Category: Administrative law

Second Chance Small Businesses Deserve Another Chance

*UPDATE (7/7/20):  “SBA throws in the towel and Congress extends the PPP deadline” As America prepares to get back to work, will some people be left behind? The Small Business Administration (SBA) has adopted rules for emergency COVID-19 loans that exclude otherwise eligible existing small businesses from relief solely because they are owned in part by individuals who have a criminal record. Given that at least 19 million Americans have a felony record, this overly broad exclusion threatens to unfairly deny a lifeline to deserving small businesses and their employees. The Paycheck Protection Program (PPP) that was part of the $2 trillion relief legislation passed by Congress and signed by President Trump provides loans to small businesses that are forgivable if the business retains its employees during the period of at least eight weeks. While the legislation was vague on exclusions based on criminal background, the guidance adopted on April 2 by the SBA is overly broad, going far beyond excluding only those who have committed  offenses related to financial dishonesty such as bank fraud or extremely serious offenses such as rape and murder. Among those excluded are small business in which an owner of 20 percent or more is currently facing charges for any offense, is currently on community supervision, or has been convicted of a felony in the last five years. For several reasons, this disqualifying language casts a much wider net than necessary. First, simply because an individual is facing charges does not mean they are guilty. Indeed, some 20 percent of those arrested ultimately have their case dismissed or are acquitted. Additionally, the current criteria exclude existing small businesses that are owned in part by the 4.5 million Americans on community supervision, which encompasses probation and parole. Yet initiatives like the Prison Entrepreneurship Program (PEP) have helped many Americans with a record become successful business owners. Consider Cedric Hornbuckle, who through PEP went from being behind bars to being owner of a moving business called “Moved by Love.” Such established small businesses should have the same access to loans during this crisis as others. While the accomplishments of those who have been to prison and started a successful business while still on parole are particularly striking, the exclusion also affects the larger group of 3.5 million Americans on probation. Most people on probation have never been to prison and were placed on probation because a prosecutor and judge deemed them a good bet to succeed in the community. Furthermore, being employed is typically a condition of probation and, given the reluctance of many employers to hire those with a criminal record, the impetus to start a small business is both obvious and commendable. Finally, the regulations cast far too wide a net when it comes to the types of prior convictions covered. By including all felonies going back five years, this exclusion rules out even those with nonviolent drug convictions. In fact, in some states, repeat possession offenses involving small amounts of marijuana can still be enhanced to a felony. In contrast, on occupational licensing, dozens of states have moved in a different direction. Instead of blanket exclusions of all felonies, recent state laws, as well as model policy adopted by the American Legislative Exchange Council, have focused narrowly on those offenses directly related to the duties of the occupation. In this context, it makes sense to exclude those who have committed certain fraudulent business offenses, such as embezzling funds from a previous loan or lying on a loan application. Additionally, recently adopted state licensing reforms allow for individualized review, including appeal through an administrative process. No such avenue for relief is available from the sweeping SBA exclusions. Unfortunately, the SBA regulations reflect a fundamental misunderstanding of the limited legitimate role of collateral consequences. They must not be additional punishment, which is exclusively dispensed by the judge or jury, and must be narrowly tailored to protect the public. During this trying time, the SBA must reexamine these regulations to ensure that small businesses that made the most of one second chance don’t have it taken away through no fault of their own. *Note: this piece was first posted at the Texas Public Policy Foundation’s website.   Read more

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

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

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

A bipartisan group of civil rights, advocacy, and business organizations, including CCRC, are calling on Congress to take immediate action to remove barriers based on arrest or conviction history for small business owners seeking COVID-19 federal relief.  This is an issue we have been covering in depth in recent posts.  This call to action—available in PDF and reprinted below—is issued by the following organizations (with additional sign-ons welcome; contact us here): American Civil Liberties Union Chicago Lawyers’ Committee for Civil Rights Collateral Consequences Resource Center College & Community Fellowship Community Legal Services of Philadelphia #cut50 Drug Policy Alliance FreedomWorks Georgia Justice Project Interfaith Action for Human Rights Jewish Council for Public Affairs Justice & Accountability Center of Louisiana Justice Action Network Leadership Conference on Civil and Human Rights Main Street Alliance National Association of Criminal Defense Lawyers National Employment Law Project Out For Justice Public Interest Law Center Reproductive Justice Inside Root & Rebound Safer Foundation Washington Lawyers’ Committee for Civil Rights and Urban Affairs Women Against Registry *Note: the letter was originally issued on April 10 and was last updated on April 17. April 17, 2020 Congress Must Act Now to Remove Barriers Based on Arrest or Conviction History for Small Business Owners Seeking COVID-19 Federal Relief We oppose the restrictions based on arrest or conviction placed by the Small Business Administration (SBA) on the two small business programs authorized and funded by the CARES Act (see Appendix). With one in three Americans having some sort of record, and people with records experiencing an unemployment rate five times higher than the average rate, these restrictions will have a significant and detrimental impact on individuals, families, and communities across the United States. The restrictions will have a particularly harsh effect on minority business owners and employees who are disproportionately affected by the criminal legal system as a result of institutional discrimination. Specifically, these restrictions are: • Unnecessary and confusing: There are no statutes requiring SBA to categorically disqualify individuals from its loan programs based on an arrest or conviction record; the authority to perform a background check does not translate into authority to exclude. SBA’s Interim Final Rule and policy guidance for the Paycheck Protection Program (PPP) and Economic Injury Disaster Loans (EIDL) are far more exclusionary than its own existing regulations on record restrictions for small business loans, which only exclude those with active cases. The new restrictions constitute unnecessary overreach that interferes with the ability of small businesses to operate and pay their employees. The PPP interim rule and policy guidance, including its application form, are confusing and likely to have a chilling effect that will discourage many eligible applicants. The EIDL guidance and application form are similarly confusing and are likely to have the same effect. • Inconsistent with Congress’ intent: The intention of the emergency relief programs authorized by the CARES Act is to sustain small businesses that are trying to save the economy by keeping people employed. Eligibility requirements should be relaxed in these circumstances, not heightened as SBA proposes. SBA’s proposed new restrictions on eligibility for its loan programs, which already operate to exclude many people with a record, contravene the intent of the CARES Act, and are inconsistent with SBA’s more general mandate of encouraging entrepreneurship and expanding access to employment. A significant number of people with arrest or conviction history have established their own small businesses, since it is frequently difficult for them to secure employment with others. Moreover, these businesses also tend to be more willing to hire employees with a record. Driving them out of business will result in a severe impact on employment of a population that already is disadvantaged in the workplace. A large percentage of small businesses are owned by single owners or a limited number of co-owners, so that any disqualification affecting 20%+ equity owners will have a significant impact on small business owners generally. A policy that excludes from loan eligibility small businesses that are owned in whole or in part by people with arrest or conviction history is not only inconsistent with the CARES Act and the mandate of SBA’s own authorizing statutes, it also frustrates federal and state efforts to encourage the reintegration of individuals involved in the criminal legal system. • Overbroad and unfair: The PPP’s categorical bar based on certain arrest or conviction records means that there is no opportunity for an individual determination that considers factors such as rehabilitation, the circumstances of the conviction/disposition, or whether the nature of the underlying crime might adversely affect the ability to properly utilize the loan. The EIDL program restrictions go even further by asking about any involvement with the criminal legal system at any time, and potentially exclude most applicants with any arrest or conviction record from the EIDL (the SBA has not provided guidance on this). The PPP and EIDL restrictions extend to individuals that the criminal legal system has specifically determined should not be convicted of a crime, including those that participate in diversionary programs or obtain deferred adjudications – the very kinds of dispositions that are supposed to help protect people involved in the criminal legal system from harsh economic collateral consequences. The SBA’s requirement that people disclose sealed and expunged records circumvents protections in state law for these cleared records and is contrary to the intent and purpose of those laws. • Racially discriminatory: The SBA’s restrictions will have a disparate impact on minority business owners and employees, who are disproportionately affected by the criminal legal system as a result of institutional discrimination. People with a record are already subject to a myriad of disadvantages in seeking to reintegrate into society, notably in bank lending policies but also in housing, employment, licensing, education, voting, and other areas. Congress must act now to: Direct the SBA to eliminate new record restrictions introduced by the PPP interim rule and application form, and clarify the record-related eligibility policy for EIDL applicants. Direct the SBA to relax the record restrictions that are applied to Section 7(a) and 7(b) loans under existing rules and policies. Direct the SBA to ensure that the application forms for SBA financial assistance accurately reflect the eligibility requirements. As the COVID-19 crisis continues to devastate communities across this country, federal relief must be made equitably accessible to all who need it. Sincerely, American Civil Liberties Union Chicago Lawyers’ Committee for Civil Rights Collateral Consequences Resource Center College & Community Fellowship Community Legal Services of Philadelphia #cut50 Drug Policy Alliance FreedomWorks Georgia Justice Project Interfaith Action for Human Rights Jewish Council for Public Affairs Justice & Accountability Center of Louisiana Justice Action Network Leadership Conference on Civil and Human Rights Main Street Alliance National Association of Criminal Defense Lawyers National Employment Law Project Out For Justice Public Interest Law Center Reproductive Justice Inside Root & Rebound Safer Foundation Washington Lawyers’ Committee for Civil Rights and Urban Affairs Women Against Registry APPENDIX: PROGRAM REQUIREMENTS (Prepared by CCRC) Paycheck Protection Program (PPP) The CARES Act authorizes the PPP, which provides small business loans under the SBA’s 7(a) loan program, with provisions for expanded eligibility, allowable uses, and forgiveness.[i] Barriers based on arrest or conviction for 7(a) loans in general: By statute: The SBA “may verify the applicant’s criminal background, or lack thereof,” prior to approval, including through an FBI background check.[ii] By regulation: “Businesses with an Associate who is incarcerated, on probation, on parole, or has been indicted for a felony or a crime of moral turpitude” are ineligible.[iii] By policy statement: SBA interprets its regulation to also make ineligible an Associate under deferred prosecution, conditional discharge, order of protection, or a sex offender registry, or currently facing any charges in any jurisdiction.[iv] SBA also states that various principals of a business “must be of good character,” which is determined through a character evaluation, requiring disclosure of any: 1) current charges; 2) arrests in the past 6 months; and 3) time the person has been convicted, pled guilty or no contest, or been placed on pretrial diversion or any form of parole or probation—other than for a minor vehicle violation. Expunged and sealed records must be disclosed, with no exceptions. A person will generally be approved if they provide documentation that they have satisfied all sentencing conditions (presumably including payment of costs and restitution) and do not have a felony conviction, misdemeanor conviction for a crime against a minor, recent misdemeanor conviction, or recent charges. Otherwise, they are subject to a fingerprint-based FBI background check and an opaque individual determination by the SBA.[v] Barriers based on arrest or conviction specific to PPP loans: By statute: The CARES Act does not specifically authorize much less require barriers based on arrest or conviction for PPP loans. To be consistent with its purposes, the CARES Act should at the least be read to say that new barriers based on arrest or conviction should not be applied to PPP assistance.[vi] By regulation: SBA Interim Final Rule (Apr. 15): “You are ineligible for a PPP loan if….iii. An owner of 20 percent or more of the equity of the applicant is incarcerated, on probation, on parole; presently subject to an indictment, criminal information, arraignment, or other means by which formal criminal charges are brought in any jurisdiction; or has been convicted of a felony within the last five years.” By application form: Borrower Application (Apr. 3): asks two questions; a “yes” to either is disqualifying: 1) “Is the Applicant (if an individual) or any individual owning 20% or more of the equity of the Applicant subject to an indictment, criminal information, arraignment, or other means by which formal criminal charges are brought in any jurisdiction, or presently incarcerated, or on probation or parole?” 2) “Within the last 5 years, for any felony, has the Applicant (if an individual) or any owner of the Applicant 1) been convicted; 2) pleaded guilty; 3) pleaded nolo contendere; 4) been placed on pretrial diversion; or 5) been placed on any form of parole or probation (including probation before judgment)?” (Note: this is far broader than the Interim Final Rule: the second question includes “any owner” and covers dispositions other than conviction.) Economic Injury Disaster Loans (EIDL) EIDL loans are authorized under the SBA’s existing 7(b) disaster loan program. The Coronavirus Preparedness and Response Supplemental Appropriations Act (Phase 1) appropriated additional funds and deemed coronavirus a disaster.[vii] Pursuant to the CARES Act, SBA is also allowing business owners in all states, D.C., and territories to apply for an EIDL advance of up to $10,000, which “will be made available within days of a successful application, and this loan advance will not have to be repaid.”[viii] Barriers based on arrest or conviction for EIDL: By statute and regulation: Individuals convicted during the past year of a felony during and in connection with a riot or civil disorder or other declared disaster are ineligible.[ix] By policy statement: The SBA policy statement provides: “It is not in the public interest…to extend financial assistance to persons who are not of good character. If any adverse information develops concerning the character or background of a disaster loan applicant or principal owner [on forms], SBA must make a determination as to the applicant’s character before a loan can be approved.”[x]  Thus, the SBA will not approve a loan “if the applicant or principal owner is presently on parole or probation following conviction of a serious criminal offense. However, [it] will consider approving an application submitted by partnerships, corporations, and LLEs, where the apparent bar to eligibility was committed independently of any official act for the business and the individual will divest all direct and indirect interest in the business.” By application form: Forms, including the COVID-19 EIDL portal, include the usual EIDL three-part question, which requires a “yes” or “no” to the entire question: “a. Are you presently subject to an indictment, criminal information, arraignment, or other means by which formal criminal charges are brought in any jurisdiction? b. Have you been arrested in the past six months for any criminal offense? c. For any criminal offense – other than a minor vehicle violation – have you ever been convicted, plead guilty, plead nolo contendere, been placed on pretrial diversion, or been placed on any form of parole or probation (including probation before judgment)?” Under pre-existing policy, if this question is answered “yes,” the SBA requires the applicant to provide a Form 912 with an explanation of the offense(s), and in some cases a fingerprint sample, before the SBA will make a character determination.[xi] The SBA has not provided guidance on whether applicants who answer “yes” to this question can obtain an EIDL advance, or whether they will be subject to the usual character evaluation. [i] CARES Act (H.R. 748), secs. 1102-1105; 15 U.S.C. 636(a). [ii] 15 U.S.C. 636(a)(1)(B). [iii] 13 C.F.R. § 120.110(n). An “Associate” includes officers, directors, owners of 20% or more of the equity, key employees, and other specified entities. See 13 C.F.R. § 120.10. [iv] See SBA Standard Operating Procedure (SOP) 50 10 5(K)(B)(2)(III)(A)(13) (eff. April 1, 2019). [v] The good character requirement applies to every proprietor, general partner, officer, director, managing member of an LLC, owner of 20% or more of the equity, trustor, or person who runs day-to-day operations.” See id. [vi] See CARES Act (H.R. 748), sec. 1102. [vii] Coronavirus Preparedness and Response Supplemental Appropriations Act (H.R. 6074), tit. 2. [viii] CARES Act (H.R. 748), sec. 1110; https://www.sba.gov/funding-programs/loans/coronavirus-relief-options/economic-injury-disaster-loan-emergency-advance. [ix] See P. L. 90 448, 1106(e), HUD Act of l968, and 13 CFR §§ 123.301, 123.101.   [x] SBA SOP 50 30 9(3.6) (effective May 31, 2018) at p. 32. [xi] Id. Read more

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

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

SBA’s bumpy guidance on criminal history requirements for stimulus loans

*UPDATE (7/7/20):  “SBA throws in the towel and Congress extends the PPP deadline” The U.S. Small Business Administration (SBA) oversees an array of government-backed loans that are key resources for small businesses fighting to survive during this pandemic.  The recently-enacted stimulus bill authorized more than $300 billion in new SBA loans, many of which are eligible for forgiveness.  We published a post about this on March 27: “Applying for an SBA loan with a criminal record.”  But in the past week, the SBA has issued confusing and frequently changing guidance regarding stimulus loan eligibility for people with a criminal record, a group that includes as many as one in three adults.  In the last week, the SBA has issued criminal history guidance for the Paycheck Protection Program on three separate occasions, each time with more restrictive eligibility rules, and it is not clear when guidance will be finalized. The most recent guidance, issued just today, disqualifies from financial assistance a business with: 1) an owner of 20% or more of the equity who is currently subject to criminal charges, incarceration, probation, or parole; or 2) “any owner” who has, in the last five years, been convicted of any felony, or pled guilty or nolo contendere to felony charges, or been placed on pretrial diversion or any form of parole or probation, including probation before judgement, based on felony charges. These developments are troubling 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.  In this post we discuss the past week’s developments on this issue.  We also provide information about COVID-19 disaster loans. Stimulus Package Last Friday, the President signed into law the CARES Act, a $2+ trillion stimulus package, which included more than $300 billion in funding for new SBA loans, now called the “Paycheck Protection Program.”  These Paycheck Protection Program loans are authorized under SBA’s primary loan program, the 7(a) loan program, but the stimulus bill increases eligibility, extends allowable uses for the loans, and allows for loan forgiveness, among other provisions.  (See H.R. 748, sec. 1102; 15 U.S.C. 636(a); our previous post). The SBA’s preexisting regulations and policies for the 7(a) loan program make a small business ineligible if the business has a principal who is incarcerated, under supervision, or facing charges; in addition, such persons “must be of good character,” determined through a character evaluation process that examines some or all of an applicant’s criminal record.  In our previous post, “Applying for an SBA loan with a criminal record,” we discussed in detail these preexisting criminal history requirements, but also indicated that the text of the stimulus bill could be read to say that these preexisting  requirements would not be applied with respect to the Paycheck Protection Program loans.  See H.R. 748, sec. 1102.  In the past week, the SBA has issued three different sets of guidance which would apply some of the preexisting requirements, and impose new grounds for disqualifying people with a past criminal record.  The most recent guidance, issued today (April 3), would even disqualify people who have been arrested but never convicted. March 31 Guidance  On March 31, the SBA released a sample application form for Paycheck Protection Program loans, which included questions regarding criminal history, to be answered by small business owners with greater than 20% ownership stakes.  A “Yes” answer to either question would be disqualifying: Are you presently subject to an indictment, criminal information, arraignment, or other means by which formal criminal charges are brought in any jurisdiction, or presently incarcerated, on probation or parole?” Within the last 7 years, for any felony or misdemeanor for a crime against a minor, have you: 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)? In describing this guidance, the Washington Post appeared to interpret the latter question to call for responses only about crimes against a minor, whether misdemeanor or felony.  However, another plausible interpretation of this ambiguously-worded question is that it called for responses concerning either 1) any felony; or 2) a misdemeanor crime against a minor.  However the first phrase was interpreted, this guidance proposed to disqualify not only based upon conviction, but also based on a non-conviction record such as a guilty plea or placement on pretrial diversion. April 2 Guidance On April 2, the SBA posted on its website an Interim Final Rule for the Paycheck Protection Program.  (This rule not yet been published in the Federal Register.)  This interim final rule states (p. 7): You are ineligible for a PPP loan if, for example: i. You are engaged in any activity that is illegal under federal, state, or local law …. 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; Thus, the Interim Final Rule makes two changes to the guidance provided by the March 31 sample application form.  First, this rule changes the second disqualification discussed above (“Within the last 7 years, for any felony or misdemeanor for a crime against a minor…?”) to a disqualification if a person “has been convicted of a felony within the last five years.”  Second, the new rule applies to owners of 20% or more of the business (as opposed to greater than 20% in the sample form). April 3 Guidance On April 3, the same day that Paycheck Protection Program went live, the SBA published a new Paycheck Protection Program borrower application form which described the grounds for criminal history-based disqualification even more broadly than the Interim Final Rule.  Specifically, the new application form asks two questions regarding criminal history, with a “Yes” answer to either one resulting in disqualification: 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? 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)? While the Interim Final Rule would disqualify an “owner of 20 percent or more of the equity” who has been “convicted of a felony within the last five years,” the application form dramatically expands this to disqualify “any owner” who has, in the last five years, for any felony, been convicted, pled guilty or nolo contendere, or been placed on pretrial diversion or any form of parole or probation, including probation before judgement. This second more sweeping disqualification surely must be a mistake, since it imposes a stricter rule on “any owner” (disqualified for any conviction or many non-conviction dispositions) than on an owner of 20% or more (disqualified only if currently serving a sentence).  Moreover, a decision to disqualify owners based on their having ever been placed in a diversion program is especially troubling: it doubles down on OPM’s widely-criticized proposal earlier this year, which was later withdrawn, to simply ask—and not necessarily disqualify—federal job seekers and contractors if they have been placed on diversion in the last 7 years.  SBA’s decision to disqualify someone who has been discharged from probation or parole, but was placed on it within the last 5 years, is also head-scratching. Since the Paycheck Protection Program is already live, we hope the SBA will clarify matters as soon as possible, and that it will at the very least return to the standard under the existing 7(a) program that disqualifies only those currently serving a sentence or facing charges. Disaster loans [5/6/20: For more current information, see our new article about a purported leak of the SBA’s internal guidance for denying disaster loan (EIDL) relief based on a record.] In addition to the Paycheck Protection Program, the SBA is also offering COVID-19 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; and pursuant to the CARES Act, small business owners in all U.S. states, Washington D.C., and territories are eligible to apply for a Economic Injury Disaster Loan advance of up to $10,000.  See H.R. 748, sec. 1110. There is a new online portal for COVID-19 Economic Injury Disaster Loans, but this portal does not allow non-applicants to see what the SBA asks about criminal history.  On April 4, a reader informed us that the criminal history inquiry for disaster loans is even more restrictive than that for the Paycheck Protection Protection: it is a three-part question, which requires a “yes” or “no” to the entire section (not question by 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)? It is not clear if a “yes” answer to this question is disqualifying, or if there will be an individual character evaluation, as under preexisting policies.  See SOP 50 30 9(3.6) (effective May 31, 2018) at p. 32.  If a “yes” answer is disqualifying, it is astounding that the SBA would completely disqualify anyone who has ever been convicted, pleaded guilty or nolo contendere, been placed on pretrial diversion, or been placed on any form of parole or probation, for ANY type of offense other than a minor vehicle violation.  We have never seen such a sweeping mandatory disqualification based on a criminal record, in any area of the law, if that is the case here.  It also bears noting that in many jurisdictions “pretrial diversion” is something that the prosecutor determines without any input from a court, and does not require any admission of guilt.  See MPC: Sentencing (2017), which distinguishes between §6.04 Deferred Adjudication (requires some admission of facts) and §6.03 Deferred Prosecution (no admission required). By statute and rule, SBA is barred from making 7(b) loans to persons who have been “convicted, during the past year, of a felony during and in connection with a riot or civil disorder or other declared disaster.”  But its policy on disaster loans disqualifies an applicant if the “applicant or principal owner is presently on parole or probation following conviction of a serious criminal offense.  However, [the government] 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.”  SOP 50 30 9(3.6) (effective May 31, 2018) at p. 32. In addition, the policy calls for the SBA to make an individual character determination, stating that “[i]t is not in the public interest for SBA to extend financial assistance to persons who are not of good character,” and “[i]f any adverse information develops concerning the character or background of a disaster loan applicant or principal owner, as disclosed on SBA Form 912, ‘Statement of Personal History’, or from any other source (e.g. SBA application), SBA must make a determination as to the applicant’s character before a loan can be approved.”  Id.  If a person answers yes to the criminal history question, a “Form 912: Statement of Personal History” is required.  Id.  Based on that form, the SBA will determine if a fingerprint sample is required.  Id.  If the record disclosed “is both minor in nature and was committed more than 10 years ago, fingerprints may not be required to continue processing.”  Id.  Fingerprints are required if the person had a felony conviction from more than a year ago in connection with a riot, civil disorder, or declared disaster.  Id.  Finally, the SBA makes a character evaluation and decision.  Id. *Note: This post was updated on April 28, 2020. 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