Tag: Coronavirus

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: 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