Tag: SBA

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

Applying for an SBA loan with a criminal record

*NEW: Applying for SBA COVID-19 relief with a criminal record in 2021 (March 8, 2021) Loans from the U.S. Small Business Administration (SBA) are a key resource for small businesses fighting to survive during this pandemic.  SBA loans are generally loans provided by private lenders and guaranteed by the federal government.  The $2+ trillion stimulus package (the CARES Act) signed into law today, includes more than $300 billion in funding for new SBA loans called the “Paycheck Protection Program,” some of which are eligible for forgiveness. These loans are to be provided under SBA’s primary loan program, the 7(a) loan program, but they increase eligibility for 7(a) loans, extend their allowable uses, and allow for loan forgiveness, among other provisions.  (See H.R. 748, sec. 1102; 15 U.S.C. 636(a)).  Notably, a Paycheck Protection Loan may be used—in addition to already-allowable uses under 7(a)—for payroll support (including paid sick, medical, or family leave, and group health care benefit costs during leave), employee salaries, mortgage payments, rent, utilities, and any other debt incurred before February 15, 2020.  See H.R. 748, sec. 1102.  Further, for all 7(a) loans made between February 15, 2020 and June 30, 2020, loaned funds would be eligible for forgiveness if used for payroll costs (with a couple of exceptions), and certain other expenses to maintain “payroll continuity” during a four-month period.  A business must submit certain documents to apply for forgiveness, and the forgiveness amount is reduced if the number of employees or their compensation has been reduced.  Se H.R. 748, sec. 1106. In this post, we explore considerations for people with a criminal record who wish to apply for a 7(a) small business loan, including the “Paycheck Protection Program” loans that will be funded through the CARES Act.  We also discuss disaster loans for small businesses in areas severely impacted by the Coronavirus (COVID-19), which the SBA is already making available. After reviewing existing SBA loan eligibility rules and vetting policies for 7(a) applicants, we have questions about the extent to which these new loans will be available to people with a criminal record.  Generally, the SBA excludes any business with a principal who is on probation, parole, or similar form of supervision; or who is currently facing any charges.  And while a closed criminal case is not automatically disqualifying, SBA requires that every 7(a) applicant’s principals be “of good character,” and conducts a character evaluation that for people with a felony conviction, certain misdemeanor convictions, or a recent case, requires a full FBI background check before loan funds may be approved.  This evaluation specifically requires disclosure of expunged convictions and certain non-conviction records.  Moreover, if a person has not completely satisfied a sentence “and other conditions of the court,” they are ineligible for a loan.  Certain broad language in the CARES Act suggests that the SBA might not impose eligibility requirements that would apply to 7(a) loans in normal times, including ineligibility due to an open criminal matter or lack of “good character.”  We hope that would be the case, given the urgent need for relief and the considerable barriers that people with records already face in the economy even in the best of times.  We will look for guidance from the SBA as to how it will interpret this language.  [See the updates at the top of this post.] 7(a) Eligibility Criteria Current SBA regulations and policies with respect to 7(a) loans and criminal history make a small business ineligible if the business has a principal who is incarcerated, under supervision, or facing charges.  The agency also requires that such persons “must be of good character,” determined through a rigorous character evaluation process that includes close attention to an applicant’s past criminal record.  The 7(a) statute allows the SBA to verify an applicant’s criminal background or lack thereof, including through an FBI background check.  See 15 U.S.C. 636(a)(1)(B). More specifically, current federal regulations provide that a business is ineligible for a 7(a) loan if the business has an “Associate” (a significant owner or person who manages day-to-day operations)1 who is “incarcerated, on probation, on parole, or has been indicted for a felony or a crime of moral turpitude.”  13 C.F.R. § 120.110(n).  SBA policies clarify that this includes a person under a deferred prosecution, conditional discharge, order of protection, or on a sex offender registry, as well as anyone “currently subject to an indictment, criminal information, arraignment, or other means by which formal criminal charges are brought in any jurisdiction.”  See SBA Standard Operating Procedure (SOP) 50 10 5(K)(B)(2)(III)(A)(13) (eff. April 1, 2019).  (In 2015, the SBA changed the rules of its 7(m) microloan program to make people on probation or parole eligible to apply for a loan, but retained the ineligibility requirement for the basic 7(a) program.) While a past conviction is not among the grounds for automatic ineligibility for a 7(a) loan, SBA policy also requires every Associate to be “of good character.”  See id.  The character evaluation process is described further below. Though these eligibility criteria and “good character” requirements certainly apply to 7(a) loans in general, the text of the stimulus bill could be read to say that these requirements do not apply with respect to the Paycheck Protection loans: In evaluating the eligibility of a borrower for a covered loan with the terms described in this paragraph, a lender shall consider whether the borrower— “(aa) was in operation on February 15, 2020; and “(bb)(AA) had employees for whom the borrower paid salaries and payroll taxes; or “(BB) paid independent contractors, as reported on a Form 1099–MISC. See H.R. 748, sec. 1102.  If this reading of this broad language is correct, the stimulus bill would waive other eligibility requirements that would normally apply to 7(a) loans, including ineligibility due to an open criminal case or lack of “good character.”  We hope that would be the case, and will look for guidance from the SBA as to how they interpret this language now that the law has been enacted.  [See the updates at the top of this post.] 7(a) Character Evaluation Process For 7(a) loans in general, and potentially for Paycheck Protection Loans as well, the SBA conducts a multi-step character evaluation process to determine if an applicant’s Associates satisfy the “good character” requirement.  See subsection 13 of SOP 50 10 5(K)(B)(2)(III)(A) (“Businesses with an Associate of Poor Character”) at p. 109. First, an applicant and its Associates must submit to the lender SBA Form 1919, which includes three questions on criminal history.  Question 17 asks if the person is presently facing charges, which would make them ineligible.  Question 18 asks about arrests in the past 6 months.  Question 19 asks, respecting “any criminal offense – other than a minor vehicle violation,” if the person has ever been convicted, pled guilty or nolo contendere, or been placed on pretrial diversion or any form of parole or probation, including probation before judgment.  SBA policy makes clear that a person must answer “Yes” to these questions “even when the individual believes the record is sealed, expunged or otherwise unavailable,” and that “[t]here are no exceptions or waivers to this policy.”  Lenders are required to keep this information private and confidential. If a person answers “Yes” to Questions 18 or 19, the person must submit to the lender SBA Form 912 (“Statement of Personal History”), along with a “detailed written statement” describing the facts and circumstances of any responsive criminal matter, including dates, locations, charges, dispositions, sentencing, court conditions, as well as “court documentation” that sentencing and other court conditions (including “fines or penalties”) were satisfied.  If any sentence “and other conditions of the court” have not been satisfied, the person is ineligible for a loan.  See SOP 50 10 5(K)(B)(2)(III)(A)(13) at p. 111.  Form 912 also states: “An arrest or conviction record will not necessarily disqualify you; however, an untruthful answer will cause your application to be denied and subject you to other penalties…” After receiving the SBA Form 912 package, the lender may process the application and proceed with the loan if it determines that all reported criminal cases resulted in one of the following dispositions: (1) dismissal of the charges; (2) the reduction of any original felony charges to misdemeanors; or (3) conviction on one or more misdemeanor counts, if any conditions were met more than 6 months before the loan application, and the convictions do not involve a crime against a minor. However, the lender may not proceed and the SBA must conduct a background investigation including an FBI fingerprint background check, and make a character determination, if any of the reported criminal cases resulted in: (1) a felony conviction; (2) a misdemeanor conviction within 6 months of the loan application or for a crime against a minor; or (3) charges filed with a final disposition entered within 6 months of the loan application.  After the background check is completed, the SBA will “determine either that the Subject Individual has good character, or is not eligible for SBA financial assistance.”  No specific standards are provided to guide this decision.  See SOP 50 10 5(K)(B)(2)(III)(A)(13) at p. 113.  A person may request reconsideration of a character determination within 6 months of the decision. Id. Disaster Loans In addition to 7(a) loans, the SBA is also already offering 7(b) Economic Injury Disaster Loans for qualifying small businesses that have suffered substantial economic injury and are located in a Coronavirus (COVID-19) declared disaster area. [See our new post for more current information on disaster loans] By statute and its own rule, SBA is barred from making 7(b) loans to anyone who has been “convicted, during the past year, of a felony during and in connection with a riot or civil disorder or other declared disaster.”  But the application for a disaster loan requires that certain owners (any proprietor, general partner, limited partner who owns 20% or more interest, or owner of 20% or more voting stock) must disclose any arrests in the past 6 months, as well as any convictions, guilty or nolo contendere pleas, and placements on pretrial diversion or any form of parole or probation, including probation before judgement.  The applicable SBA policy on disaster loans states that “[i]t is not in the public interest for SBA to extend financial assistance to persons who are not of good character,” and so it will perform a character determination of anyone disclosing any of the records described above.  SOP 50 30 9(3.6) (effective May 31, 2018) at p.32.  This character determination (described in detail here at Section 3.6) is similar to, but apparently less onerous than, the 7(a) character evaluation process described above. In addition to the programs discussed in this post, this website provides more information on SBA’s various benefit programs. — *Note this post was updated on April 28, 2020. 1. An “Associate” is defined as “(i) An officer, director, owner of more than 20 percent of the equity, or key employee of the small business; (ii) Any entity in which one or more individuals referred to [the previous clause] owns or controls at least 20 percent; and (iii) Any individual or entity in control of or controlled by the small business (except a Small Business Investment Company (“SBIC”) licensed by SBA).”  13 C.F.R. § 120.10. Read more

SBA relaxes rule against business loans to probationers, while other federal agencies keep collateral consequences unchanged

The U.S. Small Business Administration (SBA) last week published a final rule for its federal Microloan Program that will for the first time allow microloans to small businesses owned by someone currently on probation or parole. In its announcement, the SBA noted that this will “aid[] individuals with the highest barriers to traditional employment to reenter the workforce.”  The change was evidently prompted by a review of agency regulations requested by the Cabinet-level Federal Reentry Council established in 2010 by former Attorney General Eric Holder. While the change is welcome, it leaves in place substantial restrictions for people under sentence in other SBA loan programs, discussed at length in a post on this site last December. It is also striking for being the only relaxation of federal collateral consequences since the Reentry Council was established five years ago.  As reported on this site, federal agencies are said to be “mostly satisfied” with their the way their regulations address the situation of people with a criminal record. The SBA’s Microloan Program, which is focused on startups, minority and other underserved markets, provides loans up to $50,000 to help small businesses and certain not-for-profit childcare centers start up and expand. Microloans play an important role in distressed communities where access to conventional lending remains a challenge. The average microloan size is approximately $13,000. “Small business ownership and self-employment are paths toward wealth creation and independence,” said SBA spokesman Miguel A. Ayala. “This option can be particularly useful for citizens who may have difficulty finding employment after returning to their community from prison. With millions of Americans looking to start over after incarceration or move past their criminal records, the SBA is removing barriers so that citizens can achieve economic security and be successful members of society.” . . . . This action supports the goals of the Federal Reentry Council to reduce barriers to employment and reduce recidivism. It also implements key recommendations of the President’s My Brother’s Keeper Initiative to increase access to jobs, reduce violence, and provide a second chance. If the SBA is concerned about encouraging reentry, then it needs to go further than simply expanding borrower eligibility under its microloan program.  While giving probationers and parolees access to microloans -– and to employment with microloan borrowers — will certainly allow some to reestablish themselves as productive citizens, the real employment opportunities are with businesses funded under the larger 7(a) and 504 programs, for which probationers and parolees would remain absolutely barred. These businesses are also likely to be better protected against employee fraud or malfeasance.  It is hard, therefore, not to see the proposed rule as a token gesture rather than a broad effort to open opportunities for those under supervision in the community. We note that the SBA appears to be the only federal agency to date to have made any changes in its rules or policies in response to the initiative of the Federal Reentry Council. Read more

SBA to relax some rules on loans to people with a record, but most left in place

In December 2014, Amy Solomon, Senior Advisor to the Assistant Attorney General for the Office of Justice Programs in the Justice Department, testified before the U.S. Senate Addiction Forum about the review of collateral consequences federal agencies had been conducting under the auspices of the Federal Reentry Council.  She reported that most of the agencies participating in the review had concluded their collateral consequences were “appropriately tailored for their purposes.”  However, she also reported that Small Business Administration (SBA) had proposed amendments to its regulations to allow people on probation or parole to qualify for loans from its microloan program.  (The change, proposed almost a year ago, has still not become final.) We decided to take a look at the SBA’s proposed rule change, and at the SBA regulatory scheme more generally, to see how having a criminal record affects small business eligibility for government-backed loans. Current SBA regulations  The SBA guarantees against default certain loans made to small businesses by qualified private lenders under three different programs: general small business loans under the 7(a) program, real estate and equipment loans under the 504 program, and the microloan program.  The cap on 7(a) and 504 loans is $5 million, while the cap on microloans is $50,000.  Qualification standards differ under the three programs, but a core set of eligibility standards at 13 CFR § 120.110 applies to all of them. The core eligibility standards in § 120.110 do not generally bar loans to people with a criminal record (though the required “statement of personal history” asks applicants if they have ever been convicted of any criminal offense other than a minor vehicle violation, and advises that a conviction will not “necessarily” be disqualifying). However, people who are in prison, on probation or on parole, or who have criminal charges pending, are absolutely barred from obtaining a loan under any of the SBA programs. In addition, if an applicant employs individuals who are still under sentence, this may also result in ineligibility, since the SBA will not make a loan to any business with an ineligible “associate.”  An “associate” is any officer, director, owner of more than 20 percent of the equity, or a “key employee.”  A key employee is defined as one with “critical influence in or substantive control over the operations or management” of the business. See 13 CFR § 121.103 (g).  Accordingly, the SBA regulations don’t just render probationers and parolees ineligible to receive loans under the programs; they also make them ineligible for employment in significant management or operations positions in any business funded by SBA loans. The SBA restrictions on probationers and parolees are not mandated by or specifically authorized by its governing statutes.   The current eligibility restrictions pose a signficant barrier to reentry and integration, and affect a significant portion of the population. In 2013, 4.8 million Americans were serving probationary sentences or on parole (which in some jurisdictions can last many years). Because employment opportunities for this population are already limited, they frequently decide to open their own business. The SBA regulations effectively make it difficult for anyone still under supervision to make opportunities for themselves and create jobs for others. The number of business and employment opportunities limited by the SBA regulations is not insignificant:  In 2014 alone, the SBA made over 12,000 loans to small businesses under the 7(a) and 504 programs. A large number of businesses are dependent on SBA loans, which means a large number of closed doors for people currently serving a sentence. Importantly, it also means that a good number of people stand to lose their jobs if they are convicted and sentenced to probation while working in a key position for an employer dependent on SBA loans. The proposed rule change  The change in the SBA regulations would, for the first time, allow probationers and parolees to qualify for the relatively small-dollar loans available under the microloan program. Equally important, it would allow them to serve in key management or operational positions in businesses supported by microloans. The change is specifically intended to reduce returns to prison by enabling individuals who tend to have difficulty finding steady employment to start their own businesses. See 79 FR 14617, proposing to amend 13 C.F.R. § 120.707(a). Individuals under supervision for crimes involving fraud or dishonesty would remain ineligible under the microloan program, and a person convicted of an offense against children would be ineligible for a loan to a non-profit child care center. This change will be good news for many.  But it seems unnecessarily conservative, considering the SBA’s asserted interest in encouraging reentry and rehabilitation. If expanding employment options for persons under sentence is something the SBA truly wants to do, it needs to look beyond its microloan program to relax the restrictions applicable to employees as well as borrowers under the SBA’s larger 7(a) and 504 loan programs.  Businesses supported by those larger loans are more likely to provide high-level employment opportunities than those supported by smaller microloans.  They are also more likely to have internal controls in place to guard against fraud or malfeasance, giving confidence to lenders. Moreover, the current SBA regulations are anomalous in imposing no bar to those convicted of serious financial crimes who have completed their sentences, while restricting those on supervision for what might be a minor offense with no adverse implications for business dealings.  It is hard to see how barring a person serving probation for a reckless driving conviction, for example, protects the SBA or the public. Perhaps one practical reason for restricting loans those under sentence has more to do with business calculus than with fear of criminality: Probationers and parolees who violate the terms of their supervision are subject to incarceration, and people who are incarcerated are likely to have a tough time paying back their SBA-guaranteed loans. Those who have already been released from supervision, even those convicted of serious financial crimes, don’t pose such a specific risk.  But if this may be a reasonable justification for barring borrowers on supervision, there are no similar business reasons for holding their employees to the same standards. Conclusion The changes to the regulations proposed by the SBA would allow certain probationers and parolees to qualify for microloans for the first time, but would leave in place substantial restrictions for people under sentence in other SBA loan programs.  If the SBA is concerned about encouraging reentry, then it needs to go further than simply expanding borrower eligibility under its microloan program.  While giving probationers and parolees access to microloans -– and to employment with microloan borrowers — will certainly allow some to reestablish themselves as productive citizens, the real employment opportunities are with businesses funded under the larger 7(a) and 504 programs, for which probationers and parolees would remain absolutely barred. These businesses are also likely to be better protected against employee fraud or malfeasance.  It is hard, therefore, not to see the proposed rule as a token gesture rather than a broad effort to open opportunities for those under supervision in the community. At the same time, it is encouraging to see that reentry is an issue that at least one federal agency is giving thought to.  Perhaps other federal agencies will follow suit. Read more