Category: Policy

Pending federal reforms promise support for justice-affected entrepreneurs

Word is getting around about pending reforms that would make federal support for small businesses more widely available to entrepreneurs with a criminal history. Notably, the U.S. Small Business Administration has recently taken steps to reduce or remove entirely criminal record-related restrictions in its loan and contracting programs.  These are steps that CCRC has been urging ever since the SBA’s restrictive policies first came to public attention during the pandemic. An article by Michael Friedrich published today by Arnold Ventures (AV) describes a number of reforms recently proposed or adopted by the SBA that will eliminate arbitrary program barriers based on criminal history that are unrelated to any established risk. These reforms should encourage more justice-affected business owners to seek SBA support for their entrepreneurial ventures in the form of federally guaranteed loans or federal contract set-asides for “socially and economically disadvantaged” businesses. The AV article points out that the near-exclusion from these programs based on criminal history “frustrate[s] federal efforts to contribute to economic development in disadvantaged communities, often the same low-income communities of color that have suffered the most during the era of mass incarceration and tough-on-crime policies.”     The AV article showcases the situation of Sekwan Merritt, whose electrical contracting company has become established in Baltimore since his release from prison five years ago, through small loans from a local community development organization, but which now needs the more substantial financial support provided by SBA loans to expand. “Entrepreneurs like Merritt, who have previously been involved with the justice system, often start small businesses as a response to discrimination and exclusion by traditional employers; around 4% of all small businesses have an owner with a criminal conviction. But they face dire challenges when trying to access capital through the SBA, the federal agency that connects small businesses with lenders to help them launch and develop. Merritt describes coming home from prison with a desire to start his own business and   “make things easier for people who have been through the same thing I have” by hiring others reentering the community after a prison term. His business, Lightning Electric, has grown steadily since that time, surpassing $600,000 in revenue last year. But when Merritt tries to take out small business loans, he hits a brick wall because of his criminal record. The Small Business Administration (SBA) and other institutional lenders have routinely denied him, making it difficult to hire and take on larger contracts.” Merritt believes that a change in the SBA’s policy “would create a seismic shift for his business, and for many others, making it possible to grow larger, take on more business, and contribute to their communities.”  Carson Whitelemons, director of criminal justice at AV, points out that “t]he SBA guaranteed more than $44.7 billion in loans in 2021 and serves as a particularly important lender for disadvantaged communities.”  CCRC’s Margaret Love notes that the capital controlled by the SBA “is critically important to helping people with a criminal record establish themselves in the community and to closing the racial wealth gap.”  Shawn Bushway, who has done extensive research on criminal records and employment, argues that ​“Places that have high crime, poverty, and other issues have fewer businesses than they could, and one reason may be that the people who want to develop businesses can’t get a loan.” Awesta Sarkash of the Small Business Majority adds that “entrepreneurship is a proven pathway to decrease recidivism,” and justice-affected business owners “should not be further marginalized or perceived as a credit risk simply because of their past.”  Research is underway that promises to support and encourage the reforms contemplated by the SBA, reforms that in turn should influence the policies of banks and other lending institutions. A group of researchers at the University of Michigan Law School is currently studying the effects of SBA laws, rules, and regulations on access to capital and entrepreneurship more broadly. They are particularly interested in the willingness of people with criminal records to apply for loans. J.J. Prescott, Henry King Ransom professor of law at the university, notes that such rules are likely to deter people with criminal records from starting businesses and submitting loan applications in the first place. The rules also sway other institutional lenders to employ similar restrictions. “The SBA influences the norms of the industry and gives the broader private market a justification for also looking at criminal records as a way to judge creditworthiness,” Prescott says. ​“Once you have a policy like this in place, there is a bit of a domino effect.” Prescott further notes that people’s criminal records have no clear impact on whether they repay loans, according to research. We will report in this space on further developments in the various SBA reforms proposed or foreshadowed. We hope that the spirit of reform that is seemingly moving the SBA in connection with its 7(a) loan program will in time be extended to its 8(a) business development and disaster assistance programs, which contain essentially the same criminal history-related restrictions.   Read more

SBA proposes to ease criminal history restrictions in loan programs

On October 23, 2022, the U.S. Small Business Administration published for comment a rule that would significantly expand the availability of federally guaranteed loans to entrepreneurs with a criminal history. This rule, if finalized, could also transform the SBA’s role in support of urban community development. The proposed rule, titled ”Affiliation and Lending Criteria for the SBA Business Loan Programs,” 87 FR 64724 (Oct. 23, 2022), eliminates language in the SBA’s formal lending criteria that the agency has relied on for many years to restrict loans to justice-affected business owners. We have written at length over the past several years about the broad record-based restrictions in the SBA’s lending and contracting programs, restrictions that first became controversial during the pandemic, and that have never been justified by evidence of a link between criminal history and credit risk. While the proposed SBA rule covers a variety of subjects, its key provision from CCRC’s perspective is its omission of the words “character” and “reputation” from the criteria for small business loans in 13 CFR 120.150(a). It is this language that has been relied on for the “good character” policies in the SBA’s operating procedures affecting both business loans and disaster assistance. In turn, these procedures define “good character” exclusively in terms of a person’s criminal history. Our past analyses of the SBA’s operating procedures indicates that a potential borrower who reveals any past conviction on loan application forms (including convictions that have been expunged or pardoned) is unlikely to qualify for an SBA-approved bank loan or SBA disaster assistance.  Banks are not permitted to proceed with a loan application if an applicant reveals any past felony conviction, no matter how dated and minor, until the SBA launches an extended inquiry to determine whether the applicant has “good character.” applicant. Even if an applicant makes it this far in the loan process (and most are deterred from even applying given the questions on the form), banks may in turn be deterred from proceeding given how long the SBA “good character” process takes. The standards that go into “good character “ determinations are not published anywhere, though we know that they are all made in one regional office.  A FOIA request filed by the Washington Lawyer’s Committee revealed that the SBA made over 900 good character determinations in 2020-2021 but did not retain documentation of them. Indeed, the SBA maintained that it was unable even to find a record of 2/3 of these determinations. We recently applauded the SBA’s removal of “good character” from its rule certifying veteran-owned businesses for preferential treatment in contracting, as we had urged in a comment supported by 25 civil rights and advocacy organizations.  We think this aspect of the proposed rule on lending criteria would be a similarly positive step to make business capital fairly available to business owners despite their criminal history. The proposed revision of the rule would effectively eliminate the regulatory basis for disqualifying prospective borrowers based solely on their criminal record, and undercut the SBA’s ability to consider criminal record as an independent basis for denying credit. Our analysis has identified similar disqualification standards in the SBA’s disaster loan program, and the revised rule would apply to those loans as well. As the SBA proposes to revise and simplify the lending criteria, they would focus on objective standards of creditworthiness instead of relying on vague notions of “character” and “reputation” that have made it difficult for justice-affected entrepreneurs to qualify for the SBA’s federally guaranteed loans. In describing the purpose of the revised lending criteria, the SBA explains that it hopes to “expand access to capital for small businesses and drive economic recovery,” and that “allowing [lenders] to use credit scoring models for credit underwriting will result in more lenders making more smaller loans because the costs for making the small loans will decrease.”  The SBA expects that its revised rule will expand the universe of lending institutions that will be authorized to dispense SBA loans, including in particular lenders like fintechs that are not federally regulated. The proposed rule generated over 100 comments, with many SBA-certified lenders objecting to the simplified loan criteria, and specifically to the agency’s proposed expansion of the program to non-depository lending institutions (including fintechs) and removal of the “character” test in the current rule. A comment filed by the National Association of Government Guaranteed Lenders expresses concern that the proposed revision of the lending criteria will remove “the historical program guardrails” that have “ensured prudent lending throughout the program’s history.” Another by the American Bankers Association states that the revised criteria “may negatively impact the performance of loans made under the 7(a) Program, threaten the integrity of the program, and lead to increased borrower and lender fees.” Senator Benjamin Cardin, who chairs the Senate’s committee on Small Business and Entrepreneurship, and Senator Corey Booker, have together written to the SBA urging the agency to limit its program restrictions based on criminal record — although their letter also recognizes the importance of maintaining the program’s traditional “guardrails.” Their letter was sent before the SBA’s October publication of its revised eligibility standards. We are studying the comments, and hope to be in a position to report further in the near future. Read more

The Frontiers of Dignity: Clean Slate and Other Criminal Record Reforms in 2022

At the beginning of each year since 2017, CCRC has issued a report on legislative enactments in the year just ended, new laws aimed at reducing the barriers faced by people with a criminal record in the workplace, at the ballot box, and in many other areas of daily life.  These annual reports document the steady progress of what our report two years ago characterized as “a full-fledged law reform movement” aimed at restoring rights and dignity to individuals who have successfully navigated the criminal law system. In the three years between 2019 and 2021, more than 400 new criminal record reforms were enacted.  Many states enacted new laws every year, and all but two states enacted at least one significant new law during this period. The modern record reform movement reflected in our annual reports is bipartisan, grounded in and inspired by the circumstance that almost a third of adults in the United States now have a criminal record, entangling them in a web of legal restrictions and discrimination that permanently excludes then from full participation in the community. It reflects a public recognition that the “internal exile” of such a significant portion of society is not only unsafe and unfair, but it is also profoundly inefficient. We are pleased to present our report on new laws enacted in 2022, titled The Frontiers of Dignity: Clean Slate and Other Criminal Record Reforms in 2022. While this report shows that the legislative momentum gathering since 2018 slowed somewhat in the past year, there has still been progress, with more new laws enacted this year than in 2018 when the current reform movement took off in earnest. The title of this report is borrowed from the Basic Law adopted by the Federal Republic of Germany after World War II, which declared that “Human dignity shall be inviolable. To respect and protect it shall be the duty of state authority.” Most European countries incorporate this foundational premise, as well as a concern for individual privacy, into their treatment of criminal records, by making them largely unavailable to the public and by limiting how they are used to deny rights and opportunities. In part because American legal systems are not similarly grounded in respect for dignity and privacy, our progress toward a fair and efficient criminal records policy has been slow and uneven. Yet it has been steady, animated in recent years both by a concern for racial justice and by economic self-interest. This report, like our past annual reports, attempts to capture this steady progress toward recognizing the worth and dignity of the millions of Americans whose past includes a record of arrest or conviction.      Report Overview This overview highlights key developments in reintegration reforms from the past year. Following it, our fourth annual legislative Report Card recognizes the most productive legislatures in 2022, and notes that there are now only two states have enacted no record reforms since our reporting began in 2016.  The body of the report provides topical discussions of last year’s reform measures, followed by an appendix documenting and summarizing the new laws by jurisdiction. More detailed analysis of each state’s laws is available in the state profiles from CCRC’s Restoration of Rights Project, and a national overview is presented in our 50-state comparison charts on various types of record relief. In 2022, 33 states, the District of Columbia, and the federal government enacted 71 separate pieces of legislation, passed two ballot initiatives, and took unprecedented executive actions to restore rights and opportunities to people with an arrest or conviction history. As in past years, more than half of the new authorities involved individual record clearing: 22 states and the federal government enacted 37 measures and took six executive actions that revise, supplement or limit public access to individual criminal records to reduce or eliminate barriers to opportunity. Because of the significant progress on this front in recent years, most of the laws enacted in 2022 represent measured changes to existing record relief schemes rather than radical new reforms. At the same time, three states significantly expanded automatic “clean slate” record relief, a handful of states continued to remove marijuana convictions from public view, and other states trimmed barriers to relief by reducing waiting periods or eliminating obstacles to relief represented by outstanding court debt (fines and fees). Executive actions also continued the momentum, particularly with actions to relieve the consequences of past marijuana convictions. In addition, many of the new laws limited consideration of criminal record in economic settings: 20 states and the federal government enacted 24 new measures regulating employment and occupational licensing, while two more states removed barriers to restoring a driver’s license. A few states made significant improvements in their occupational licensing laws by enacting binding preliminary applications for licensure, and by limiting the types of records that licensing agencies may consider. Arizona is the only state whose legislature took steps this past year to restore civil rights to those with felony convictions, although governors in Missouri, Virginia and Wisconsin used their pardon power to restore civil rights in unprecedented ways. As in the past, the state legislatures that have enacted the most significant reforms span the political spectrum, from California and Maryland to Oklahoma and Utah.  The report highlights the renewed interest in executive pardons by both Republican and Democratic governors, notably in Missouri (where large case backlogs invited energetic executive attention), in Wisconsin (where the pardon power had been shelved for almost a decade), and in Oregon (where 45,000 individuals benefitted from pardons in response to marijuana legalization). Overall, while there were fewer record reforms in 2022 than in the three preceding years, it would be a mistake to see this as a flagging of the reform wave we’ve identified in previous reports.  In fact, the productivity of state legislatures in 2022 mirrors their performance in 2018, itself a year that broke every record.  If 2022 marked a return to pre-2019 productivity levels, several states making significant strides toward restoring rights and clearing records, and many others built on and extended reforms enacted in earlier years. This year’s criminal record reforms bring the total number of separate laws enacted in the past five years to more than 500. Looking ahead to 2023, we expect to see a continuing expansion of eligibility for record clearing, and reduction of access barriers like lengthy waiting periods, outstanding court debt and application-related costs.  We also predict efforts to improve records management to accommodate automation of record clearance.  We look for extension of state fair employment laws, and further facilitation of occupational licensing, both areas where bipartisan reforms have benefitted from helpful model laws. We are slightly less optimistic about additional progress toward dismantling the structure of felony disenfranchisement, which has become mired in faction looking toward the presidential race in 2024. Hopefully, 2023 will see some record reform action in Congress and federal agencies, including measures to extend access to government-guaranteed loans and contracting opportunities to small businesses owned or managed by people with a criminal history. We have come a long way just in the past five years, but there is still a long way to go.   Read more

Applying for federal disaster assistance with a criminal record

In addition to its lending and other programs in support of small businesses, the U.S. Small Business Administration provides long-term low-interest loans under Section 7(b) of the Small Business Act directly to individuals, businesses, and nonprofits in declared disaster areas. The current devastation wrought by Hurricane Ian in Florida — the subject of a dedicated new page on the SBA’s website — reminded us of some research we published two years ago, at the height of the pandemic, about how people with a criminal record were faring under the SBA’s COVID-related disaster relief program.  The answer initially was “not well.” Our research indicates that neither FEMA (emergency aid) nor the USDA (farm loans) impose criminal record restrictions on disaster assistance.  But the SBA does.  What’s more, the SBA’s restrictions are not formalized in a regulation but buried in operating procedures. The criminal history restrictions on SBA economic injury disaster loans (EIDL) under the CARES Act were initially even more restrictive than those that applied to its PPP relief, and they too were never formalized in a rule. The PPP restrictions were rolled back in response to public outcry and lawsuits, and the following year the COVID-related EIDL policy was also rolled back to disqualify the same limited population as the PPP itself (people in prison or on probation or parole, with pending felony charges, or with recent financial fraud and related convictions).  However, criminal record restrictions in the SBA’s general non-COVID lending programs, including its general disaster assistance programs, were not affected. Now that the SBA’s disaster assistance programs are no longer administered under the exceptional and well-publicized approach of the pandemic-related authorities, we thought it would be timely to take another look at how those programs — presumably including the one that specifically applies to Hurricane Ian relief — are available to people with a criminal record.     At the outset, it is worth noting that the federal government delivers immediate emergency aid to victims of disasters through FEMA, which appears not to ask about criminal record in any of its programs. FEMA refers individuals to the SBA for longer term assistance for physical and economic injury, but will resume some aid if someone is ineligible for an SBA disaster loan.  We don’t know how often this occurs, or what the process is for interagency coordination in such cases. A person will seek out an SBA disaster loan after the immediate stages of a disaster, to rebuild property or compensate for lost business income. By statute and rule, SBA is barred from making 7(b) disaster 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 the SBA’s operating policy on disaster loans is far broader than this narrow formal bar. In addition to barring assistance to anyone on parole or probation, the policy states the general principle that “It is not in the public interest for SBA to extend financial assistance to persons who are not of good character.” SOP 50 30 9 (3.6) (effective May 31, 2018) at p. 32. Like its policy on business lending, the SBA’s disaster assistance policy measures a person’s “good character” exclusively in terms of whether or not they have a criminal record. The SBA’s policy on disaster assistance disqualifies at the outset anyone who is “presently on parole or probation following conviction of a serious criminal offense.” Moreover, if an applicant discloses a prior criminal record in response to questions on the obligatory SBA Form 912, “Statement of Personal History”, the SBA must “make a determination as to the applicant’s character before a loan can be approved.” A potentially disqualifying record includes not only convictions but also diversions and guilty pleas and any form of probation at any time in the past, as well as unpaid fines and fees.  A detailed explanation about the records must be provided, and an application for disaster assistance can be processed without an FBI background 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. (It is worth noting that the analogous SBA operating policy that applies to bank lending requires a background check only if the disclosed criminal activity is more serious than a misdemeanor.) Finally, after the background check is completed the SBA will make a determination of whether the person is “of good character” and therefore deserving of assistance.  The SBA’s practice of conducting background checks more broadly for disaster loans than for general small business loans is notable, especially in light of the lack of specific authority in the applicable authorizing statute. If minor criminal conduct (including misdemeanors and diversions) occurred within the previous ten-year period, or if criminal conduct is judged not to be “minor in nature” (a category not defined in publicly available documents as far as we can tell), it must be the basis of a fingerprint background investigation and may be the occasion for disqualification based on “unsatisfactory character.” That strikes us as a very tough standard to apply to disaster assistance, and will have particular applicability in urban settings that tend to have a large number of people with a criminal record. We plan to conduct further research into how the SBA is currently applying the restrictions in its operating policy on disaster assistance to those with a criminal record, and we welcome communications from anyone who has had relevant experience in this regard.       Read more

A closer look at racial disparities in California’s automatic record clearing

Numerous studies have demonstrated how Black Americans are treated more harshly at every stage of the criminal legal system—from over-policing to overcharging to more punitive sentencing. New research from California shows how eligibility limitations on criminal record relief perpetuate racial disparities in the criminal justice system, and have a disproportionately adverse effect on Black Americans. The study, by Alyssa Mooney, Alissa Skog, and Amy Lerman, and published in Law & Society Review, examined recent legislative changes to criminal record relief laws in California, one of the first states to automate relief. The study assessed the equity of California’s existing automatic record relief laws by examining the share of people with criminal records who are presently eligible for automatic record clearing, and variations across racial and ethnic groups. The authors found that 20% of all those convicted of any offense between 2000 and 2016 were eligible for automatic relief. An additional 33% were eligible to petition the court for relief, and 47% were ineligible for any relief at all by virtue of the nature of their conviction or terms of their sentence. But the study also found eligibility was lowest among Black people, with only 15% qualifying for automatic relief, and 29% for petition-based relief. Meanwhile, 21% of White people with convictions qualify for automatic relief, and another 35% are eligible by petition. As in other states, the California legislature has limited the types of convictions that are eligible for record relief, generally excluding those who spent time in state prison for more serious felonies. Because of the state prison limitation, the study shows 30% of Black people in California will never get relief from their records, compared to 15% of White people and 19% of people with convictions overall. In addition, if all ineligible felony convictions are factored in, the ineligibility rate increases to 40% for Black people, 28% for White people and to 32% overall. (Incomplete sentences, pending charges, and variable waiting periods make it hard to calculate eligibility percentages exactly, while missing data creates another set of problems.) The study then considered how several hypothetical changes to current California law would affect racial equity in eligibility for record clearing. First, the authors examined the effect of incorporating convictions currently eligible only by petition into automatic relief. Then the study considered the effects of automatically granting record relief after seven years for convictions now ineligible for any relief. Finally, the study considered the result if both of these changes were enacted. The study found that making relief automatic in cases where it is now “discretionary” (i.e., petition-based) would increase eligibility from 15% to 44% of Black Californians and from 21% to 56% of White Californians—but this would double the racial disparity for automatic relief from 6% to 12%. Enacting a seven-year “sunset” rule (making relief automatic seven years after completion of sentence) for those currently excluded from any record-clearing relief would would reduce disparity slightly by increasing overall eligibility to 58% of Black Californians and 63% of White Californians. If both of these potential reforms were enacted, eligibility for automatic relief would increase to 64% of Black Californians and 70% of White Californians. While some racial disparity remains, it would be no greater than the differential under existing law — and, more significant, the absolute number of people who qualified for automatic record relief would greatly increase. The study’s authors suggest that other states that have automated some record relief likely have similar racially disparate outcomes because felony convictions are largely excluded from eligibility. The study also points out that California also has a particular challenge in effectuating its new provisions for automatic record clearing, since many county agencies do not report the outcomes of criminal cases to the California Department of Justice. Because the DOJ administers automatic record relief by sending lists of eligible cases to courts, people with convictions in counties that do not report disposition data will be left without the relief for which they are legally eligible. Since the initial publication of the study, the California legislature has passed a bill, SB 731, that would incorporate several of the authors’ proposed reforms, which Governor Newsom is expected to sign into law. Another enrolled bill, SB 1106, will make additional cases eligible by removing at least some outstanding court debt as a bar to relief. CCRC will publish a comprehensive review of that legislation when it becomes law. The study’s authors plan to revise their eligibility estimates this fall, based on the new legislation. Read more