Updated regulations would remove barriers to capital for entrepreneurs with certain types of justice involvement
Today, the U.S. Small Business Administration (SBA) invited public comment on a proposed rule that would help expand access to SBA loan programs for people with certain criminal history records. These proposed reforms would open up entrepreneurship opportunities to the one in three American adults with a prior criminal history record and build upon President Biden’s comprehensive Safer America Plan to prevent and combat gun violence and crime by addressing their root causes through expanding access to employment, education, health care, housing, and other supportive services that strengthen public safety and advance equity. As the SBA expands access to capital to more qualified entrepreneurs, it continues to implement additional reforms to mitigate the risk of fraud in its traditional capital programs to ensure funds get to the businesses they were intended to serve, including front-end detection protocols conducted by SBA. These safeguards further strengthen the existing ones set and implemented by lenders allowing for expansion of capital with speed and certainty.
Current SBA regulations contain barriers for loan applicants with certain criminal history records, with some applicants barred entirely from SBA programs. If finalized, the proposed rule would expand access to capital for entrepreneurs with prior justice involvement by expanding eligibility and removing barriers to SBA’s loan and surety bond programs. The proposed rule would also eliminate the current practice on SBA application forms of asking all applicants about their involvement with the criminal justice system. This is because there is no evidence that people with prior criminal justice system history are at a greater risk of default. In fact, research shows that asking applicants about this history can deter people from applying for SBA loans, even though they would not be categorically barred from obtaining those loans. At the same time, the proposed rule would maintain prohibitions on applicants who are currently incarcerated or are found to have previously defrauded the government based on SBA cross-checks with available databases would remain ineligible for SBA-guaranteed loans.
“America is about possibilities and second chances – and that includes justice-involved individuals who are working hard to rebuild their lives through entrepreneurship,” said Administrator Isabella Casillas Guzman. “SBA’s proposed rule would help returning citizens have better access to capital to start and grow their businesses and ensure our economy and society can benefit from their pursuit of the American dream of business ownership. Doing so is not only the right thing to do to strengthen our economy and communities, but it is also the smart thing to do because research shows that employment helps people thrive during reentry and reduces the risk of recidivism.”
One in three American adults has a criminal record, and people with prior criminal history involvement identify employment as their most urgent need, but most significant obstacle. According to a 2018 study, formerly incarcerated people have a 27% unemployment rate, dramatically higher than the overall United States unemployment rate.[1] In addition, there is substantial evidence of labor force discrimination against formerly incarcerated individuals, both due to concerns about recidivism and gaps in work experience, and a general stigma above and beyond productivity-related factors.[2] Formerly incarcerated people who are employed recidivate at lower rates than those who do not obtain work.[3] Entrepreneurship offers people with prior connections to the criminal justice system – which disproportionately involves historically marginalized and underserved communities – a strong alternative. The proposed updated regulations would clarify requirements across SBA capital programs and expand access to the capital necessary to start a business
The SBA proposed rule change would:
- Standardize eligibility rules across SBA capital programs, including the 7(a) Loan Program, 504 Loan Program, Disaster Loan Program, Microloan Program, and Surety Bond Guarantee Program—which collectively provide over $40 billion in capital annually to small businesses;
- Reduce confusion and subjectivity (e.g., what is considered a “crime of moral turpitude”);
- Rather than rely on self-reporting from the applicant, SBA will eliminate detailed questions on the application and, instead ask a straightforward question on current incarceration status and then verify that status using the applicant’s SSN and a third-party database. SBA will also check against SBA internal data for those connected to pandemic fraud and other resources related fraud against the federal government.
- Continue to allow SBA lenders to follow their own policies on criminal background checks;
- Continue to deem businesses with owners who are currently incarcerated and all those who have previously committed fraud against the government as ineligible for all capital programs.
“I have been proud to work with my colleagues in Congress in a bipartisan manner to reduce barriers for justice-impacted people seeking economic stability and success through entrepreneurship after release,” said Senator Cory Booker (D-NJ). “I’m pleased that the U.S. Small Business Administration has now taken this important step toward helping justice-involved people overcome barriers to accessing capital to grow their small businesses. Expanding access to SBA programs and the critical resources they provide will help these businesses succeed and help people who are working to turning their lives around to pursue the American dream.”
“Reducing barriers to entrepreneurship for justice-impacted individuals and returning citizens has been a long-time priority of mine. As a champion for the inclusion of justice-impacted individuals in COVID-19 small business relief, I applaud the Biden-Harris Administration’s proposed rule for building on these efforts. Justice-impacted entrepreneurs are less likely to recidivate and are more likely to employ other justice-impacted individuals,” said Senator Ben Cardin (D-MD), Chair of the Senate Small Business and Entrepreneurship Committee. “Through access to SBA programs, returning citizens will tap into the vast resources and training that can make a real difference for their small businesses and their community. It’s past time that we provide the resources to actualize the full potential of these entrepreneurs.”
“For the formerly incarcerated, entrepreneurship is a proven tool to bypass discrimination in the job market and provide a path toward a healthy and productive life,” said Congresswoman Nydia M. Velázquez (D-NY), Ranking Member of the House Small Business Committee. “I applaud this proposed rule, which will increase access to SBA programs for the formerly incarcerated and help ensure that more returning citizens have a place in our economy and a genuine second chance.”
“After someone has served their time and paid their debt to society, it’s important that we make sure there are no roadblocks to their personal growth and success. That includes restoring their right to vote, and it certainly includes their ability to be an entrepreneur,” said Congressman Steven Horsford (D-NV). “I applaud the SBA’s movement to make sure that previous mistakes won’t restrict the ability for someone to get a small business loan or other assistance provided by the agency.”
As the SBA continues to expand access to capital to American entrepreneurs, it is doing more than ever to protect against fraud in its traditional capital programs. On August 1, 2023, SBA began, for the first time outside of COVID programs, pre-screening all business loan applications for fraud. Previously this check was left to self-reporting from the borrower and a lender review. SBA’s fraud check uses best-in-class third-party databases to independently verify information provided by the borrower and lender. When a mismatch is identified, it must be cleared before the loan will be approved. This substantial investment in fraud prevention would be unaffected by the proposed rule. Furthermore, banks and credit unions that issue the loans would retain the ability to conduct their own inquiries about an applicant’s criminal history and make their own lending decision, which will vary by lender as it currently does. The SBA programs at issue are traditional loans that must be repaid.
Starting a business advances economic opportunity and promotes financial stability, not just for people with criminal history involvement, but also for their families and communities. It also strengthens our economy and public safety. The Biden-Harris Administration has made second chance opportunities a high priority to reduce recidivism and allow individuals to become productive members of society.
The Biden-Harris Administration has implemented a whole-of-government effort to expand opportunities for returning citizens and strengthen communities and the economy. At the height of the pandemic, the Administration adopted a bipartisan reform that eliminated a business’ ineligibility for a Paycheck Protection Program loan if it was at least 20 percent owned by an individual who had a felony within the previous year. Additionally, the SBA removed barriers to eligibility based on irrelevant criminal history records for its 7(a), Microloan, and 504 loan programs and eliminated criminal record restrictions to access its Community Advantage loans, a critical program that provides loans to low-income borrowers and those from underserved communities.