administration removed an additional restriction.  In this post, we review those developments and describe the SBA’s current criminal history policies, also available on the SBA’s website (PPP and EIDL). To summarize, as a result of developments to date, the SBA now excludes from PPP relief only a narrow category of people with a criminal record: those 1) actually incarcerated or with pending felony charges; or 2) convicted, pleaded guilty or nolo contendere to, or commenced any form of parole or probation within the last 5 years for certain financial felonies. The category of those excluded from EIDL relief is broader: 1) anyone convicted of any felony within the past five years, and 2) anyone with any sort of pending criminal charges. We conclude with a series of recommended changes to the laws governing SBA loans that affect people with a criminal record, and to related SBA regulations and policies.  These recommendations include consideration of how a loan applicant’s criminal record is treated in the rules and policies governing the SBA’s general lending programs under Section 7(a) and 7(b) of the Small Business Act, whose only mention of criminal record is to authorize the SBA to “verify the applicant’s criminal background, or lack thereof,” including through an FBI background check. In Spring 2020, after Congress first authorized hundreds of billions of dollars for small business relief during the early months of COVID-19, the SBA, by rule and by policy, imposed unusually broad and frequently changing restrictions on applicants with an arrest or conviction history. It applied even more restrictive policies on application forms than in published regulations. Alerted to the problem by emails from affected small business owners, we identified and described the relevant policies, and collaborated with a consortium of other organizations to persuade the SBA to roll back these restrictions. As we documented, these criminal history restrictions, neither required nor contemplated by Congress, impeded access to the Paycheck Protection Program (PPP) and the Economic Injury Disaster Loan (EIDL) program, for small business owners, sole proprietors, and nonprofits. Paycheck Protection Program Facing a chorus of criticism, and the introduction of a bipartisan Senate bill to roll back most of the PPP criminal history restrictions, SBA eased some of them, in a limited fashion, on June 12. Shortly thereafter, multiple federal lawsuits were filed challenging the PPP restrictions. On June 24, SBA further relaxed them, this time in a far more significant fashion, notably making the business owners who had sued eligible. The change came less a week before the June 30 final deadline to apply for the original round of PPP. A day before the deadline, a federal judge ruled that the SBA’s criminal history restrictions, except for the June 24 policy change, were likely unlawful. The court extended the deadline, but only for those who had sued. Shortly thereafter, Congress extended the PPP application deadline to August 8 for everyone, giving many newly eligible business owners their first opportunity to apply. After Congress authorized a new round of PPP funding in December, the SBA reopened the program on January 11 for first-time participants, and on January 13 for certain business who are eligible to apply for Second Draw PPP Loans. The SBA’s criminal history restrictions reflecting the June 24 policy change, excluded applicants if: An owner of 20 percent or more of the equity of the applicant is presently incarcerated or, for any felony, presently subject to an indictment, criminal information, arraignment, or other means by which formal criminal charges are brought in any jurisdiction; or has been convicted of, pleaded guilty or nolo contendere to, or commenced any form of parole or probation (including probation before judgment) for, a felony involving fraud, bribery, embezzlement, or a false statement in a loan application or an application for federal financial assistance within the last five years or any other felony within the last year. See Interim Final Rule on Paycheck Protection Program as Amended by Economic Aid Act (published on Jan. 14, 2021 in the Federal Register); see also FAQs for Lenders and Borrowers (effective Dec. 9, 2020). On March 3, 2021, following an announcement from the Biden White House, the SBA removed the one-year lookback restriction related to non-financial fraud felonies, consistent with bipartisan Congressional support for reducing criminal history restrictions in the Paycheck Protection Program. Therefore, the current policy excludes an applicant if: An owner of 20 percent or more of the equity of the applicant is presently incarcerated or, for any felony, presently subject to an indictment, criminal information, arraignment, or other means by which formal criminal charges are brought in any jurisdiction; or has been convicted of, pleaded guilty or nolo contendere to, or commenced any form of parole or probation (including probation before judgment) for a felony involving fraud, bribery, embezzlement, or a false statement in a loan application or an application for federal financial assistance within the last five years. Economic Injury Disaster Loans For most of 2020, SBA was nontransparent about its criminal history restrictions for COVID-19 Economic Injury Disaster Loans (EIDL) and advances. According to an alleged leak of documents on May 3, 2020 (which we believe was reliable), the SBA for some time had been denying applicants if they had ever been arrested, unless the arrest was for a misdemeanor and occurred more than 10 years ago. On May 20, 2020, an SBA spokesperson, without disputing the authenticity of the leaked documents, nonetheless stated that their information “is incorrect. An applicant with a felony conviction in the last 5 years would be declined.” Several months later, in an FAQ published on September 8, 2020, the SBA finally disclosed its criminal history restrictions for COVID-19 EIDL, which were broader than the May 20, 2020 spokesperson’s statement (and broader than the PPP restrictions): Applicants [for COVID-19 EIDL] may be declined if they have been convicted of a felony in the past five years; or ever been engaged in the production or distribution of any product or service that has been determined to be obscene by a court…are currently suspended or debarred from contracting with the federal government or receiving federal grants or loans; and/or those who are presently subject to an indictment, criminal information, arraignment, or other means by which formal criminal charges are brought in any jurisdiction. Those restrictions remained operative through at least FAQs that were effective Feb. 4, 2021. However, in new FAQs published and effective September 8, 2021, SBA incorporated the current criminal history restrictions of the Paycheck Protection Program into the COVID-19 EIDL program, replacing all previous guidance: Ineligible entities:…. • Any 20% or more owner of the applicant currently incarcerated • Any 20% or more owner of the applicant presently subject to an indictment, criminal information, arraignment, or other means by which formal criminal charges are brought in any jurisdiction for any felony • Any 20% or more owner of the applicant, within the last 5 years, for any felony involving fraud, bribery, embezzlement, or a false statement in a loan application or an application for federal financial assistance, has 1) been convicted; 2) pleaded guilty; 3) pleaded nolo contendere; or 4) commenced any form of parole or probation (including probation before judgment)? • Any 20% or more owner of the applicant, in the past year, has been convicted of a felony committed during and in connection with a riot or civil disorder or other declared disaster…. See FAQ Regarding COVID-19 EIDL (effective Sep 8, 2021). Preexisting SBA 7(a) Requirements The 7(a) statute authorizes the SBA to “verify the applicant’s criminal background, or lack thereof,” including through an FBI background check. An SBA regulation makes ineligible “[b]usinesses with an Associate who is incarcerated, on probation, on parole, or has been indicted for a felony or a crime of moral turpitude.” An SBA policy statement goes beyond this regulation to makes ineligible businesses with an Associate currently under specified forms of diversionary or conditional dispositions, order of protection, a sex offender registry, or facing any charges in any jurisdiction. This policy statement further provides that various principals of a business “must be of good character.” (The “good character” determination requires disclosure and documentation of: 1) current charges; 2) arrests in the past 6 months; and 3) any (excluding minor vehicle violations) convictions, guilty and no contest pleas, or placement on pretrial diversion or any form of parole or probation, at any time. Expunged and sealed records must be disclosed. A person may then be approved if they have satisfied all sentencing conditions and do not have a felony conviction, misdemeanor conviction for a crime against a minor, recent misdemeanor conviction, or recent charges. Otherwise, in any of these situations, the SBA requires that they undergo an FBI fingerprint background check followed by an individual “good character” determination by the SBA.) Recommended reforms Along with the Justice Roundtable, we recommend that the Biden Administration and the 117th Congress make the following changes in the SBA’s Paycheck Protection Program and 7(a) Loans: Executive Branch Proposals The SBA should thoroughly review and revamp its general 7(a) rules and policies to remove any exclusions based on criminal history. The SBA should ensure that if any criminal history restrictions remain in regulations, the restrictions in policy documents and application forms for the Paycheck Protection Program (PPP) and other loans within the general 7(a) program are no broader than the regulations require. Legislative Proposals Amend the Small Business Act to prohibit the SBA from excluding people from eligibility for 7(a) loan assistance based on criminal history. Strengthen the Paycheck Protection Program Second Chance Act (S.3865), a bipartisan Senate bill that would prohibit many criminal history restrictions for PPP relief, by removing categorical exceptions for applicants with an equity ownership of 20 percent or more who are incarcerated or were convicted of certain felonies. Note: This post was originally posted on Jan. 21, 2021, and has been updated to reflect that on March 3, 2021, the SBA issued new rules removing a one-year look-back restriction related to non-financial fraud felonies, and that on September 8, 2021, the SBA issued new guidance for COVID-19 EIDL. Read more

New efforts to channel federal relief to small business owners with a record

*UPDATE (7/7/20):  “SBA throws in the towel and Congress extends the PPP deadline” After Congress authorized hundreds of billions of dollars in funds for small business relief during COVID-19, the Small Business Administration (SBA) imposed restrictions on applicants with an arrest or conviction history.  These barriers, neither required nor contemplated by Congress, impede access to the two major relief programs for small businesses, nonprofits, and independent contractors during the COVID-19 crisis.  The two programs are the newly created Paycheck Protection Program (PPP) and the ramped-up Economic Injury Disaster Loan (EIDL) program. Three developments within the past week signal major pushback against or the possible reversal of at least some of these burdensome restrictions, which unfairly deny relief to worthy applicants. First, at least 65 organizations submitted five public comments in opposition to the SBA’s criminal history restrictions for PPP relief.  Our organization joined 25 other groups in submitting a comment asking the SBA to rescind or modify the regulation on legal and policy grounds, citing recent court decisions that suggest the SBA may lack authority to impose record-based disqualifications at all. These comments are the most recent expression of what has become a wave of bipartisan opposition to the SBA’s exclusionary policies, and growing coverage of the issues in the press.  We have been collecting relevant documents on our small business relief resource page. Second, Treasury Secretary Steven Mnuchin signaled in a recent conversation with key Senators that he may be open to easing restrictions on PPP applicants with felony records from the last five years. Third, the HEROES Act, passed by the House on Friday, includes provisions that would significantly constrain the SBA’s authority to deny applicants based on a record of arrest or conviction in both the PPP and EIDL programs.  If enacted into law, these provisions would mark a turning point in how federal law deals with discrimination based on criminal record. We discuss these developments in detail after the jump.  Public Comments Urge SBA To Rescind its Restrictions The SBA’s Interim Final Rule for the Paycheck Protection Program has come under scrutiny during the public comment period, which concluded on Friday.  Collectively, more than 65 organization wrote five comments in opposition to the criminal history exclusions. The Interim Final Rule makes ineligible for PPP relief any individual who owns 20% or more of the equity of a business and is presently incarcerated, on probation, on parole, or subject to charges.  Additionally, the regulation as supplemented by the PPP application form makes ineligible any owner of a business if they have in the last 5 years, for a felony: 1) been convicted; 2) pleaded guilty; 3) pleaded nolo contendere; 4) been placed on pretrial diversion; or 5) been placed on parole or probation. The first public comment, filed on behalf of a diverse bipartisan group of organizations, including our own, calls on SBA to rescind or modify its “needlessly restrictive and unfairly discriminatory” rules. The comment highlights that many people with a record, facing challenges in securing employment, have established their own small businesses and hired many employees with a record.  “Driving them out of business will result in a severe impact on employment of a population that is already disadvantaged in the workplace.”  The comment also points out the particularly adverse impact on business owners and employees of color, “arrested and convicted at disproportionately high rates due to institutional racism, ensuring that business owners of color will be disproportionately excluded from critical economic assistance.” Finally, the comment articulates how the SBA’s exclusions are contrary to the intent of Congress in enacting the CARES Act, which calls for relief on an emergency basis and includes a specific provision that “any business concern … shall be eligible” for relief if it has the requisite number of employees.  The comment argues that the SBA’s rules are not only at odds with the CARES ACT, but also “inexplicably depart from prior [SBA regulations] and are unsupported by any explanation.” The comment cites three recent federal court decisions to suggest that the SBA may lack statutory authority to impose the exclusions at issue: A federal court in Michigan found unlawful a different SBA rule that made certain categories of businesses ineligible for PPP—including banks, lobbying firms, certain private clubs, and sexually oriented businesses providing “prurient” products. See DV Diamond Club of Flint, LLC, et al. v. United States Small Business Administration, et al., No. 20-CV-10899, 2020 WL 2315880, at *1 (E.D. Mich. May 11, 2020).  The court held that because Congress made PPP funds available to “all” small business that satisfy the eligibility requirements in the CARES Act with respect to number of employees, the SBA’s more restrictive eligibility rules (drawn from exclusions in preexisting SBA policies) unlawfully exceed the statute.  This reasoning would seem to apply equally to the SBA’s criminal history exclusions. Two federal bankruptcy courts, one in New Mexico and one in Texas, held that the SBA’s decision to exclude bankrupt debtors, an exclusion not in the CARES Act, was arbitrary and capricious, and in excess of statutory authority. See In re: Roman Catholic Church of the Archdiocese of Santa Fe, No. 18-13027 T11, 2020 WL 2096113 (Bankr. D.N.M. May 1, 2020); In re Hidalgo County Emergency Service Foundation, Case no. 19-20497; Adv. pro. No. 20-2006, 2020 WL 2029252 (Bankr. S.D. Tex., Apr. 25, 2020). The comment urges the SBA to immediately remove the ineligibility for persons charged with a crime: “Punishing individuals who have not been convicted of wrongdoing in a court of law is fundamentally unfair and jeopardizes the economic well-being of thousands of employers and employees.”  The group urges the SBA to rescind the 5-year ineligibility period for individuals convicted of a felony, placed on pretrial diversion/probation/parole for a felony, or currently on probation or parole.  To the extent the SBA has authority to restrict eligibility for PPP beyond the criteria in the CARES Act itself, they should be limited to felony convictions for financial fraud from the past 3 years, subject to an individualized assessment and waiver. A second comment by the Institute for Justice Clinic on Entrepreneurship illustrates the real world impacts of the SBA’s rules and policies, which may “arbitrarily wipe out” all that entrepreneurs with criminal histories have built: businesses that employ workers, create wealth, and provide goods and services to their communities.  The comment articulates the importance of entrepreneurship for those with criminal histories and describes the stories of individuals who started small businesses. A third comment by Citizens for Juvenile Justice and 37 other organizations emphasizes language in the CARES Act that directs the SBA to prioritize relief for “socially and economically disadvantaged individuals,” which the comment argues includes persons with criminal records.  Excluding a class of persons simply based on involvement in the criminal justice system, or unadjudicated allegations, “is not only contrary to law, it is wrong,” and “perpetuate[s] long-standing forms of racial and ethnic discrimination.” A fourth comment by Americans for Prosperity (filed under a related regulation) argues that the SBA’s criminal history exclusion is “contrary to the text, structure, and purpose of the CARES Act,” raises due process concerns as applied to those only charged with crimes, and “is poor public policy with an overbroad sweep that harms otherwise deserving small businesses and their employees.” Finally, the National Center for Transgender Equality filed a comment asserting that the SBA’s rules are not based in the statute and should be revised to reflect only statutory eligibility requirements. Possible Administrative Change In April, Treasury Secretary Steven Mnuchin defended the SBA restrictions, stating that the Administration would not voluntarily change them.  But on May 13, the New York Times reported that Senator Cory Booker had raised with Mnuchin the issue of regulations barring some people with records from getting PPP loans.  According to a Senate aide, Mnuchin was “receptive to easing the restrictions” on applicants with felony records from the last five years. The HEROES Act Would Constrain the SBA Even if the SBA does not amend its policies, Congress may force its hand. In April, 16 members of Congress issued letters criticizing the SBA’s criminal history exclusions, including a bipartisan letter by Senators Rob Portman and Ben Cardin, a joint letter by Reps. Joyce Beatty and Joe Kennedy III, a letter by Senator Jeffrey Merkley, and a letter by Rep. Cedric Richmond and 10 other members. This past Friday, the House enacted the HEROES Act, which includes language drawing on Reps. Joyce Beatty and Joe Kennedy III’s Fair Chance for Small Business Relief Act, which would explicitly curtail the SBA’s authority to deny PPP and EIDL relief based on criminal history. As to PPP relief, the bill would allow the SBA to deny a loan if an owner of 20 percent or more equity was convicted of felony financial fraud or deception in the previous 5 years.  However, other criminal history would not disqualify an applicant unless such an owner is currently incarcerated.  See H.R 6800, Sec. 90001(j).  This provision would significantly roll back the PPP exclusions discussed above, and analyzed in greater detail in previous postings collected on our small business relief resource page. As to EIDL relief, the HEROES Act would require that the SBA’s application forms include a statement making clear that an applicant for these disaster advances and loans is not ineligible “solely because of the applicant’s involvement in the criminal justice system.”  See H.R 6800, Sec. 90009.  Currently, it appears that the SBA is denying COVID-19-related EIDL relief to applicants who have ever been arrested for a felony or who have been arrested for a misdemeanor in the last 10 years.  We read the HEROES Act provision to prohibit the SBA from denying disaster relief to any otherwise eligible person based upon their criminal record, an even broader restriction than would apply to the PPP program. While the HEROES Act in its entirety is unlikely to become law in its current form, if these two provisions make it through the next round of negotiations in the Senate, they would dramatically expand access to critical relief for many small business owners, nonprofits, and independent contractors that the SBA has unfairly been excluding in the past.  They would mark a breakthrough in the federal government’s approach to securing fair treatment for people with a record.  While last year’s Fair Chance Act was an important step in opening doors to federal agency and contractor employment by limiting background inquiries in the early stages of hiring, this would be the first time in decades that Congress has directly prohibited record-based discrimination in a major government benefit program.  We will have more to say on that subject if and when the law is enacted with these provisions in it. Read more

SBA has no excuse for excluding people with a record from stimulus relief

*UPDATE (7/7/20):  “SBA throws in the towel and Congress extends the PPP deadline” Some federal officials have claimed in recent days that the government is required to bar people with a criminal record from emergency loans under the Paycheck Protection Program (PPP) either by the CARES Act or by preexisting SBA rules.  Neither assertion is true. There is nothing in federal law, including the CARES Act, that requires the Small Business Administration (SBA) to disqualify small businesses from applying for PPP loans based on an owner’s past arrest or conviction history.  Prior to enactment of the CARES Act, the SBA’s rules disqualified only people with open criminal cases from the 7(a) loan program of which the PPP is the newest part.  Yet in launching the PPP, the SBA inexplicably decided to impose entirely new record-related restrictions on a population that is already severely disadvantaged: the new PPP rules and accompanying application forms prohibit loans to any small business owner convicted of a felony within the past five years, or placed on probation or parole during that time, even if all court-imposed penalties have been fully satisfied.  In fact, the SBA even disqualifies people whose felony charges never led to a conviction, but instead were dismissed after completion of pretrial diversion. Our one-pager, “At a Glance: Barriers to the Paycheck Protection Program (‘PPP’) Based on Arrest or Conviction,” available in PDF and included below, explains the new barriers to relief under the PPP as well as preexisting barriers under the 7(a) program. The SBA’s new policy, which comes at perhaps the worst possible time for struggling small businesses, cannot be squared with recent Congressional efforts to support people with past justice involvement in their efforts to reintegrate into the community, by enabling them to compete fairly for federal employment and contracts.  Eligibility requirements for federal relief should be relaxed in these circumstances, not made more restrictive as the SBA has done.  A coalition of conservative groups today urged in a letter to Senator McConnell that Congress take steps to roll back this counterproductive SBA policy, joining advocates who wrote last week directly to the federal executive officials most directly responsible for it.  We hope Congress will curb the SBA’s authority to discriminate against small business owners with a record in its new stimulus package. At a Glance: Barriers to the Paycheck Protection Program (“PPP”) Based on Arrest or Conviction SBA regulations and policy statements for the 7(a) loan program disqualify applicants if certain principals of the business are currently serving a sentence or subject to charges; otherwise, applicants with a past record are subject to a character determination (see below). The CARES Act authorizes PPP loans under the 7(a) program and does not impose or require any barriers based on arrest or conviction history. Nonetheless, the SBA has imposed—through a regulation and application form—the following new mandatory disqualifications for PPP: Applicants with an owner of 20% or more equity who was convicted of any felony within the last 5 years (Interim Final Rule); and Applicants with “any owner” who within the last 5 years, for any felony: was convicted, pleaded guilty or no contest, or was placed on pretrial diversion, parole, or probation (Application Form). Preexisting SBA 7(a) Requirements The 7(a) statute authorizes the SBA to “verify the applicant’s criminal background, or lack thereof,” including through an FBI background check. An SBA regulation makes ineligible “[b]usinesses with an Associate who is incarcerated, on probation, on parole, or has been indicted for a felony or a crime of moral turpitude.” SBA’s policy statement also makes ineligible businesses with an Associate currently under specified forms of diversionary or conditional dispositions, order of protection, a sex offender registry, or facing any charges in any jurisdiction. This policy statement further provides that various principals of a business “must be of good character.”* New PPP Requirements The CARES Act (H.R. 748) authorized PPP loans under the 7(a) program, but does not impose or require any barriers based on arrest or conviction history for PPP loans. SBA’s PPP Interim Final Rule makes an applicant ineligible if: “An owner of 20 percent or more of the equity of the applicant is incarcerated, on probation, on parole; presently subject to an indictment, criminal information, arraignment, or other means by which formal criminal charges are brought in any jurisdiction; or has been convicted of a felony within the last five years”; or if the applicant is ineligible under existing regulation or policy statement. The PPP Application Form goes further: it disqualifies all applicants who answer “yes” to any of the following: “Is the Applicant (if an individual) or any individual owning 20% or more of the equity of the Applicant subject to an indictment, criminal information, arraignment, or other means by which formal criminal charges are brought in any jurisdiction, or presently incarcerated, or on probation or parole?” or “Within the last 5 years, for any felony, has the Applicant (if an individual) or any owner of the Applicant 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)?” * The “good character” determination requires disclosure and documentation of: 1) current charges; 2) arrests in the past 6 months; and 3) any (excluding minor vehicle violations) convictions, guilty and no contest pleas, or placement on pretrial diversion or any form of parole or probation, at any time. Expunged and sealed records must be disclosed. A person may then be approved if they have satisfied all sentencing conditions and do not have a felony conviction, misdemeanor conviction for a crime against a minor, recent misdemeanor conviction, or recent charges. Otherwise, there is an FBI fingerprint background check and individual determination by the SBA. See SBA SOP 50 10 5(K)(B)(2)(III)(A)(13) (eff. April 1, 2019). Read more

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.] 7(a) Eligibility Criteria Current SBA regulations and policies with respect to 7(a) loans and criminal history make a small business ineligible if the business has a principal who is incarcerated, under supervision, or facing charges.  The agency also requires that such persons “must be of good character,” determined through a rigorous character evaluation process that includes close attention to an applicant’s past criminal record.  The 7(a) statute allows the SBA to verify an applicant’s criminal background or lack thereof, including through an FBI background check.  See 15 U.S.C. 636(a)(1)(B). More specifically, current federal regulations provide that a business is ineligible for a 7(a) loan if the business has an “Associate” (a significant owner or person who manages day-to-day operations)1 who is “incarcerated, on probation, on parole, or has been indicted for a felony or a crime of moral turpitude.”  13 C.F.R. § 120.110(n).  SBA policies clarify that this includes a person under a deferred prosecution, conditional discharge, order of protection, or on a sex offender registry, as well as anyone “currently subject to an indictment, criminal information, arraignment, or other means by which formal criminal charges are brought in any jurisdiction.”  See SBA Standard Operating Procedure (SOP) 50 10 5(K)(B)(2)(III)(A)(13) (eff. April 1, 2019).  (In 2015, the SBA changed the rules of its 7(m) microloan program to make people on probation or parole eligible to apply for a loan, but retained the ineligibility requirement for the basic 7(a) program.) While a past conviction is not among the grounds for automatic ineligibility for a 7(a) loan, SBA policy also requires every Associate to be “of good character.”  See id.  The character evaluation process is described further below. Though these eligibility criteria and “good character” requirements certainly apply to 7(a) loans in general, the text of the stimulus bill could be read to say that these requirements do not apply with respect to the Paycheck Protection loans: In evaluating the eligibility of a borrower for a covered loan with the terms described in this paragraph, a lender shall consider whether the borrower— “(aa) was in operation on February 15, 2020; and “(bb)(AA) had employees for whom the borrower paid salaries and payroll taxes; or “(BB) paid independent contractors, as reported on a Form 1099–MISC. See H.R. 748, sec. 1102.  If this reading of this broad language is correct, the stimulus bill would waive other eligibility requirements that would normally apply to 7(a) loans, including ineligibility due to an open criminal case or lack of “good character.”  We hope that would be the case, and will look for guidance from the SBA as to how they interpret this language now that the law has been enacted.  [See the updates at the top of this post.] 7(a) Character Evaluation Process For 7(a) loans in general, and potentially for Paycheck Protection Loans as well, the SBA conducts a multi-step character evaluation process to determine if an applicant’s Associates satisfy the “good character” requirement.  See subsection 13 of SOP 50 10 5(K)(B)(2)(III)(A) (“Businesses with an Associate of Poor Character”) at p. 109. First, an applicant and its Associates must submit to the lender SBA Form 1919, which includes three questions on criminal history.  Question 17 asks if the person is presently facing charges, which would make them ineligible.  Question 18 asks about arrests in the past 6 months.  Question 19 asks, respecting “any criminal offense – other than a minor vehicle violation,” if the person has ever been convicted, pled guilty or nolo contendere, or been placed on pretrial diversion or any form of parole or probation, including probation before judgment.  SBA policy makes clear that a person must answer “Yes” to these questions “even when the individual believes the record is sealed, expunged or otherwise unavailable,” and that “[t]here are no exceptions or waivers to this policy.”  Lenders are required to keep this information private and confidential. If a person answers “Yes” to Questions 18 or 19, the person must submit to the lender SBA Form 912 (“Statement of Personal History”), along with a “detailed written statement” describing the facts and circumstances of any responsive criminal matter, including dates, locations, charges, dispositions, sentencing, court conditions, as well as “court documentation” that sentencing and other court conditions (including “fines or penalties”) were satisfied.  If any sentence “and other conditions of the court” have not been satisfied, the person is ineligible for a loan.  See SOP 50 10 5(K)(B)(2)(III)(A)(13) at p. 111.  Form 912 also states: “An arrest or conviction record will not necessarily disqualify you; however, an untruthful answer will cause your application to be denied and subject you to other penalties…” After receiving the SBA Form 912 package, the lender may process the application and proceed with the loan if it determines that all reported criminal cases resulted in one of the following dispositions: (1) dismissal of the charges; (2) the reduction of any original felony charges to misdemeanors; or (3) conviction on one or more misdemeanor counts, if any conditions were met more than 6 months before the loan application, and the convictions do not involve a crime against a minor. However, the lender may not proceed and the SBA must conduct a background investigation including an FBI fingerprint background check, and make a character determination, if any of the reported criminal cases resulted in: (1) a felony conviction; (2) a misdemeanor conviction within 6 months of the loan application or for a crime against a minor; or (3) charges filed with a final disposition entered within 6 months of the loan application.  After the background check is completed, the SBA will “determine either that the Subject Individual has good character, or is not eligible for SBA financial assistance.”  No specific standards are provided to guide this decision.  See SOP 50 10 5(K)(B)(2)(III)(A)(13) at p. 113.  A person may request reconsideration of a character determination within 6 months of the decision. Id. Disaster Loans In addition to 7(a) loans, the SBA is also already offering 7(b) Economic Injury Disaster Loans for qualifying small businesses that have suffered substantial economic injury and are located in a Coronavirus (COVID-19) declared disaster area. [See our new post for more current information on disaster loans] By statute and its own rule, SBA is barred from making 7(b) loans to anyone who has 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 application for a disaster loan requires that certain owners (any proprietor, general partner, limited partner who owns 20% or more interest, or owner of 20% or more voting stock) must disclose any arrests in the past 6 months, as well as any convictions, guilty or nolo contendere pleas, and placements on pretrial diversion or any form of parole or probation, including probation before judgement.  The applicable SBA policy on disaster loans states that “[i]t is not in the public interest for SBA to extend financial assistance to persons who are not of good character,” and so it will perform a character determination of anyone disclosing any of the records described above.  SOP 50 30 9(3.6) (effective May 31, 2018) at p.32.  This character determination (described in detail here at Section 3.6) is similar to, but apparently less onerous than, the 7(a) character evaluation process described above. In addition to the programs discussed in this post, this website provides more information on SBA’s various benefit programs. — *Note this post was updated on April 28, 2020. 1. An “Associate” is defined as “(i) An officer, director, owner of more than 20 percent of the equity, or key employee of the small business; (ii) Any entity in which one or more individuals referred to [the previous clause] owns or controls at least 20 percent; and (iii) Any individual or entity in control of or controlled by the small business (except a Small Business Investment Company (“SBIC”) licensed by SBA).”  13 C.F.R. § 120.10. Read more