Category: Administrative law

SBA reduces criminal history restrictions in one of its business development programs

We are very pleased to see that the U.S. Small Business Administration has taken a significant step toward ending discrimination against justice-affected small business owners in the programs it administers. In a new rule governing certification of veteran-owned businesses for preferential treatment in the award of VA contracts, the SBA has omitted a requirement that business owners must have “good character” to be certified.  This is a step we recommended in commenting on the rule when it was proposed last summer, and we are gratified that the SBA accepted our recommendation. CCRC’s study of the SBA’s record-based restrictions has identified the “good character” requirement as that agency’s long-established way of weeding out people with a criminal history from the programs it administers, including business loans, disaster assistance, and federal contracting opportunities like the one at issue here. Typically, SBA operating procedures give agency staff broad discretion to deny assistance to justice-affected business owners based solely on untested assumptions about perceived risk and desert embodied in the “good character” requirement. Broad inquiries into criminal history on application forms deter many from even applying. It was therefore a matter of concern to see a “good character” criterion included when the SBA proposed its veteran-owned business rule last summer. The good news was that this offered a first chance for public comment on how this criterion limits opportunities for justice-affected business owners. And it appears that it has led to a very favorable outcome that augurs well for future SBA criminal record reforms. When the SBA proposed its rule on certifying veteran-owned businesses in August, CCRC worked with the Washington Lawyer’s Committee for Civil Rights to draft comments that were critical of the SBA’s vague and open-ended test of business owners’ “character” that results in disqualification of many deserving individuals from this and other federal programs administered by the SBA. Those comments, which were joined by 24 other organizations, were filed on August 5 and are available here. The comments commended the SBA’s proposal to extend eligibility for certification to veteran business owners who are in prison or under supervision in the community, but expressed concern that these same individuals – along with other veterans with a criminal history who have fully served their sentences — could be arbitrarily excluded from a program specifically intended to benefit them: The proposed removal of categorical exclusions for those on parole, probation, or who are incarcerated is an important step. However, the Proposed Rule’s continued use of “good character,” as well as the absence of any substantive or procedural criteria to guide decision-making, will continue to deny certification to individuals with significant business ability who otherwise could effectively and responsibly perform federal government contracts and contribute to the development of their communities. Our comments were also critical of the SBA’s “disjointed approach to ‘good character’ determinations in its various programs,” pointing out that other specialized contracting programs administered by the SBA (women-owned businesses and HUB Zone contracts) do not include a good character test.  However, the SBA’s general business loan programs and the larger 8(a) contracting program use “good character” determinations as a way of denying assistance to justice-affected business owners. We urged the SBA to abandon entirely the “undefined and potentially invidious ‘good character’” test, and instead to adopt “an evidence-based, transparent, and objective method of assessing the intersection between criminal record and effective contract performance.” We are very pleased to see that the SBA accepted our recommendation in the final version of the rule and eliminated the “good character” test from the rule entirely.  As finalized, the rule would permit consideration of an applicant’s conduct only if it resulted in formal debarment or suspension from federal contract eligibility, or if an applicant intentionally made false statements in their application.  Explaining the final rule, the SBA noted that it had “considered a modified good character requirement that could render an applicant ineligible if there were outstanding issues relating to moral turpitude or business integrity,” but had decided that these issues could be considered by a contracting official only if they were shown to reflect adversely on an applicant’s ability to perform the contract: SBA views the issues related to whether the concern has the necessary integrity to perform a contract in the same way as it does questions relating to whether the concern has the necessary financial wherewithal, capacity or tenacity, and perseverance to perform a contract. All are responsibility issues determined by a contracting officer relating to a specific contract. The SBA also echoed the observation in our comment about the absence of the “good character” test in some other specialized contracting programs and noted that “SBA seeks to make its contracting program regulations as consistent as possible.” We plan to hold the SBA to its word here: The next step in making its contracting program regulations consistent must be for the SBA to remove the “good character” restrictions from its larger 8(a) business development program, where they have explicitly limited opportunities for justice-affected individuals for more than three decades. After that, the SBA must consider whether similar “good character” requirements can be justified in its lending and disaster assistance programs, in light of their explicit exclusion of justice-affected individuals and disparate impact on minority business owners. Read more

SBA proposes rules affecting businesses owned by veterans with a record

Over the past two years, CCRC has been studying the restrictions imposed by the U.S. Small Business Administration on loans to small businesses owned by justice-affected individuals. Many of those same restrictions, which are grounded in an operating policy that recipients of federal assistance have “good character,” also apply by formal rule in the SBA’s business development program under 8(a) of the Small Business Act. For more than half a century, the so-called “8(a) program” has earmarked federal contracts for businesses owned by socially or economically disadvantaged individuals, and it has been a key driver of community development in urban areas. But the program’s “good character” test has historically excluded from participation many if not most business owned or managed by individuals with a criminal history. The 8(a) program also has satellite programs, including ones offering preferential treatment to businesses owned by women and veterans, though it is less clear whether these programs have similar criminal history restrictions. Recently, Congress returned responsibility for certifying program eligibility for veteran-owned business from the VA to the SBA, and the SBA has now published proposed certification rules for public comment. These proposed rules offer a first chance to speak to the SBA’s “good character” requirement. CCRC worked with the Washington Lawyer’s Committee for Civil Rights to draft comments on the proposed rule that are critical of the SBA’s vague and open-ended test of business owners’ “character” that results in disqualification of many deserving individuals from this and other federal programs administered by the SBA. Those comments, which are joined by 24 other organizations, were filed on August 5 and are available here. The comments commend the SBA’s proposal to extend eligibility for certification to veteran business owners who are on probation or parole, or incarcerated.  However, they express concern that these individuals – along with others with a criminal history who have fully served their sentences — may be arbitrarily excluded from a program specifically intended to benefit them: The proposed removal of categorical exclusions for those on parole, probation, or who are incarcerated is an important step. However, the Proposed Rule’s continued use of “good character,” as well as the absence of any substantive or procedural criteria to guide decision-making, will continue to deny certification to individuals with significant business ability who otherwise could effectively and responsibly perform federal government contracts and contribute to the development of their communities. The comments are also critical of the SBA’s “disjointed approach to ‘good character’ determinations in its various programs,” noting that the approach taken in the proposed rule may be inconsistent with rules and operating policies in other SBA programs that also exclude business owners with a criminal history throuigh “good character” determinations. The comments urge the SBA to abandon entirely the “undefined and potentially invidious ‘good character’” test, and instead to adopt “an evidence-based, transparent, and objective method of assessing the intersection between criminal record and effective contract performance.” Promulgation of clear standards and procedures in a formal rule will serve the interests of both the SBA and applicants for certification, as well as the national interest in reintegration of justice-affected individuals. The comments suggest that the SBA look to recent state reforms in occupational and professional licensing statutes, in which states have rooted out similarly vague statutory terms such as “good moral character” or restrictions applicable to crimes of “moral turpitude.” Instead of using such ill-defined terms, licensing reforms have required assessment of candidates on a case-by-case basis guided by clear standards and processes that examine whether, among other things, a conviction is directly related to the occupation or profession, how much time has passed since the conviction, and evidence of mitigating circumstances and subsequent rehabilitation. CCRC’s work in connection with this comment to the SBA is directly related to its larger “Fair Chance Lending” project, on which it is partnering with the University of Michigan’s Ford School of Public Policy.  There will be more in this space about that project in weeks to come.         Read more

CFPB documents the financial burdens imposed on justice-involved individuals

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

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

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

Forum on governmental barriers to small business financing for people with a criminal history

We are delighted to announce a program where a panel of experts will discuss the barriers faced by small business owners and managers with a criminal history in obtaining government-sponsored loans. This virtual program will take place on November 18 from 12:00-1:15pm (EST), and is sponsored by the Georgetown Center for Business and Public Policy as part of its Georgetown on the Hill series. Register for the event here. The program–which we helped organize along with Georgetown’s PIVOT Program–will focus on the broad criminal history restrictions in rules and policies of the U.S. Small Business Administration. These policies came to the public’s attention in the early days of the pandemic, when thousands of small businesses were denied PPP and other relief authorized by the CARES Act. While many of these restrictions were eventually rolled back in response to widespread criticism, similar restrictions in the SBA’s general lending programs remain, restrictions that influence state and private lending as well. The program on November 18 will explore the origins, scope, and justification for these restrictions. Panelists include a former high-ranking SBA official, a small business owner who successfully challenged the PPP restrictions in court, a scholar who has argued that the SBA restrictions contravene civil rights law, and the CCRC’s Deputy Director David Schlussel, who contributed to the bipartisan campaign in the spring of 2020 that led the SBA to abandon many of its exclusionary policies. We hope that everyone interested in collateral consequences, notably those related to access to business capital, will register for the program. The Georgetown announcement describing the program is reproduced below. Understanding Governmental Barriers to Small Business Financing for People with a Criminal Record Date: Thursday, November 18, 2021 – 12:00pm to 1:15pm Location: Zoom Seminar (register for link) New businesses are a key driver to economic growth, but individuals seeking to start these businesses face a number of challenges. For individuals with a criminal history these challenges of establishing and growing a new business increase dramatically. Indeed, a particularly stifling series of federal regulations and policies are currently in place that impose broad criminal history restrictions on access to government-sponsored business loans. Last year, the U.S. Small Business Administration (SBA) imposed broad criminal history restrictions on COVID-19 relief, leading to criticism from the public and members of Congress. Successive decisions by the Trump and Biden Administrations rolled back of most of these restrictions on emergency relief, but similar policies remain in the SBA’s general lending programs. Given that about one third of adult Americans have an arrest or conviction record, of whom a disproportionate percentage are people of color, it is important to reconcile this population’s limited access to government-sponsored business capital with the emerging public policy of encouraging reintegration and second chances. At this Georgetown on the Hill event, a panel of experts moderated by Crystal Francis, Program Manager, Georgetown University Pivot Program, will discuss the economic and social impact of these restrictive policies in a forum with Q&A. Panelists will consider the issues that arose when the policies were applied to pandemic relief funds; the possible correlation between criminal history and creditworthiness; and the elements of a “fair chance” approach to business lending. Panelists include: Taja-Nia Henderson, Professor of Law, Rutgers University Law School Sekwan Merritt, Entrepreneur and Owner, Lightning Electric, a Baltimore-Based Electrical Contractor Chris Pilkerton, Chief Legal and Regulatory Strategy Officer for the Accion Opportunity Fund, and former Cabinet member and head of the U.S. Small Business Administration David Schlussel, Deputy Director, Collateral Consequences Resource Center This forum is part of the Georgetown Center for Business and Public Policy’s Georgetown on the Hill series at which we convene policymakers, academics, and industry experts to discuss important economic policy issues of the day. Read more