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Don’t Deny Pandemic Relief Loans to Second-Chance Entrepreneurs

A new regulation threatens to exclude people with criminal records—and their employees—from the recovery.
April 21, 2020
Featured Image
A barber shop sits closed during the coronavirus (COVID-19) outbreak on March 20, 2020 in New York City. Today New York announced new measures to control the epidemic, including the closure of all hair salons, barber shops, nail salons, and tattoo parlors. The economic situation in the city continued to decline as more businesses closed their doors and New York weighed a shelter in place order for the entire city. (Photo by Victor J. Blue/Getty Images)

The coronavirus relief package enacted late last month authorized substantial forgivable loans to small businesses nationwide—and, as of last Thursday, the money is already spent. It will be up to Congress to add more funds to this important program.

But a flawed regulation may keep some people from deserved pandemic recovery funds. The Small Business Administration (SBA), which runs the program, has stated that businesses owned by people with criminal records will not be eligible for the loans—an exclusion that appears nowhere in the law Congress passed. The consequences are far-reaching, and at odds with the Trump administration’s rhetoric on criminal justice reform. The White House can and should intervene to overturn this rule and ensure that people with criminal records are not bureaucratically barred from the recovery.

The coronavirus pandemic is destabilizing even to large, established firms. For small businesses, it is devastating: many face closure, throwing employees and owners into financial despair. To avert disaster, on March 27 Congress passed and the president signed passed the CARES Act, a key component of which is the $350 billion Paycheck Protection Program (PPP), an effort to provide support to small businesses. Firms can receive loans equal to as much as 2.5 times their monthly payroll; the loans will be forgiven if the recipient firms keep their employees on staff at their pre-crisis salaries. The goal of the program is to move beyond traditional unemployment insurance—to keep businesses intact, to make sure there are workplaces to return to once the public-health crisis is brought under control, and to avoid wiping out the savings of large numbers of entrepreneurs. Given the rapid deterioration of the labor market and the economy, time is of the essence.

Unfortunately, the SBA, which is tasked with implementing the program, is actively limiting its reach. The SBA has issued rules and guidance that specifically exclude many business owners who have interacted with the criminal justice system. According to the PPP borrower application form, any business even partially owned by someone who is currently subject to prosecution—or on probation or parole—is ineligible. Also excluded are any owners who, within the past five years, have been convicted or been placed on probation or parole for any felony.

The scale of America’s criminal justice system means these rules will affect the lives of many. At any given moment, there are millions of people on probation or parole in the United States—at the end of 2016, there were more than 4.5 million. Any business with an owner, even a part owner, among those millions will not receive a PPP loan. And the number of people with a felony conviction may be three times that size. Nor will people with a criminal record be the only ones harmed by this decision: their family members will be affected, as will their employees, if businesses are forced to close down or furlough staff. These effects will be felt most sharply among black and Latino people, who are over-represented in the criminal justice system and face an especially hostile job market after conviction.

SBA’s decision to exclude people with a criminal history is misguided for two other reasons. First, it’s entirely a creation of the administrative state. The CARES Act’s criteria for evaluating borrowers are extremely broad, exactly what one would hope to see in an emergency, and make no mention of criminal history. Criminal history exclusions first crept into an interim SBA regulation released earlier this month, where they were already stricter than SBA’s normal disaster lending criteria, and then became even stricter still in the final document.

These exclusions also cut sharply against the bipartisan consensus on criminal justice reform—and the Trump administration’s own priorities. President Trump signed the First Step Act, a major criminal justice reform initiative. And, following states and cities across the country, Trump signed a federal “ban-the-box” bill designed to help people with criminal records find jobs. Major employers have made their own efforts. And last year, President Trump pledged to cut the unemployment rate among formerly imprisoned people to “single digits within five years.”

All of this makes SBA’s decision deeply misguided. Thankfully, it’s also easy to reverse. Because the CARES Act does not require SBA to deny loans to entrepreneurs with criminal histories, SBA can and should change its rules, without delay and without the need for congressional action. SBA should also ensure that people who have already been turned away have their applications reconsidered, and the agency should publicize the changes broadly. If SBA does not reverse course, Congress should step in when it appropriates more funds for the program.

The survival of small businesses is the key to a real and equitable recovery. People who used their “second chances” in life to start businesses and contribute to their communities must not be excluded from it.

Stan Veuger and Ames C. Grawert

Stan Veuger is resident scholar at the American Enterprise Institute (Twitter: @stanveuger) and Ames C. Grawert is senior counsel and John L. Neu Justice Counsel in the Brennan Center’s Justice Program (Twitter: @AmesCG).