Tag: Paycheck Protection Program

Is SBA denying disaster relief based only on an arrest?

*UPDATE (7/7/20):  “SBA throws in the towel and Congress extends the PPP deadline” In response to COVID-19, Congress created the Paycheck Protection Program (PPP) and expanded the Economic Injury Disaster Loan (EIDL) program, appropriating hundreds of billions of dollars across these programs to assist small businesses affected by the pandemic and economic crisis.  As we have been pointing out in this space over the past five weeks, the Small Business Administration (SBA), which administers both programs, has imposed broad restrictions on access to relief based on arrest or conviction history, restrictions that were neither required nor contemplated by Congress.[1] Until now, attention has been focused on small business owners unfairly denied PPP relief based on their record.  Members of Congress and major organizations have written in opposition to PPP regulations and policies that impose barriers based on a record, and dozens of media outlets have covered the issue.  But the EIDL disaster relief program has largely gone under the radar, in part because the SBA has not published guidance about how it is treating EIDL applicants with a record. In a new development, documents posted anonymously on Reddit last week, and published by Law360 on May 3, purport to be internal SBA guidance for reviewing EIDL applications.  The documents instruct agency staff to deny relief to applicants if they have ever been arrested, unless the arrest was for a misdemeanor and occurred more than 10 years ago.  These leaked documents, also covered in detail by Entrepreneur this morning, would suggest that behind the scenes the SBA is imposing even greater record-related restrictions on COVID-19-related disaster relief than on PPP loans. Upon review, we believe that this new information about the record-related standards being applied by the SBA to EIDL loans is likely correct.  We have heard from readers who were denied EIDL relief after SBA staff asked them questions over email about their arrest history, questions that correspond exactly to those in the leaked documents.  An SBA spokesperson, given an opportunity to correct the record if it needed correcting, declined to confirm or deny the information. We have never see a government program in the United States with such broad and arbitrary restrictions based on criminal history.  The purported EIDL guidance is devoid of nuance: it instructs staff to deny relief based on arrest history regardless of offense and regardless of whether the arrest resulted in prosecution, much less conviction.  The look-back period is limitless for felony arrests and a full decade for misdemeanor arrests.  The guidance inevitably produces unwarranted disparities: a person with a decades-old felony arrest that was never charged, or whose arrest resulted in an acquittal, is treated more severely than someone with a more recent misdemeanor conviction.  Finally, the guidance cannot be squared with existing published SBA policies, as discussed below. In normal times, a sweeping and secretive restriction on disaster relief would be problematic.  In this global public health and economic crisis, it is inexcusable. The standards in the leaked SBA guidance are inconsistent with applicable laws, regulations, and agency policies.  Existing statutes and regulations governing the 7(b) disaster loan program, of which EIDL is a part, only require the SBA to deny disaster loans if an otherwise eligible applicant has been convicted in the past year of a felony related to a riot, civil disorder, or other declared disaster. However, a close look at the SBA’s policy statement on disaster loans suggests that the leaked documents may represent a shortcut through an existing vetting process during the present exigency. The published EIDL policy statement (§ 3.6) requires disqualification if the “applicant or principal owner is presently on parole or probation following conviction of a serious criminal offense.”  Further, because “[i]t is not in the public interest for SBA to extend financial assistance to persons who are not of good character,” the agency will make a “character determination” in the event “any adverse information develops concerning the character or background of a disaster loan applicant.”  This adverse information might develop from a three-part question about criminal history in the SBA disaster loan application forms, including for COVID-19-related EIDL relief, a question requiring a “yes” or “no” answer to the entire section: a. Are you presently subject to an indictment, criminal information, arraignment, or other means by which formal criminal charges are brought in any jurisdiction? b. Have you been arrested in the past six months for any criminal offense? c. For any criminal offense – other than a minor vehicle violation – have you ever been convicted, plead guilty, plead nolo contendere, been placed on pretrial diversion, or been placed on any form of parole or probation (including probation before judgment)? The policy statement provides if an applicant answers “yes” to this wide-ranging criminal history question, they must disclose the details of their record on a Form 912: Statement of Personal History.  Based on that information, the SBA will determine if a fingerprint sample is required.  The policy mandates fingerprints only if the person had a felony conviction more than a year ago in connection with a riot, civil disorder, or disaster, but it permits them in other cases.  If the record disclosed “is both minor in nature and was committed more than 10 years ago, fingerprints may not be required to continue processing.”  After all necessary information is collected, the SBA “completes its character evaluation” and finds the person eligible or ineligible.  The criteria applied for this final decision are not disclosed. Presumably, this policy statement is still legally applicable to EIDL, but the SBA seems to be skipping steps in the process to simply deny relief to anyone who might be subject to a fingerprint sample in ordinary times, instead of fashioning a rule appropriate to these extraordinary circumstances.  To anyone familiar with the widespread recent efforts to encourage reintegration, it is a bit shocking to see the inner workings of a federal agency pulling in the opposite direction. [1] The only statutory record-related restriction for these programs is a half-century old exclusion from EIDL of persons convicted in the last year of a felony “during and in connection with a riot or civil disorder.”  See Department of Housing and Urban Development (HUD) Act of 1968, P.L. 90-448 § 1106(e). 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

Bipartisan coalition calls on SBA to roll back record-related restrictions in COVID-19 small business loan programs

On April 17 a diverse bipartisan group of civil rights, advocacy, and business organizations, including CCRC, sent a letter to Treasury Secretary Mnuchin and SBA Administrator Carranza expressing concern over the restrictions imposed by the SBA on people with a record of arrest or conviction under two programs recently authorized by Congress in response to the COVID-19 crisis.  The letter points out that these unwarranted restrictions on loan programs intended to aid small businesses and non-profits will have a significant and detrimental impact in communities across the country, and a particularly harsh effect on minority business owners and employees who are disproportionately affected by the criminal legal system as a result of institutional discrimination.  It urges that federal relief be made equitably accessible to all who need it. The letter describes how the SBA’s program restrictions based on record are unnecessary and confusing inconsistent with Congress’ intent in enacting the CARES Act overbroad and unfair racially discriminatory In conclusion, the letter urges the SBA to take the following steps: At a minimum, bring the record restrictions for PPP and EIDL programs in line with those that applied to Section 7(a) and 7(b) loans under regulations adopted prior to enactment of the CARES Act. Relax existing rules and policies that restrict access to PPP or EIDL financial assistance for people with a record in the urgent circumstances presented by the pandemic, in line with the purposes of the CARES Act. Ensure that the application forms for SBA financial assistance accurately reflect the eligibility requirements and are written in a clear manner. An Appendix to the letter describes how the new rules and policies governing the Payroll Protection Program are more restrictive than those governing the 7(a) program generally, and how barriers based on arrest or conviction may also disqualify people with any sort of a record from loans under the EIDL program authorized under the SBA’s existing 7(b) disaster loan program. The letter —available in PDF and reprinted below – was sent by the following organizations: American Civil Liberties Union Chicago Lawyers’ Committee for Civil Rights Collateral Consequences Resource Center Community Legal Services of Philadelphia Drug Policy Alliance FreedomWorks Georgia Justice Project Interfaith Action for Human Rights Jewish Council for Public Affairs Justice & Accountability Center of Louisiana Justice Action Network Leadership Conference on Civil and Human Rights National Association of Criminal Defense Lawyers National Employment Law Project Public Interest Law Center Reproductive Justice Inside Safer Foundation Washington Lawyers’ Committee for Civil Rights and Urban Affairs Women Against Registry April 17, 2020  The Honorable Steven Mnuchin                                 The Honorable Jovita Carranza Secretary                                                                Administrator U.S. Department of Treasury                                     U.S. Small Business Administration Washington, D.C. 20220                                           Washington, D.C. 20416 Dear Secretary Mnuchin and Administrator Carranza, As a bipartisan and diverse group of organizations working to ensure fair treatment of people with a record of arrest or conviction, we write to express our deep concern over the restrictions imposed by the Small Business Administration on this population’s eligibility for benefits under the two programs authorized and funded by the CARES Act (see Appendix).  With one in three Americans having a record, and people with records experiencing an unemployment rate five times higher than the average, these restrictions will have a significant and detrimental impact on individuals, families, and communities across the United States. The restrictions will have a particularly harsh effect on minority business owners and employees who are disproportionately affected by the criminal legal system as a result of institutional discrimination. Specifically, these restrictions are: Unnecessary and confusing: There are no statutes requiring the SBA to categorically disqualify individuals from its loan programs based on an arrest or conviction record; the authority to perform a background check does not translate into authority to exclude. SBA’s Paycheck Protection Program (PPP) Interim Final Rule, and the PPP’s even more restrictive application form, are far more exclusionary than the preexisting rule on record restrictions for small business loans under the 7(a) program, which only excludes those with active criminal cases. SBA’s new rule excludes anyone convicted of any felony within the last 5 years, and its application form additionally disqualifies anyone who pleaded guilty or no contest, or was placed on pretrial diversion, probation, or parole during that period (see Appendix). The lack of new policy guidance for Economic Injury Disaster Loans (EIDL) for people with a record, especially regarding the new advances, also leads to additional exclusion. The new restrictions constitute unnecessary overreach that interferes with the ability of small businesses to operate and pay their employees. The PPP Interim Final Rule, policy guidance, and application form are confusing and likely to have a chilling effect that will discourage many eligible business owners from applying; and, they may lead to applicants inadvertently answering the records questions incorrectly. The policy guidance and application form for Economic Injury Disaster Loans (EIDL) advances are similarly confusing and are likely to have the same chilling effect. Inconsistent with Congress’ intent:  The intention of the emergency relief programs authorized by the CARES Act is to sustain small businesses that are trying to save the economy by keeping people employed. Eligibility requirements should be relaxed in these circumstances, not heightened. SBA’s new restrictions on eligibility for its loan programs, which already operate to exclude many people with a record, contravene the intent of the CARES Act, and are inconsistent with SBA’s more general mandate of encouraging entrepreneurship and expanding access to employment, including for people with a record of arrest or conviction. A significant number of people with an arrest or conviction history have established their own small businesses, since it is frequently difficult for them to secure employment with others. Moreover, these businesses also tend to be more willing to hire employees with a record. Driving them out of business will result in a severe impact on employment of a population that already is disadvantaged in the workplace. A large percentage of small businesses are owned by single owners or a limited number of co-owners, so that any disqualification affecting 20%+ equity owners will have a significant impact on small business owners generally. A policy that excludes from loan eligibility small businesses that are owned in whole or in part by people with arrest or conviction history is not only inconsistent with the CARES Act and the mandate of SBA’s own authorizing statutes, it also frustrates federal and state efforts to encourage the reintegration of individuals involved in the criminal legal system. Overbroad and unfair: The PPP’s categorical bars based on certain arrest or conviction records mean that there is no opportunity for an individual determination that considers factors such as rehabilitation, the circumstances of the conviction/disposition, or whether the nature of the underlying crime might adversely affect the ability to properly utilize the loan. The EIDL program restrictions go even further by asking about any involvement with the criminal legal system at any time, which could potentially exclude applicants with any arrest or conviction record. The PPP and EIDL restrictions extend to individuals that the criminal legal system has specifically determined should not be convicted of a crime, including those that participate in diversionary programs or obtain deferred adjudications – the very kinds of dispositions that are supposed to help protect people involved in the criminal legal system from harsh economic collateral consequences. The SBA’s requirement that people disclose sealed and expunged records circumvents protections in state law for these cleared records and is contrary to the intent and purpose of those laws. Racially discriminatory: The SBA’s restrictions will have a disparate impact on minority business owners and employees, who are disproportionately affected by the criminal legal system as a result of institutional discrimination. People with a record are already subject to myriad disadvantages in seeking to reintegrate into society, notably in bank lending, but also in housing, employment, licensing, education, voting, and other areas. The SBA must act now to: At a minimum, bring the record restrictions for PPP and EIDL programs in line with those that applied to Section 7(a) and 7(b) loans under regulations adopted prior to enactment of the CARES Act. Relax existing rules and policies that restrict access to PPP or EIDL financial assistance for people with a record in the urgent circumstances presented by the pandemic, in line with the purposes of the CARES Act. Ensure that the application forms for SBA financial assistance accurately reflect the eligibility requirements and are written in a clear manner. As the COVID-19 crisis continues to devastate communities across this country, federal relief must be made equitably accessible to all who need it. Sincerely,   American Civil Liberties Union Chicago Lawyers’ Committee for Civil Rights Collateral Consequences Resource Center Community Legal Services of Philadelphia Drug Policy Alliance FreedomWorks Georgia Justice Project Interfaith Action for Human Rights Jewish Council for Public Affairs Justice & Accountability Center of Louisiana Justice Action Network Leadership Conference on Civil and Human Rights National Association of Criminal Defense Lawyers National Employment Law Project Public Interest Law Center Reproductive Justice Inside Safer Foundation Washington Lawyers’ Committee for Civil Rights and Urban Affairs Women Against Registry     APPENDIX: PROGRAM REQUIREMENTS (Prepared by CCRC, last revised 4/17/20) Paycheck Protection Program (PPP) The CARES Act authorizes the PPP, which provides small business loans under the SBA’s 7(a) loan program, with provisions for expanded eligibility, allowable uses, and forgiveness.[1] Barriers based on arrest or conviction for 7(a) loans in general: By statute: The SBA “may verify the applicant’s criminal background, or lack thereof,” prior to approval, including through an FBI background check.[2] By regulation: “Businesses with an Associate who is incarcerated, on probation, on parole, or has been indicted for a felony or a crime of moral turpitude” are ineligible.[3] By policy statement: SBA interprets its regulation to also make ineligible an Associate under deferred prosecution, conditional discharge, order of protection, or a sex offender registry, or currently facing any charges in any jurisdiction.[4] SBA also states that various principals of a business “must be of good character,” which is determined through a character evaluation, requiring disclosure of any: 1) current charges; 2) arrests in the past 6 months; and 3) time the person has been convicted, pled guilty or no contest, or been placed on pretrial diversion or any form of parole or probation—other than for a minor vehicle violation. Expunged and sealed records must be disclosed, with no exceptions. A person will generally be approved if they provide documentation that they have satisfied all sentencing conditions (presumably including payment of costs and restitution) and do not have a felony conviction, misdemeanor conviction for a crime against a minor, recent misdemeanor conviction, or recent charges. Otherwise, they are subject to a fingerprint-based FBI background check and an opaque individual determination by the SBA.[5] Barriers based on arrest or conviction specific to PPP loans: By statute: The CARES Act does not specifically authorize much less require barriers based on arrest or conviction for PPP loans. To be consistent with its purposes, the CARES Act should be read to say at the least that new barriers based on arrest or conviction should not be applied to PPP assistance.[6] By regulation: SBA Interim Final Rule (Apr. 15): “You are ineligible for a PPP loan if….iii. 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.” By application form: Borrower Application (Apr. 3): asks two questions; a “yes” to either is disqualifying: 1) “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?” 2) “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)?” (Note: this is far broader than the Interim Final Rule: the second question includes “any owner” and covers dispositions other than conviction.) Economic Injury Disaster Loans (EIDL) EIDL loans are authorized under the SBA’s existing 7(b) disaster loan program. The Coronavirus Preparedness and Response Supplemental Appropriations Act (Phase 1) appropriated additional funds and deemed coronavirus a disaster.[7] Pursuant to the CARES Act, SBA is also allowing business owners in all states, D.C., and territories to apply for an EIDL advance of up to $10,000, which “will be made available within days of a successful application, and this loan advance will not have to be repaid.”[8] Barriers based on arrest or conviction for EIDL: By statute: Individuals convicted during the past year of a felony during and in connection with a riot or civil disorder or other declared disaster are ineligible.[9] By regulation: “Businesses with an Associate who is incarcerated, on probation, on parole, or has been indicted for a felony or a crime of moral turpitude” are ineligible.[10] By policy statement: The SBA policy statement provides: “It is not in the public interest…to extend financial assistance to persons who are not of good character. If any adverse information develops concerning the character or background of a disaster loan applicant or principal owner [on forms], SBA must make a determination as to the applicant’s character before a loan can be approved.”[11] Thus, the SBA will not approve a loan “if the applicant or principal owner is presently on parole or probation following conviction of a serious criminal offense. However, [it] will consider approving an application submitted by partnerships, corporations, and LLEs, where the apparent bar to eligibility was committed independently of any official act for the business and the individual will divest all direct and indirect interest in the business.” By application form: Forms, including the COVID-19 EIDL portal, include the usual EIDL three-part question, which requires a “yes” or “no” to the entire question: “a. Are you presently subject to an indictment, criminal information, arraignment, or other means by which formal criminal charges are brought in any jurisdiction? b. Have you been arrested in the past six months for any criminal offense? c. For any criminal offense – other than a minor vehicle violation – have you ever been convicted, plead guilty, plead nolo contendere, been placed on pretrial diversion, or been placed on any form of parole or probation (including probation before judgment)?” The SBA has not provided guidance on whether applicants who answer “yes” to this question can obtain an EIDL advance. Under pre-existing policy, if this question is answered “yes,” the SBA requires the applicant to provide a Form 912 with an explanation of the offense(s), and in some cases a fingerprint sample, before the SBA will make a character determination.[12]   [1] CARES Act (H.R. 748), secs. 1102-1105; 15 U.S.C. 636(a). [2] 15 U.S.C. 636(a)(1)(B). [3] 13 C.F.R. § 120.110(n). An “Associate” includes officers, directors, owners of 20% or more of the equity, key employees, and other specified entities. See 13 C.F.R. § 120.10. [4] See SBA Standard Operating Procedure (SOP) 50 10 5(K)(B)(2)(III)(A)(13) (eff. April 1, 2019). [5] The good character requirement applies to every proprietor, general partner, officer, director, managing member of an LLC, owner of 20% or more of the equity, trustor, or person who runs day-to-day operations.” See id. [6] See CARES Act (H.R. 748), sec. 1102. [7] Coronavirus Preparedness and Response Supplemental Appropriations Act (H.R. 6074), tit. 2. [8] CARES Act (H.R. 748), sec. 1110; https://www.sba.gov/funding-programs/loans/coronavirus-relief-options/economic-injury-disaster-loan-emergency-advance. [9] See P. L. 90 448, 1106(e), HUD Act of l968, and 13 CFR §123.101(a). [10] 13 C.F.R. § 120.110(n). An “Associate” includes officers, directors, owners of 20% or more of the equity, key employees, and other specified entities. See 13 C.F.R. § 120.10. [11] SBA SOP 50 30 9(3.6) (effective May 31, 2018) at p. 32. [12] Id. Read more

Organizations call on Congress to remove record-related barriers to small business relief

A bipartisan group of civil rights, advocacy, and business organizations, including CCRC, are calling on Congress to take immediate action to remove barriers based on arrest or conviction history for small business owners seeking COVID-19 federal relief.  This is an issue we have been covering in depth in recent posts.  This call to action—available in PDF and reprinted below—is issued by the following organizations (with additional sign-ons welcome; contact us here): American Civil Liberties Union Chicago Lawyers’ Committee for Civil Rights Collateral Consequences Resource Center College & Community Fellowship Community Legal Services of Philadelphia #cut50 Drug Policy Alliance FreedomWorks Georgia Justice Project Interfaith Action for Human Rights Jewish Council for Public Affairs Justice & Accountability Center of Louisiana Justice Action Network Leadership Conference on Civil and Human Rights Main Street Alliance National Association of Criminal Defense Lawyers National Employment Law Project Out For Justice Public Interest Law Center Reproductive Justice Inside Root & Rebound Safer Foundation Washington Lawyers’ Committee for Civil Rights and Urban Affairs Women Against Registry *Note: the letter was originally issued on April 10 and was last updated on April 17. April 17, 2020 Congress Must Act Now to Remove Barriers Based on Arrest or Conviction History for Small Business Owners Seeking COVID-19 Federal Relief We oppose the restrictions based on arrest or conviction placed by the Small Business Administration (SBA) on the two small business programs authorized and funded by the CARES Act (see Appendix). With one in three Americans having some sort of record, and people with records experiencing an unemployment rate five times higher than the average rate, these restrictions will have a significant and detrimental impact on individuals, families, and communities across the United States. The restrictions will have a particularly harsh effect on minority business owners and employees who are disproportionately affected by the criminal legal system as a result of institutional discrimination. Specifically, these restrictions are: • Unnecessary and confusing: There are no statutes requiring SBA to categorically disqualify individuals from its loan programs based on an arrest or conviction record; the authority to perform a background check does not translate into authority to exclude. SBA’s Interim Final Rule and policy guidance for the Paycheck Protection Program (PPP) and Economic Injury Disaster Loans (EIDL) are far more exclusionary than its own existing regulations on record restrictions for small business loans, which only exclude those with active cases. The new restrictions constitute unnecessary overreach that interferes with the ability of small businesses to operate and pay their employees. The PPP interim rule and policy guidance, including its application form, are confusing and likely to have a chilling effect that will discourage many eligible applicants. The EIDL guidance and application form are similarly confusing and are likely to have the same effect. • Inconsistent with Congress’ intent: The intention of the emergency relief programs authorized by the CARES Act is to sustain small businesses that are trying to save the economy by keeping people employed. Eligibility requirements should be relaxed in these circumstances, not heightened as SBA proposes. SBA’s proposed new restrictions on eligibility for its loan programs, which already operate to exclude many people with a record, contravene the intent of the CARES Act, and are inconsistent with SBA’s more general mandate of encouraging entrepreneurship and expanding access to employment. A significant number of people with arrest or conviction history have established their own small businesses, since it is frequently difficult for them to secure employment with others. Moreover, these businesses also tend to be more willing to hire employees with a record. Driving them out of business will result in a severe impact on employment of a population that already is disadvantaged in the workplace. A large percentage of small businesses are owned by single owners or a limited number of co-owners, so that any disqualification affecting 20%+ equity owners will have a significant impact on small business owners generally. A policy that excludes from loan eligibility small businesses that are owned in whole or in part by people with arrest or conviction history is not only inconsistent with the CARES Act and the mandate of SBA’s own authorizing statutes, it also frustrates federal and state efforts to encourage the reintegration of individuals involved in the criminal legal system. • Overbroad and unfair: The PPP’s categorical bar based on certain arrest or conviction records means that there is no opportunity for an individual determination that considers factors such as rehabilitation, the circumstances of the conviction/disposition, or whether the nature of the underlying crime might adversely affect the ability to properly utilize the loan. The EIDL program restrictions go even further by asking about any involvement with the criminal legal system at any time, and potentially exclude most applicants with any arrest or conviction record from the EIDL (the SBA has not provided guidance on this). The PPP and EIDL restrictions extend to individuals that the criminal legal system has specifically determined should not be convicted of a crime, including those that participate in diversionary programs or obtain deferred adjudications – the very kinds of dispositions that are supposed to help protect people involved in the criminal legal system from harsh economic collateral consequences. The SBA’s requirement that people disclose sealed and expunged records circumvents protections in state law for these cleared records and is contrary to the intent and purpose of those laws. • Racially discriminatory: The SBA’s restrictions will have a disparate impact on minority business owners and employees, who are disproportionately affected by the criminal legal system as a result of institutional discrimination. People with a record are already subject to a myriad of disadvantages in seeking to reintegrate into society, notably in bank lending policies but also in housing, employment, licensing, education, voting, and other areas. Congress must act now to: Direct the SBA to eliminate new record restrictions introduced by the PPP interim rule and application form, and clarify the record-related eligibility policy for EIDL applicants. Direct the SBA to relax the record restrictions that are applied to Section 7(a) and 7(b) loans under existing rules and policies. Direct the SBA to ensure that the application forms for SBA financial assistance accurately reflect the eligibility requirements. As the COVID-19 crisis continues to devastate communities across this country, federal relief must be made equitably accessible to all who need it. Sincerely, American Civil Liberties Union Chicago Lawyers’ Committee for Civil Rights Collateral Consequences Resource Center College & Community Fellowship Community Legal Services of Philadelphia #cut50 Drug Policy Alliance FreedomWorks Georgia Justice Project Interfaith Action for Human Rights Jewish Council for Public Affairs Justice & Accountability Center of Louisiana Justice Action Network Leadership Conference on Civil and Human Rights Main Street Alliance National Association of Criminal Defense Lawyers National Employment Law Project Out For Justice Public Interest Law Center Reproductive Justice Inside Root & Rebound Safer Foundation Washington Lawyers’ Committee for Civil Rights and Urban Affairs Women Against Registry APPENDIX: PROGRAM REQUIREMENTS (Prepared by CCRC) Paycheck Protection Program (PPP) The CARES Act authorizes the PPP, which provides small business loans under the SBA’s 7(a) loan program, with provisions for expanded eligibility, allowable uses, and forgiveness.[i] Barriers based on arrest or conviction for 7(a) loans in general: By statute: The SBA “may verify the applicant’s criminal background, or lack thereof,” prior to approval, including through an FBI background check.[ii] By regulation: “Businesses with an Associate who is incarcerated, on probation, on parole, or has been indicted for a felony or a crime of moral turpitude” are ineligible.[iii] By policy statement: SBA interprets its regulation to also make ineligible an Associate under deferred prosecution, conditional discharge, order of protection, or a sex offender registry, or currently facing any charges in any jurisdiction.[iv] SBA also states that various principals of a business “must be of good character,” which is determined through a character evaluation, requiring disclosure of any: 1) current charges; 2) arrests in the past 6 months; and 3) time the person has been convicted, pled guilty or no contest, or been placed on pretrial diversion or any form of parole or probation—other than for a minor vehicle violation. Expunged and sealed records must be disclosed, with no exceptions. A person will generally be approved if they provide documentation that they have satisfied all sentencing conditions (presumably including payment of costs and restitution) and do not have a felony conviction, misdemeanor conviction for a crime against a minor, recent misdemeanor conviction, or recent charges. Otherwise, they are subject to a fingerprint-based FBI background check and an opaque individual determination by the SBA.[v] Barriers based on arrest or conviction specific to PPP loans: By statute: The CARES Act does not specifically authorize much less require barriers based on arrest or conviction for PPP loans. To be consistent with its purposes, the CARES Act should at the least be read to say that new barriers based on arrest or conviction should not be applied to PPP assistance.[vi] By regulation: SBA Interim Final Rule (Apr. 15): “You are ineligible for a PPP loan if….iii. 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.” By application form: Borrower Application (Apr. 3): asks two questions; a “yes” to either is disqualifying: 1) “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?” 2) “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)?” (Note: this is far broader than the Interim Final Rule: the second question includes “any owner” and covers dispositions other than conviction.) Economic Injury Disaster Loans (EIDL) EIDL loans are authorized under the SBA’s existing 7(b) disaster loan program. The Coronavirus Preparedness and Response Supplemental Appropriations Act (Phase 1) appropriated additional funds and deemed coronavirus a disaster.[vii] Pursuant to the CARES Act, SBA is also allowing business owners in all states, D.C., and territories to apply for an EIDL advance of up to $10,000, which “will be made available within days of a successful application, and this loan advance will not have to be repaid.”[viii] Barriers based on arrest or conviction for EIDL: By statute and regulation: Individuals convicted during the past year of a felony during and in connection with a riot or civil disorder or other declared disaster are ineligible.[ix] By policy statement: The SBA policy statement provides: “It is not in the public interest…to extend financial assistance to persons who are not of good character. If any adverse information develops concerning the character or background of a disaster loan applicant or principal owner [on forms], SBA must make a determination as to the applicant’s character before a loan can be approved.”[x]  Thus, the SBA will not approve a loan “if the applicant or principal owner is presently on parole or probation following conviction of a serious criminal offense. However, [it] will consider approving an application submitted by partnerships, corporations, and LLEs, where the apparent bar to eligibility was committed independently of any official act for the business and the individual will divest all direct and indirect interest in the business.” By application form: Forms, including the COVID-19 EIDL portal, include the usual EIDL three-part question, which requires a “yes” or “no” to the entire question: “a. Are you presently subject to an indictment, criminal information, arraignment, or other means by which formal criminal charges are brought in any jurisdiction? b. Have you been arrested in the past six months for any criminal offense? c. For any criminal offense – other than a minor vehicle violation – have you ever been convicted, plead guilty, plead nolo contendere, been placed on pretrial diversion, or been placed on any form of parole or probation (including probation before judgment)?” Under pre-existing policy, if this question is answered “yes,” the SBA requires the applicant to provide a Form 912 with an explanation of the offense(s), and in some cases a fingerprint sample, before the SBA will make a character determination.[xi] The SBA has not provided guidance on whether applicants who answer “yes” to this question can obtain an EIDL advance, or whether they will be subject to the usual character evaluation. [i] CARES Act (H.R. 748), secs. 1102-1105; 15 U.S.C. 636(a). [ii] 15 U.S.C. 636(a)(1)(B). [iii] 13 C.F.R. § 120.110(n). An “Associate” includes officers, directors, owners of 20% or more of the equity, key employees, and other specified entities. See 13 C.F.R. § 120.10. [iv] See SBA Standard Operating Procedure (SOP) 50 10 5(K)(B)(2)(III)(A)(13) (eff. April 1, 2019). [v] The good character requirement applies to every proprietor, general partner, officer, director, managing member of an LLC, owner of 20% or more of the equity, trustor, or person who runs day-to-day operations.” See id. [vi] See CARES Act (H.R. 748), sec. 1102. [vii] Coronavirus Preparedness and Response Supplemental Appropriations Act (H.R. 6074), tit. 2. [viii] CARES Act (H.R. 748), sec. 1110; https://www.sba.gov/funding-programs/loans/coronavirus-relief-options/economic-injury-disaster-loan-emergency-advance. [ix] See P. L. 90 448, 1106(e), HUD Act of l968, and 13 CFR §§ 123.301, 123.101.   [x] SBA SOP 50 30 9(3.6) (effective May 31, 2018) at p. 32. [xi] Id. Read more

The Marshall Project reports on criminal history barriers to small business relief

In the past two weeks we have written at length about the U.S. Small Business Administration (SBA)’s “bumpy guidance on criminal history requirements” for small business financial relief during the COVID-19 pandemic (see also “Applying for an SBA loan with a criminal record”).  Today, Eli Hager of The Marshall Project has picked up the story with a new piece that draws on our research and will bring the story to a wider audience.  We hope this will prompt the SBA to revise its policy, or guide Congress toward clearer and fairer standards if it passes a planned new round of small business assistance. Before the pandemic, the SBA didn’t automatically disqualify people for small business loans based on a past criminal record, and we can’t understand why it would suddenly decide to do so now, when small businesses across the country are struggling to stay afloat.  (Preexisting policy, described here, disqualifies a business if it has a principal who is incarcerated, is under supervision, is facing charges, or lacks “good character.”)  The new SBA policy—which automatically disqualifies even certain people who have completed a diversionary program and were never convicted—seems entirely at odds with the wave of recent state and federal law reforms aimed at encouraging reintegration. The Marshall Project piece notes that “never in recent U.S. history have so many conservatives and liberals agreed that people with criminal histories deserve a second chance—especially job-creating small-business owners.”  It is no wonder that the SBA “did not respond Tuesday to multiple requests for clarification,” when its new policy is so indefensible. An excerpt from The Marshall Project piece, “Trump Administration Tells Some Business Owners ‘Do Not Apply’ for Coronavirus Loans,” is included below: Michelle E. of Scottsdale, Arizona, was relieved when President Trump last month signed into law the sweeping stimulus package intended to keep the U.S. economy afloat during the coronavirus pandemic. Michelle and her husband have owned a small hardwood flooring business for 18 years. She hoped the law’s $350 billion for small-business loans would help them avoid laying off any of their five employees, whom she said are like family. So she got a loan application through her bank. But as she filled it out, Michelle saw the question: Had any of the business owners pleaded guilty to or been on probation for a criminal offense? Michelle immediately thought of her husband, who is on probation because he took a guilty plea on a theft charge after taking home the scope of someone else’s rifle on a hunting trip, something he says he did accidentally. His name and her last name are being withheld because his criminal case, and the couple’s loan application, are pending. “Because of that, our employees can’t get help from the United States government?” Michelle said. It’s a little noticed frustration compared to the logistical problems of the Trump administration’s rollout of the CARES Act. A set of new regulations for implementing the law, issued by the Small Business Administration, prohibits small-business owners with criminal records from accessing the desperately needed loans. “We have never seen such a sweeping mandatory disqualification based on a criminal record, in any area of the law,” wrote the Collateral Consequences Resource Center, a nonprofit, nonpartisan website that tracks how federal, state and local laws affect people with past charges or convictions. The site is run by Margaret Love, who was the U.S. Pardon Attorney during the Clinton administration. [. . . .] Critics of the new regulations said the rules waste precious time examining people’s pasts when so many are, with each new day, losing their lives or livelihoods.  One New Jersey pet-supply store owner with a 10-year-old felony conviction put it this way in an email to the Collateral Consequences Resource Center: It is as if, after Hurricane Katrina flooded New Orleans, rescuers flying in helicopters asked families stranded on their roofs if they had ever faced a criminal charge.“ And if anyone answered yes,” he wrote, “they would move along to the next house.” Read more