Category: Government Benefits

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.

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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.    

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When banks ask loan applicants about their arrest record

The National Community Reinvestment Coalition reports that its evaluation of small business loan applications from a sample of seven banks in Washington, DC revealed that “some lenders discriminate against applicants who have been charged at any time in their lives with a criminal offense.”  A comment on the NCRC website proposes that these banks consider applicants to be “a lending risk for having been ‘ever charged’ with any crime, other than a minor vehicle violation, no matter when it occurred.”  It goes on to argue that “[t]his practice is not only factually suspect, it is discriminatory.”  The comment, written by Anneliese Lederer, the NCRC’s Director of Fair Lending, was subsequently republished in The American Banker. 

The NCRC findings demonstrate that even interactions with the criminal justice system that do not result in a conviction record can have “lasting implications:”

It is known that having a criminal record is a barrier to both housing and employment. There are few protections for people with a criminal record.

But what about for people who have been charged and found not guilty, or their charges were dropped? What barriers do they face? Unfortunately, they face similar barriers as people who have a criminal record, especially in the small business lending arena.

Citing CCRC’s analyses of lending policies of the Small Business Administration, the NCRC comment highlights how these policies have given banks cover for their discriminatory practices:

Small business loans administered by the Small Business Administration (SBA) have broad criminal history restrictions. Analysis conducted by the Collateral Consequences Resource Center (CCRC) found that no statute requires criminal history to be used as a factor in determining creditworthiness. Instead, the Small Business Act uses the words “may verify the applicant’s criminal background.” Furthermore, many restrictions that the US Small Business Administration (SBA) implements on interactions with the justice system are not codified. These restrictions are “either unannounced or only disclosed through FAQs published on the agency’s website…..[or] through policy statements and application forms.”

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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.

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CCRC’s First Newsletter

Dear Subscribers,

We write with an update on our continued work to promote public discussion of restoration of rights and opportunities for people with a record. Highlights from this year’s work are summarized below, including roundups of new legislation, case studies on barriers to expungement, policy recommendations, and a new “fair chance lending” project to reduce criminal history barriers to government-supported loans to small businesses. We thank you for your interest and invite your comments as our work progresses. Read more