Tag: SBA

CFPB documents the financial burdens imposed on justice-involved individuals

The Consumer Financial Protection Bureau has just issued an extraordinary new report on the financial challenges faced by justice-involved individuals in navigating each stage of the criminal justice system. The report, which describes itself as “the first of its kind done by the CFPB,” paints a devastating picture of how the criminal law enforcement system conspires at every step to exacerbate the financially precarious situation in which many entering the justice system already find themselves. “Justice-Involved Individuals and the Consumer Financial Marketplace” documents in clear and compelling prose how the financial products and services marketed to individuals and families entangled in the criminal justice system “too often contain exploitative terms and features, offer little or no consumer choice, and can have long-term negative consequences for the individuals and families affected.” What the CFPB researchers found “raises serious questions about the transparency, fairness, and availability of consumer choice in markets associated with the justice system, as well as demonstrating the pervasive reach of predatory practices targeted at justice-involved individuals.” The report explores the financial burdens imposed by the criminal law enforcement system in four contexts: pretrial, incarceration, reentry, and criminal justice debt.  We found both insightful and energizing, in light of several projects we are currently working on, the report’s thoroughly-sourced analyses of the high cost of diversion and bonding at the pretrial stage, the failure to regulate background screening, the lack of access to business capital at the post-conviction stage, and the consequences of outstanding criminal justice debt at every stage. We were especially pleased that our work on Small Business Act lending policies is cited in the section on access to business capital. Our forthcoming 50-state report (with the National Consumer Law Center) on court debt as a barrier to record clearing, whose publication is imminent, will add a new dimension to the CFPB’s analysis of the consequences of unpaid fines, fees, and restitution. Finally, we’ll now be able to incorporate the CFPB’s critique of unreliable background screens and expensive diversionary dispositions into our updated national survey of restoration and record relief mechanisms, the Many Roads to Reintegration, and the 50-state ranking of the Reintegration Report Card, both of which we expect to issue later this month. The CFPB report is well worth a close look on other issues, including the exorbitant cost of prison-sponsored contract services (e.g., for telephone and other communications, and for access to education and training). It documents in detail how “governments are shifting the cost of incarceration to people who are incarcerated and their families,” and how communication restrictions make it difficult for people “to manage finances while incarcerated, which can result in increased debt, deteriorated credit ratings, and diminished access to credit.” The CFPB report concludes with a promise from the agency that it will stay on top of the consumer protection issues raised by this commendable report: The CFPB intends to engage stakeholders to learn more about the challenges facing those involved in the criminal justice system and how the CFPB can use its tools to safeguard families from harm. The CFPB is particularly interested in the market circumstances in which people may be forced to use a prescribed product or service, and in how an individual’s criminal history might be used by some actors to restrict economic opportunities—undermining the goal of successful reentry. Entities covered by federal consumer financial laws that target or market to individuals and families involved in the criminal justice system should ensure that their activities are in compliance with law. We welcome the CFPB’s presence in looking critically at the issues that concern all advocates for justice-involved individuals, whose implications extend well beyond the consumer level. We hope it augurs well for the attention of the Biden Administration to these issues, because a number of other federal agencies bear responsibility for addressing the “predatory practices targeted at justice-involved individuals” so effectively illuminated by the CFPB, including the FCC, the SBA, and the Department of Justice.  Hopefully Congress is also listening. Read more

VIDEO: Governmental Barriers to Small Business Financing for People with a Criminal History

On November 18, the Georgetown Center for Business & Public Policy hosted an informative and provocative forum on “Understanding Governmental Barriers to Small Business Financing for People With a Criminal History.” A video recording of the program is now available on YouTube. This event marks the first public discussion of our organization’s new initiative aimed at illuminating and reducing barriers to small business financing based on criminal history. The panelists were Sekwan Merritt, owner of an electrical contracting business in Baltimore, David Schlussel of CCRC, Awesta Sarkash of the Small Business Majority, and Chris Pilkerton, a former SBA general counsel and acting SBA administrator. Sekwan Merritt, who has built a thriving business and employs several people who also have a record, illuminated the challenges he faces as a justice-affected entrepreneur in gaining access to business capital. Merritt, a graduate of the Georgetown Pivot Program, was one of the plaintiffs in the litigation that led to the SBA’s rollback of its PPP restrictions after he was denied this emergency COVID-19 federal relief. He explained that because he is still on parole he is ineligible for the SBA’s general loan programs and that the kinds of questions asked on SBA application forms frequently deter people from even applying. Merritt also described the need for a holistic assessment as part of an overall credit evaluation, recognizing achievements such as educational attainment, rather than a frequently-disqualifying early inquiry into criminal record. CCRC’s David Schlussel described how the SBA’s “broad and blunt” record-related restrictions first came to the public’s attention in the early months of the pandemic, when hundreds of thousands of small businesses—a substantial percentage of which were Black-owned—were disqualified from government-supported relief. Schlussel traced the history of the SBA’s restrictive loan policies to the 1950’s, noting that they are neither required nor specifically authorized by statute. He quoted from a 1978 SBA statement justifying these policies based on its belief that the SBA “should not be involved in rehabilitation processes,” that “good character is essential in any creditworth transaction,” and that the possibility of reincarceration creates a risk of absentee management. Schlussel described the conclusion of a 2005 law review article by Taja-Nia Henderson that the SBA restrictions appear to violate civil rights laws in their heavy impact on Black business owners, and he noted that there has been no empirical study linking criminal record with creditworthiness. In any case, the SBA has apparently not attempted to justify its policies since 1978, even as they have become increasingly restrictive in recent years. He noted that the other major federal lending agency, the USDA, has nothing comparable for its rural small business and agricultural lending programs. Awesta Sarkash of the Small Business Majority was effective in describing the difficulties minority- and women-owned small businesses generally have in accessing capital, noting that these difficulties are exacerbated when a business owner or manager has a criminal record. Sarkash also emphasized the importance of resources to support early-stage entrepreneurs, such as her organization’s Venturize.org educational portal, and community development financial institutions (like Baltimore Community Lending that helped Sekwan Merritt manage a large contract). Chris Pilkerton, a former SBA general counsel and acting SBA administrator, made a number of very cogent suggestions about how to address this important public policy question through coalition building, message coordination, bipartisanship, and education. Several of the panelists noted that the SBA is by far the country’s most influential player in facilitating small business access to capital, and that its policies necessarily influence both private lenders and state legislatures considering analogous state loan programs. The panel was moderated by Dr. Crystal Francis, assistant director of program management of the Georgetown Pivot Program, who engaged with the panelists in a wide-ranging discussion and facilitated audience questions. The video of the event is available here. As CCRC continues to develop our “Fair Chance Lending” project, we are finding that agencies and organizations involved in small business and community financing are eager to extend their agendas to address barriers based on a criminal record. Regular visitors to our website can expect to hear about this issue frequently in the months to come. Read more

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

CCRC files congressional testimony on fair chance lending

The Collateral Consequences Resources Center submitted a statement for the record ahead of tomorrow’s hearing before the Subcommittee on Diversity & Inclusion of the House Committee on Financial Services: “Access Denied: Eliminating Barriers and Increasing Economic Opportunity for Justice-Involved Individuals.” The CCRC statement recommends that Congress conduct oversight on criminal history restrictions in federally sponsored small business lending policies, and facilitate access to these resources for small businesses owned by justice-impacted individuals. CCRC’s statement describes some of its research about the the U.S. Small Business Association’s (SBA) criminal history policies and identifies the following concerns: The SBA’s extensive criminal history restrictions are not provided by statute. Many of the SBA’s criminal history restrictions are also not included in its published regulations. The SBA’s criminal history restrictions are overbroad and lack specific justification. The SBA’s criminal history restrictions have racially disparate impacts. You can read the statement here. Read more

Federal policies block loans to small business owners with a record

Starting a small business is increasingly recognized as a pathway to opportunity for individuals with an arrest or conviction history—particularly given the disadvantages they face in the labor market. An estimated 4% of small businesses in the United States have an owner with a conviction (1.5% have a felony conviction). Small businesses provide “a vital opportunity for those with a criminal record to contribute to society, to earn an honest profit, and to give back to others.” They also frequently employ people with a record and help reduce recidivism. A growing number of organizations and government programs are devoted to supporting individuals with a record in building their own businesses. Yet many structural barriers remain, including a series of little-known federal regulations and policies that impose broad criminal history restrictions on access to government-sponsored business loans, notably by the U.S. Small Business Administration (SBA).  A recent article illustrates the steep challenges faced by business owners with a record by telling the stories of several entrepreneurs who were either denied an SBA loan or were discouraged from even trying for one because of a dated felony conviction.  One of those entrepreneurs comments: “You might do five years, ten years, one year, but you pay for it until you’re in the grave.” To illuminate and help reduce these barriers, our organization is working to develop a new “Fair Chance Lending” project. We hope to show that—rather than broadly exclude individuals with a criminal history—officials should draw record-based restrictions as narrowly as feasible, facilitate access to resources, and celebrate entrepreneurial efforts, consistent with growing national support for reintegration and fair chances in civil society. The SBA’s record-related lending policies came into focus in the spring of 2020 when the agency imposed remarkably broad criminal history restrictions on hundreds of billions in financial relief for small businesses and nonprofits authorized through the CARES Act in response to COVID-19. The SBA’s pandemic relief programs were massive: in fiscal year 2020, the agency distributed $525 billion through the Paycheck Protection Program (PPP) and $211 billion through the Economic Injury Disaster Loan (EIDL) program. But hundreds of thousands of small businesses and nonprofits were barred by the SBA from accessing these funds through shockingly extensive criminal history restrictions not required or suggested by statute, with disproportionate impacts on Black and Latino/Latinx communities. A recent RAND study found that just one aspect of these restrictions—the disqualification from PPP relief of all businesses with an owner or “associate” with a felony conviction within the previous five years—excluded an estimated 212,655 small businesses with 343,198 employees. When we began to write about SBA’s restrictions on COVID-19 relief shortly after the passage of the CARES Act, our servers crashed because of the level of public interest, requiring us to update our systems. Thousands of business owners emailed us, with a wide variety of disqualifying records and types of businesses, desperate for help, fearful of publicly discussing their predicament lest their backgrounds be exposed. We researched the issues in detail and joined a large bipartisan group of organizations calling on the SBA to revise its restrictions. The SBA, also facing public pressure from impacted individuals, a bipartisan group of lawmakers, and litigation, rolled back most of the restrictions it had imposed, with the Trump Administration loosening restrictions on multiple occasions over the course of 2020 and the Biden Administration making additional changes in early 2021. Despite the massive impact of these restrictions on the first round of emergency relief, the SBA did not initially explain or attempt to justify them. When sued in June 2020, the SBA defended its rule on grounds that criminal history can speak to an applicant’s “higher likelihood of reincarceration” and “potential for misuse of funds.” See Defy Ventures v. U.S. Small Business Administration, 469 F. Supp. 3d 459, 476 (D. Md. 2020). Despite the easing of record-related restrictions on COVID-19 relief, the SBA continues to maintain extensive criminal record barriers in its general business loan and disaster assistance programs which are summarized below. The SBA treats criminal history as a credit risk, despite the absence of any evidence to support that position or statutory authority for it.1 While the agency has awarded a handful of grants in recent years to community-based organizations working with formerly incarcerated entrepreneurs, its general lending programs all but preclude loans to the entrepreneurs themselves. In addition to its various lending programs, the SBA provides training, contracting opportunities, and other forms of assistance to small disadvantaged businesses through the 8(a) Business Development Program, which allows participants to take advantage of set-aside and sole-source contracts to help aspiring entrepreneurs compete for positions as government contractors. The 8(a) Program allows for, and often requires, consideration of applicants’ criminal backgrounds as part of a mandate that applicants have “good character.” In contrast, the SBA’s rural-focused sister agency, the U.S. Department of Agriculture, appears to administer its various lending programs to farmers and ranchers with narrowly-tailored criminal history restrictions tied to specific statutory provisions.2 The SBA’s criminal history restrictions very likely contribute to racial inequalities in the economy. The SBA’s criminal history restrictions on COVID-19 relief led to documented racial disparities. The SBA’s comparable criminal history restrictions in its general loan programs almost certainly have similar effects, particular given the well-documented racial disparities in the instance of criminal records in general. The SBA makes little effort to justify its broad policy-based restrictions, which heightens their contrast with the targeted statutory restrictions that apply to rural-focused lending programs administered by the USDA. The criminal record restrictions in the SBA’s lending programs are described in greater detail below. Criminal record restrictions in the Small Business Administration’s lending programs The SBA 7(a) and 504 programs The SBA’s most common business loan, through the 7(a) program, guarantees a large percentage of a loan provided by a private lender. The SBA’s development company program, the 504 program, provides long-term, fixed rate financing for major fixed assets through Certified Development Companies. Both programs authorize individual loans of up to $5 million. In fiscal year 2020 alone, the SBA provided $22.5 billion in loans through the 7(a) program and $5.8 billion through the 504 program. An SBA regulation makes ineligible for either program “[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 applicable to both programs imposes additional blanket restrictions, also making ineligible businesses with an associate currently under specified forms of diversionary or conditional dispositions, an order of protection, registered with a sex offense registry, or facing any criminal charges in any jurisdiction. This policy statement further provides that various individuals associated with the business must also be “of good character,” as determined by the SBA (this includes any proprietor, general partner, officer, director, managing member of a limited liability company, owner of 20% or more of the equity of the Applicant, Trustor, or any person hired to manage day-to-day operations). Each of these persons must disclose and provide documentation about: (1) any arrests in the past six months; and (2) any criminal offense (excluding minor vehicle violations), any convictions, guilty pleas, no contest pleas, or any placements on pretrial diversion or any form of parole or probation, at any time. All expunged and sealed records must be disclosed. If any person has not satisfied all sentencing conditions (which may include payment of court debt), the applicant is not eligible for a loan. A lender may proceed with a loan (assuming all other requirements are met) if all the documented criminal records are older than six months and involve either: a non-conviction or a misdemeanor conviction not involving a crime against a minor. However, if any person has: a prior felony conviction that was not reduced to a misdemeanor, a prior misdemeanor conviction for a crime against a minor, or, within the previous six months, either a misdemeanor conviction or charges filed, they are required to complete an FBI fingerprint background check and undergo an individualized character determination by the SBA—before a lender may process the loan. It is unknown how often lenders actually proceed with the FBI/SBA process at that point rather than simply deny the application. It is also unknown how often the SBA finds that such a person meets the “good character” requirement in its policy statement. 2. The SBA microloan program The SBA’s microloan program, which provides loans of up to $50,000 through authorized nonprofit community-based intermediaries, imposes narrow criminal history restrictions. The SBA distributed $85 million through this program in fiscal year 2020. Regulations provide that businesses are ineligible only if they have an associate who is incarcerated or under indictment for a felony or crime of moral turpitude, or on probation or parole for certain offenses. The SBA’s policy statement for the microloan program does not impose any additional blanket restrictions or good character requirements, although it vests discretion with the lender to determine whether to lend to an applicant with a criminal record other than the disqualifying records described above. 3. The SBA disaster loan program The SBA’s disaster loan program, which provides long-term, low-interest loans to recover from disasters, also includes criminal history restrictions. First, an applicant is not eligible by statute if an owner was convicted in the previous year of a felony during and in connection with a riot or civil disorder or other declared disaster. Second, the applicable SBA policy statement states that it will not approve a loan if the applicant or principal owner is presently on parole or probation following conviction of a “serious criminal offense” (unless, for partnerships, corporations, and limited liability entities, the offense was unrelated to the business and the individual will divest all interest in the business). Third, the SBA requires that all of the following persons undergo a “character evaluation”: proprietors, limited partners who own 20% or more interest,  general partners, or stockholders or entities owning 20% or more voting stock, if they have any current charges pending, have been arrested in the previous six months, or if they have for any criminal offense excluding minor vehicle violations, any convictions, guilty pleas, no contest pleas, or any placements on pretrial diversion or any form of parole or probation. A detailed explanation about the records must be provided, including unpaid fines and fees. An application can be processed without an FBI fingerprint check only if the disclosed criminal activity “is both minor in nature and was committed more than 10 years ago.” Otherwise, an FBI background check must be completed. Finally, the SBA will make a determination of whether the person is “of good character.” (Note that separate criminal history requirements apply to COVID-19 disaster loans.) *** In the coming months, we plan to continue this work by conducting further research on SBA, USDA, and state policies, convening conversations between stakeholders, and issuing policy recommendations on this important issue. 1 The Small Business Act authorizes the SBA to “verify [a loan] applicant’s criminal background, or lack thereof,” and authorizes the conduct of an FBI investigation of loan applicants. See 15 U.S.C. §636(a)(1)(B).  But neither this provision nor any other law requires that a background check be conducted as a condition of making a loan, much less does it require the agency to treat criminal history as a measure of creditworthiness.  Cf. 13 C.F.R. §120.150(a) (SBA regulation stating that it will consider “character” and “reputation” in determining if an applicant is “creditworthy”). The only statutory criminal history restriction on SBA loan applicants that we can identify is a half-century old exclusion from 7(b) disaster loans of persons convicted in the year prior to application 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). In addition, the SBA, and every other federal agency, is subject to a government-wide provision that can result in disqualification from federal loans and grants for a period of time based on certain drug convictions. See 21 U.S.C. § 862 (denial of federal grants, contracts, loans, and licenses based on court-imposed and mandatory debarments based on convictions for trafficking or possessing controlled substances). 2 Record-related barriers covering USDA lending programs appear to be few and targeted, rooted in statutes, and triggered by specific offenses. See, e.g., 21 U.S.C. § 889 (conviction for planting, cultivation, growing, producing, harvesting, or storing a controlled substance triggers prohibition for that crop year and four succeeding crop years on access various USDA loan, grant, payment and contract programs); 7 C.F.R. § 718.6 (same); 7 U.S.C. § 2209j (permanent or 10-year debarment from USDA programs for fraud in connection with USDA programs); 2 C.F.R. § 417.865 (same). One of the USDA’s business loan programs, for example, the Business & Industry (B&I) Loan Guarantees program, described by the USDA as “similar” to the SBA 7(a) program but targeted to rural businesses, does not appear to contain any additional criminal history restrictions except an optional bank “character” review that is not specifically linked to criminal record. See 7 C.F.R. § 5001.202 (“When applicable, a [lender’s] evaluation [of an applicant] may include the character of persons with management control or a 20 percent or more ownership interest in the borrower.”). In addition, the USDA, like every federal agency, is subject to government-wide provisions that can result in disqualification from federal loans and grants for a period of time based on specific types of criminal convictions. See note 1. Read more