Tag: Small Business Administration

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

Collected resources on record restrictions for small business relief

*NEW POST (Jan. 21, 2021): Applying for SBA COVID-19 relief with a criminal record in 2021 On this page, we collected a variety of materials on the restrictions related to arrest or conviction imposed by the Small Business Administration (SBA) on small business owners seeking relief under the Paycheck Protection Program (PPP) and Economic Injury Disaster Loan (EIDL) program during 2020. Included are proposed reform legislation, lawsuits filed, academic studies, letters from legislators and major organizations, articles by us and by others, and official documents related to this issue. (For more current information, see: Applying for SBA COVID-19 relief with a criminal record in 2021.) After the first COVID-19 relief bill in March 2020, the CARES Act, the SBA imposed broad criminal history restrictions on applicants. Following the introduction of a bipartisan Senate bill, Treasury Secretary Steven Mnuchin agreed on June 10, 2020, to revise the PPP restrictions.  On June 12, 2020, SBA issued new regulations and applications forms to ease some of the barriers in the PPP.  On June 24, 2020, the SBA further relaxed its criminal history barriers for PPP assistance, this time in a far more significant fashion, and in a manner that makes the business owners who are suing the SBA now eligible to apply.  The new regulation and application form came less a week before the June 30, 2020 deadline to apply for relief. Meanwhile, two lawsuits were filed against the SBA in federal court in Maryland, asserting that the SBA’s criminal history restrictions are beyond the agency’s authority, arbitrary and capricious, and contrary to the text of the CARES Act; the second lawsuit also asserts that the restrictions fall hardest on minority businesses due to the impact of over-criminalization on communities of color.  On June 29, 2020, a federal judge ruled that the SBA’s criminal history restrictions on PPP, except for the June 24 policy change, were likely unlawful.  The court extended the deadline to apply, but only for the small business owners who had sued. In a dramatic finale, Congress extended the PPP application deadline to August 8, 2020 for everyone.  This extension, signed into law on July 4, gave business owners made eligible under the June 24, 2020 policy a meaningful opportunity to learn about their eligibility and complete the application process. Proposed Reform Legislation Paycheck Protection Program Second Chance Act Fair Chance for Small Business Relief Act HEROES Act Lawsuits MoveCorp, et al. v. U.S. Small Business Administration, et al., 1:20-cv-01739 (D.D.C., filed June 25, 2020) Carmen’s Corner Store, et al. v. U.S. Small Business Administration, et al., 1:20-cv-01736 (D. Md., filed June 10, 2020) Defy Ventures, Inc., et al. v. U.S. Small Business Administration, et al., 1:20-cv-01838 (D. Md., filed June 16, 2020) Academic Studies Criminal Disqualifications in the Paycheck Protection Program, University of Michigan Institute for Social Research (June 2020) Letters from Legislators Letter to the head of the SBA from Rep. Dina Titus and 15 other Members of Congress (May 19) Letter to heads of the U.S. Treasury and SBA from Senator Rob Portman and Senator Ben Cardin, Ranking Member of the Senate Small Business Committee (April 30) Letter to PA Congressional Delegation from 21 PA legislators (April 24) Letter to Congressional Leadership from Rep. Joe Kennedy III and Rep. Joyce Beatty (April 17) Letters to Congressional Leadership and heads of the U.S. Treasury and SBA from Senator Jeffrey A. Merkley (April 8) Letter to heads of the U.S. Treasury and SBA from Rep. Cedric L. Richmond and 10 other Members of Congress (April 6) Letters from Major Organizations Comment on PPP Interim Final Rule by the Collateral Consequences Resource Center and 25 other organizations (May 15) Comment on PPP Interim Final Rule by the Institute for Justice Clinic on Entrepreneurship (May 15) Comment on PPP Interim Final Rule by the National Center for Transgender Equality (May 15) Comment on PPP Interim Final Rule by Citizens for Juvenile Justice and 37 other organizations (May 15) Letter to Congressional leadership from the Ethics & Religious Liberty Commission (May 7) Comment on PPP Interim Final Rule by Americans for Prosperity Foundation (April 23) Letter to Senator Marco Rubio from leaders of nine evangelical and Catholic organizations (April 20) Letter to Congressional Leadership and heads of the U.S. Treasury and SBA from nine conservative organizations (April 20) and Letter to the President (April 21) Letter to Senate Leader Mitch McConnell from national and Kentucky-based groups (April 20) Joint Statement by the Council of State Governments Justice Center and 12 other groups (April 16) Letter to head of SBA from Florida Rights Restoration Coalition (April 10) Letter to heads of the U.S. Treasury and SBA from bipartisan group of civil rights, advocacy, and business organizations, including CCRC (April 17) and Letter to Congress (April 10; updated April 17) CCRC Articles SBA throws in the towel and Congress extends the PPP deadline (July 7) SBA rolls back many criminal history barriers just before deadline (June 24) SBA eases some criminal history barriers and faces litigation (June 16) Senate bill would deliver relief to small biz owners with a record (June 5) New efforts to channel federal relief to small business owners with a record (May 20) Is SBA denying disaster relief based only on an arrest? (May 6) Mnuchin defends record restrictions for SBA stimulus loans (April 22) Second Chance Small Businesses Deserve Another Chance (April 21) SBA has no excuse for excluding people with a record from stimulus relief (April 20) At a Glance: Barriers to the Paycheck Protection Program (‘PPP’) Based on Arrest or Conviction (April 16) SBA’s bumpy guidance on criminal history requirements for stimulus loans (April 3) Applying for an SBA loan with a criminal record (March 27) Official Documents 15 U.S.C. §§ 636(a), (b) CARES Act Paycheck Protection Program and Health Care Enhancement Act S.4116 (“A bill to extend the authority for commitments for the paycheck protection program….”) Paycheck Protection Program Additional Revision to the First Interim Final Rule Revisions to First Interim Final Rule Interim Final Rule Application Form (rev. June 24) Application Form (rev. June 12) FAQs 13 CFR 120.110 13 CFR 120.150 Standard Operating Procedures (SOP) 50 10 5(K) SBA’s Economic Injury Disaster Loan program P.L. 90-448, 1106(e), Department of Housing and Urban Development (HUD) Act of 1968 13 CFR 123.301 13 CFR 123.101 13 CFR 123.6 SOP 50 30 9 Other Articles Denied U.S. economic relief because of criminal record, Baltimore electrician challenged the system, Baltimore Sun (July 6) Court: Hagerstown shop owner, ex-con, can seek PPP loan, Daily Record (July 6) PPP Loans: What You Need to Know About the Latest Changes, WSJ (July 6) Local business owner sees PPP change just in time for $200,000 loan, WCPO (July 3) Biz Owners Barred For Criminal Past Win PPP Extension, Law 360 (June 30) Court Rules SBA PPP Loan Application Barring Eligibility from Business Owners with Criminal Records Unlawful, ACLU (June 30) NCLA Court Win Keeps SBA from Rewriting CARES Act to Exclude Small Biz Owners on Probation (June 30) Court rules that former SBA rules barring business owners with criminal records from aid were illegal, extends deadline for our client, Public Interest Law Center (June 29) New Guidance From SBA Eliminates Some Eligibility Requirements for Criminal Records, NCSL (June 29) Small Business Owners with Criminal Records Sue Over Pandemic Aid Restrictions, Route 50 (June 17) Formerly Incarcerated Businessowners Sue SBA For Denying Them COVID-19 Emergency Loans, Appeal (June 17) Trump Administration Sued for ‘Destructive’ Denial of Covid-19 Relief Loans to Small Business Owners With Criminal Records, Common Dreams (June 17) Entrepreneurs with criminal records illegally refused Cares Act relief, lawsuit says, Washington Post (June 17) SBA Sued Over Rule Barring Convicted Felons From PPP Loans, WSJ (June 16) Civil rights groups sue Small Business Administration over PPP loans, CBS (June 16) ACLU sues to stop SBA from denying PPP loans to people with criminal records, Yahoo (June 16) In face of lawsuit, SBA broadens loan program to more recent felons, Newsday (June 15) U.S. eases criminal record provision in coronavirus business loan program, AP (June 12) Criminal record shouldn’t bar small businesses from COVID-19 payroll loans, suit says, McClatchy (June 12) The Coronavirus Stimulus Discourages Aid to Small Business Owners With a Criminal Record, Intercept (June 8) Bipartisan Bill Seeks PPP Access Despite Criminal Records, Law360 (June 5) Support the Paycheck Protection Program Second Chance Act, S. 3865, FreedomWorks (June 5) Justice Action Network Applauds Bipartisan Senate Coalition Introducing “Paycheck Protection Program Second Chance Act”, Justice Action Network (June 4) Senators Stand Up for Entrepreneurs with Criminal Record During Pandemic, Prison Fellowship CSG Justice Center Backs Bill Weakening Barriers on Small Business Owners, CSG Justice Center (June 4) Don’t Bar Ex-Offenders From Coronavirus Aid Funds, New York Times (June 2) SBA Excludes Small Business Owners With Criminal Records From Relief Loans, Forbes (May 27) Number of working black business owners falls 40%, far more than other groups amid coronavirus, Washington Post (May 25) Applicants with troubled pasts can’t qualify for PPP loans. Rubio hopes to change that, Miami Herald (May 21) Federal agency denies COVID-19 loans for applicants’ past mistakes, News Channel 5 Nashville (May 20) We Have Criminal Records. Don’t Shut Us Out of the Recovery, Barron’s (May 18) Paycheck Protection Program shouldn’t exclude ex-cons who have paid their debt to society, Dallas Morning News (May 13) Does an Arrest Record Disqualify Business Owners From COVID-19 Disaster Relief? Crime Report (May 8) Some Business Owners Excluded From PPP Due To Criminal History, Newsy (May 7) Congress should include second chances in coronavirus relief bill, The Hill (May 7) Emergency Loan Program Excludes Ex-Cons Trying to Make Good, Corvallis Advocate (May 7) Is the SBA Denying Disaster Loans to Anyone Arrested in the Last 10 Years? A Leaked Powerpoint Suggests It Is, Entrepreneur (May 6) Local business owner says PPP application holds his past against him, WCPO (May 4) Nonprofit Advocates for Business Owners with Criminal Records, Biz New Orleans (May 4) Have A Criminal Record? COVID-19 Relief May Be Out Of Reach, Law 360 (May 3) Emergency Coronavirus Loans Will Cripple Some Small Businesses, National Interest (May 1) Sen. Portman says small business owners with criminal records should be allowed to apply for PPP, News 5 Cleveland (April 30) How the SBA is Stepping on Small Business Owners, R Street (April 30) Small businesses just got a $300B bailout but many who need a second chance won’t get a dime, The Star-Ledger/NJ.com (April 28) A criminal record shouldn’t be a barrier to the Paycheck Protection Program, Pennsylvania Capital-Star (April 27) By restricting PPP based on criminal record, many non-profits will suffer, Philadelphia Inquirer (April 27) Paycheck Protection Program Leaves Behind Formerly Incarcerated Business Owners, JJIE (April 24) Rep. Ayanna Pressley Calls For Racial Data On Coronavirus Business Loans, WGBH (April 24) Christian leaders demand access to COVID-19 relief loans for business owners with criminal record, The Christian Post (April 23) Former felons should not be pushed out of loans under CARES Act, USA Today (April 23) Some ex-felons excluded from small business relief in spite of Trump’s criminal justice reform platform, CNN (April 22) Criminal records shut small biz owners out of aid program, AP (April 21) A criminal past means no Paycheck Protection Program loan, CBS (April 21) Don’t deny pandemic relief loans to second-chance entrepreneurs, AEI (April 21) Formerly Incarcerated Americans Were Excluded From Federal COVID-19 Relief, The Appeal (April 20) Advocates lament exclusion of those with criminal records from business loan program, Catholic Sentinel (April 20) Paycheck Protection Program coronavirus relief: ‘They say it’s for everyone, but it’s really not’, Cincinnati.com (April 19) If You’re A Business Owner On Probation, Don’t Bother To Apply For COVID-19 Relief Loans, KCUR (April 16) Don’t Let Red Tape Limit Second Chances During Pandemic, CSG Justice Center (April 14) Not every small business owner can qualify for SBA Paycheck Protection loans, Kelo (April 13) Trump Administration Tells Some Business Owners “Do Not Apply” for Coronavirus Loans, The Marshall Project (April 8) Read more

Senate bill would deliver relief to small biz owners with a record

*UPDATE (7/7/20):  “SBA throws in the towel and Congress extends the PPP deadline” After Congress authorized hundreds of billions of dollars for small business relief during COVID-19, the Small Business Administration (SBA) imposed restrictions on applicants with an arrest or conviction history.  These barriers, neither required nor contemplated by Congress, impede access to the two major relief programs for small businesses, nonprofits, and independent contractors: the Paycheck Protection Program (PPP) and the Economic Injury Disaster Loan (EIDL) program. A major development in Congress signals the likely elimination of most of these restrictions, which would make crucial economic assistance newly available to many small business owners with a record.  On June 4, Senators Rob Portman (R-OH), Ben Cardin (D-MD), James Lankford (R-OK), and Cory Booker (D-NJ) introduced the Paycheck Protection Program Second Chance Act. This bipartisan Senate bill would allow those with a record to apply for PPP funds, subject to only two record-based restrictions that are far narrower than the current PPP restrictions.  Under the Senate bill, the SBA would not be permitted to deny an applicant based on arrest or conviction, unless the owner of 20% or more of the equity of the applicant is: 1) currently incarcerated; or 2) was convicted in the last 5 years of felony financial fraud or deception.  The second restriction may be waived by the SBA. The provisions of the Senate bill are nearly identical to analogous provisions in the HEROES Act, which passed the House on May 15, giving some basis for optimism that this reform will become law.  CCRC Executive Director Margaret Love is quoted in the Senate bill press release: “This bill represents a momentous bipartisan effort to roll back overbroad regulatory barriers that rely on arrest and conviction history to unfairly exclude small businesses from critical economic assistance, with a particularly adverse impact on minority-owned businesses and their employees.”  The press release also includes statements from the four Senators and Holly Harris, Executive Director of Justice Action Network, with a common theme that people who have paid their debt to society, turned their lives around, and started small businesses should celebrated rather than denied federal assistance. While the Senate bill would expand access to PPP, unlike the HEROES Act it does not address the SBA’s record restrictions for EIDL disaster relief, which have been even more exclusionary than the PPP restrictions.  According to an alleged SBA document leak in early May, which we believe was reliable, the agency was denying relief to any EIDL applicant who had ever been arrested, unless the arrest was for a misdemeanor and occurred more than 10 years ago.  But on May 20, an SBA spokesperson, without disputing the authenticity of the leaked documents, nonetheless stated that this information “is incorrect. An applicant with a felony conviction in the last 5 years would be declined.”  The 5-year felony restriction for EIDL disaster relief is consistent with the PPP restrictions, suggesting that sometime in May, the agency started to evaluate EIDL applicants under the PPP standards.  We would hope and expect that if the Senate bill were enacted, the SBA would also apply the bill’s relaxed PPP eligibility standards in considering EIDL applicants. 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

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