Proposed Rule2023-19183
Criminal Justice Reviews for the SBA Business Loan Programs and Surety Bond Guaranty Program
Primary source
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Published
September 15, 2023
Issuing agencies
Small Business Administration
Abstract
The U.S. Small Business Administration (SBA or Agency) is proposing to amend regulations governing SBA's business loan programs (7(a) Loan Program, 504 Loan Program, Microloan Program, Intermediary Lending Pilot Program (ILP), Surety Bond Guarantee Program (SBG), and the Disaster Loan Program (except for the COVID Economic Injury Disaster Loan (EIDL) Disaster Loan Program) for criminal background reviews. The amendments are designed to improve equitable access based on criminal background review of applicants seeking to participate in one or more of these programs.
Full Text
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[Federal Register Volume 88, Number 178 (Friday, September 15, 2023)]
[Proposed Rules]
[Pages 63534-63539]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2023-19183]
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Proposed Rules
Federal Register
________________________________________________________________________
This section of the FEDERAL REGISTER contains notices to the public of
the proposed issuance of rules and regulations. The purpose of these
notices is to give interested persons an opportunity to participate in
the rule making prior to the adoption of the final rules.
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Federal Register / Vol. 88, No. 178 / Friday, September 15, 2023 /
Proposed Rules
[[Page 63534]]
SMALL BUSINESS ADMINISTRATION
13 CFR Parts 109, 115, 120, and 123
RIN 3245-AI03
Criminal Justice Reviews for the SBA Business Loan Programs and
Surety Bond Guaranty Program
AGENCY: U.S. Small Business Administration.
ACTION: Proposed rule.
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SUMMARY: The U.S. Small Business Administration (SBA or Agency) is
proposing to amend regulations governing SBA's business loan programs
(7(a) Loan Program, 504 Loan Program, Microloan Program, Intermediary
Lending Pilot Program (ILP), Surety Bond Guarantee Program (SBG), and
the Disaster Loan Program (except for the COVID Economic Injury
Disaster Loan (EIDL) Disaster Loan Program) for criminal background
reviews. The amendments are designed to improve equitable access based
on criminal background review of applicants seeking to participate in
one or more of these programs.
DATES: SBA must receive comments on this proposed rule on or before
November 14, 2023.
ADDRESSES: You may submit comments, identified by RIN 3245-AI03,
through the Federal eRulemaking Portal: <a href="https://www.regulations.gov">https://www.regulations.gov</a>.
Follow the instructions for submitting comments.
SBA will post all comments on <a href="https://www.regulations.gov">https://www.regulations.gov</a>. If you
wish to submit confidential business information (CBI) as defined in
the User Notice at <a href="https://www.regulations.gov">https://www.regulations.gov</a>, please submit the
information via email to <a href="/cdn-cgi/l/email-protection#17537e7679797639447276757865795764757639707861"><span class="__cf_email__" data-cfemail="5a1e333b34343b74093f3b383528341a29383b743d352c">[email protected]</span></a>. Highlight the
information that you consider to be CBI and explain why you believe SBA
should hold this information as confidential. SBA will review the
information and make the final determination whether it will publish
the information.
FOR FURTHER INFORMATION CONTACT: Dianna Seaborn, Director, Office of
Financial Assistance, Office of Capital Access, Small Business
Administration, at (202) 205-3645 or <a href="/cdn-cgi/l/email-protection#44002d252a2a256a172125262b362a043726256a232b32"><span class="__cf_email__" data-cfemail="3d79545c53535c136e585c5f524f537d4e5f5c135a524b">[email protected]</span></a>.
SUPPLEMENTARY INFORMATION:
I. Background Information
The mission of SBA is to ``aid, counsel, assist and protect the
interests of small business concerns in order to preserve free
competitive enterprise and to maintain and strengthen the overall
economy of our nation.'' 15 U.S.C. 631(a). SBA accomplishes this
mission, in part, through Capital Access programs that bridge the
financing gap in the private market and help businesses of all sizes to
recover from disasters. Further, 15 U.S.C. 636(a)(1)(B) states that the
Administrator may verify criminal background of the applicant, which
grants SBA the flexibility to determine whether and how to consider
criminal history in the context of issuing loan guarantees. After
conducting a comprehensive study of SBA capital programs' current
policies on individuals with criminal histories, SBA believes the
changes proposed herein specifically honor and incorporate other
statutory mandates of 15 U.S.C. 631 that recognize the importance of
small business development in general as well as the responsibility to
increase opportunities for certain groups that may not historically
have had equitable opportunities for small business ownership.
Supporting these statutory mandates and based on changing conditions in
how state and local governments and the private sector have broadened
access to business capital and employment opportunities coupled with
data and empirical research demonstrating the public safety and
economic benefits of doing so. Federal laws have also evolved regarding
recidivism and second chances for formerly incarcerated individuals.
SBA has determined the need to update regulations to reduce barriers to
participation in these programs for equitable support for small
business entrepreneurs with criminal history records. Throughout this
proposed rule, ``currently incarcerated'' means ``a person who is
currently serving a sentence of imprisonment imposed upon an
adjudication of guilt. It does not include a person who is detained but
not convicted, such as people in jails.''
SBA is proposing to update the 7(a), 504, Microloan, ILP, SBG and
Disaster Loan Program regulations requiring criminal background
reviews. Specifically, SBA is revising 13 CFR 109.400(b)(15) on
``Eligible Small Business Concerns''; 13 CFR 115.13(a)(2)(i) on
``Eligibility of Principal''; 13 CFR 120.110(n) on ``What businesses
are ineligible for SBA business loans?''; 13 CFR 120.707(a) on ``What
conditions apply to loans by Intermediaries to Microloan borrowers?'';
13 CFR 123.101(i) on ``When am I not eligible for a home disaster
loan?''; 13 CFR 123.502(c) on ``Under what circumstances is your
business ineligible to be considered for a Military Reservist Economic
Injury Disaster Loan?''; and 13 CFR 123.702(c)(1) and (2) on
``Character requirements''.
SBA proposes to revise 13 CFR 109.400(b)(15) for ILP loans to small
businesses to remove the restrictions on Associates of an Applicant who
are on probation, parole, or who have been indicted but not convicted
of a felony or crime of moral turpitude; SBA proposes to revise 13 CFR
115.13(a)(2)(i) for surety bond applicants to remove restrictions on a
Principal bidding for a contract (as defined in 13 CFR 115.10) who is
under indictment but not convicted, or previously convicted of a felony
or received civil judgment regarding business transactions; 13 CFR
120.110(n) for 7(a) and 504 loans to remove restrictions on businesses
with an Associate who is on probation, on parole, or is under
indictment but not convicted of a felony or any crime involving or
relating to financial misconduct or a false statement; 13 CFR
120.707(a) for Microloans to remove restrictions on businesses with an
Associate who is currently on probation or parole for an offense
involving fraud or dishonesty; 13 CFR 123.101(i) for physical and
economic injury and 123.502(c) for military reservist economic injury
disaster loans to remove restrictions regarding principal owners of
damaged property who are on probation or parole following conviction
for a serious criminal offense. Further, regarding Immediate Disaster
Assistance Program (IDAP) loans in Subpart G of 13 CFR 123.702(c)(1)
and (2), to remove restrictions for businesses with an
[[Page 63535]]
Associate who is presently under indictment but not convicted, on
parole or probation; that has ever been charged with, arrested for,
convicted, placed on pretrial diversion, and/or placed on any form of
probation (including adjudication withheld pending probation) for any
criminal offense other than a minor motor vehicle violation (including
offenses which have been dismissed, discharged, or not prosecuted).
Accordingly, SBA has determined that reducing barriers to these
programs for otherwise qualified applicants where one or more of their
associates has the criminal justice system involvement described above
is necessary to ensure equity and expand economic opportunities. The
ILP Intermediary Program currently considers as ineligible Associates
of an applicant that are incarcerated, on parole or probation, or that
have been indicted but not convicted for a felony or a crime of moral
turpitude. Historically, for the Surety Bond Guarantee Program, SBA
considers an applicant ineligible if any of the principals are under
indictment but not convicted, previously convicted of a felony or have
received civil judgment regarding business transactions. Currently for
the 7(a) and 504 business loan programs, SBA considers an applicant
ineligible if the business has an Associate who is incarcerated, on
probation, on parole, or is under indictment for a felony or any crime
involving or relating to financial misconduct or a false statement, and
for Microloans, in addition to incarcerated, an Associate who is on
probation or parole for an offense involving fraud or dishonesty. For
the Disaster loan program in 13 CFR 123.101(i) and 13 CFR 123.502(c),
currently SBA considers ineligible any principal owners of the damaged
property that are currently incarcerated, or on probation or parole
following conviction for a serious criminal offenses, with additional
specific restrictions for IDAP loans, that include presently under
indictment, on parole or probation; charged with, arrested for,
convicted, placed on pretrial diversion, and/or placed on any form of
probation (including adjudication withheld pending probation) for any
criminal offense other than a minor motor vehicle violation (including
offenses which have been dismissed, discharged, or not prosecuted).
SBA understands the original intent of these restrictions was to
protect the performance of SBA's capital programs against a presumed
higher likelihood of default. Data and research, however, refute what
may have animated SBA's initial rationale. Importantly, SBA reviewed
the relevant research and found no evidence of a negative impact on
repayment for qualified individuals with criminal history records in
any American business loan program. This lack of data demonstrates that
continuing to rely on this restriction for that purpose would
contradict the available evidence and although the restrictions may
have been originally put in place with the goal of protecting program
performance, the lack of data suggests continuing to rely on this
restriction would reflect an outdated, inaccurate structural bias
against individuals with criminal history records. Specifically,
research demonstrates that employment increases success during reentry
and decreases the risk of recidivism, with entrepreneurship providing
an important and distinct avenue for economic stability given
persistent stigma from employers who may decline to hire people with
criminal history records. Notably, SBA found several studies showing
the difficulty of obtaining employment for formerly incarcerated people
(see for example, Investigating Prisoner Reentry: The Impact of
Conviction Status on the Employment Prospects of Young Men; \1\ from
the Department of Justice's National Institute of Justice Grant) and a
positive link between employment and successful reentry, including
avoiding recidivism (see for example, Local Labor Markets and Criminal
Recidivism \2\ in the Journal of Public Economics). Moreover, because
justice-impacted individuals may face barriers in obtaining employment,
entrepreneurship can be an attractive option, and SBA found several
studies showing the potential for entrepreneurship among Americans with
criminal histories (see for example From Prison to Entrepreneurship \3\
in the American Academy of Political and Social Science). Given the
lack of data suggesting program performance issues and the breadth of
research indicating the benefits, SBA is proposing to remove
unnecessary restrictions that limit access to capital for justice-
impacted individuals. Furthermore, by providing an employment
opportunity for formerly incarcerated individuals through
entrepreneurship and/or growing a small business, SBA seeks to
strengthen economic opportunity and growth as well as support public
safety by reducing recidivism.
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\1\ Investigating Prisoner Reentry: The Impact of Conviction
Status on the Employment Prospects of Young Men. Investigating
Prisoner Reentry National Institute of Justice Grant, Final Report.,
October 2009.
\2\ Local Labor Markets and Criminal Recidivism, ScienceDirect,
Journal of Public Economics, Volume 147, March 2017, Pages 16-29.
\3\ From Prison to Entrepreneurship: Can Entrepreneurship be a
Reentry Strategy for Justice-Impacted Individuals? <a href="https://doi.org/10.1177/00027162221115378">https://doi.org/10.1177/00027162221115378</a>, Sage Journals, Volume 701, Issue 1,
September 14, 2022.
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SBA believes that modernizing the character requirements regarding
consideration of the criminal history records of SBA loan applicants
and Associates of business loan applicants is timely and appropriate to
reflect changes in the public and private sector that have reduced
unnecessary barriers to access to capital and successful reentry. Doing
so also promotes equitable consideration for applicants who are
ineligible for federal assistance in SBA's programs due to pending
indictments that have not led to convictions; prior convictions that
have been adjudicated; and terms of incarceration that have been
served. These changes create the opportunity for formerly incarcerated
individuals to participate in SBA's loan and surety bond programs and
engage in entrepreneurial endeavors that research shows statistically
decrease recidivism based on employment and continued engagement within
their communities, thereby strengthening public safety.\4\ These
proposed changes will enable SBA programs to provide capital in the
form of Surety Bonds, 7(a), 504, Microloan, ILP, and Disaster loans to
more qualified small businesses and disaster survivors, which will
strengthen our economy. SBA does not propose to remove or change 13 CFR
120.110(q) regarding ineligibility due to prior default and loss to the
Federal Government. Finally, SBA will continue the pandemic implemented
practices to access certain public data to perform fraud checks prior
to approval of any 7(a), 504 or Disaster loans.
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\4\ Providing Another Chance: Resetting Recidivism Risk in
Criminal Background Checks [verbar] RAND Bushway, Shawn D., Brian G.
Vegetabile, Nidhi Kalra, Lee Remi, and Greg Baumann, Providing
Another Chance: Resetting Recidivism Risk in Criminal Background
Checks. Santa Monica, CA: RAND Corporation, 2022.
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The Agency requests comments on all aspects of the revisions in
this proposed rule and on any related issues affecting the 7(a) Loan,
504 Loan, Microloan, ILP, Surety Bond Guarantee, and Disaster Loan
Programs.
II. Section-by-Section Analysis
Section 109.400(b)(15) Eligible Small Business Concerns
Current section 109.400(b)(15) for the ILP Program states that
ineligible businesses are those with an Associate
[[Page 63536]]
who is currently incarcerated, on probation, on parole, or has been
indicted but not convicted of a felony or crime of moral turpitude. SBA
proposes to revise this regulation to remove those barriers while
maintaining the prohibition against only those businesses with an
Associate who is currently incarcerated at the time of application or
any time thereafter, and between the time of application and
disbursement of loan proceeds. This revision is therefore narrowly
tailored to reduce barriers to access for qualified formerly
incarcerated small business owners who may be eligible to receive a
loan through the ILP Pilot from an existing Intermediary with remaining
funds to lend.
Section 115.13(a)(2)(i) Eligibility of Principal
Current section 115.13(a)(2)(i) for the Surety Bond program states
that ineligible businesses are those with a Principal who is under
indictment but is not convicted, or has been previously convicted of a
felony, or a final civil judgment has been entered stating that such
Person has committed a breach of trust or has violated a law or
regulation protecting the integrity of business transactions or
business relationships. SBA proposes to remove those barriers while
maintaining the prohibition against only those businesses with a
Principal who is currently incarcerated. This revision is therefore
narrowly tailored to reduce barriers to access for qualified justice-
impacted small business owners to compete for Federal and other
contract opportunities by obtaining guarantees for surety bid and final
payment and/or performance bonds.
Section 120.110(n) What businesses are ineligible for SBA business
loans?
Current section 120.110(n) for the 7(a), 504 and Microloan programs
states that ineligible businesses are those with an Associate who is
currently incarcerated, on probation, on parole, or is under indictment
but not convicted for a felony or any crime involving or relating to
financial misconduct or a false statement. SBA proposes to revise this
regulation to remove some of those barriers while maintaining the
prohibition against businesses with an Associate who is currently
incarcerated. This revision is therefore narrowly tailored to reduce
barriers to access for qualified justice-impacted small business
owners. Section 636(a)(1)(B) of the Small Business Act states that SBA
may verify an applicant's criminal history background, but does not
require such verification, nor does it prohibit loans for people
formerly incarcerated. Lenders, CDCs, and Microloan Intermediaries make
risk-based lending decisions. Some lenders include conducting criminal
history background checks and others do not. SBA's proposed revision
does not impact a lender's ability to continue to do so, in accordance
with their own policies, provided they do so in a manner that complies
with the Equal Credit Opportunity Act and other relevant laws.
Section 120.707(a) What conditions apply to loans by Intermediaries to
Microloan borrowers?
SBA proposes to revise section 120.707(a) to remove some of those
barriers while maintaining the prohibition against where there is an
Associate on parole or probation. For public safety reasons, however,
SBA will retain the prohibition against making a loan to a childcare
business, where an Associate is on probation or parole for an offense
against children. This change will closely align with the proposed
requirements for all business loan programs regarding the determination
that an applicant with a Principal or Associate that is currently
incarcerated is ineligible for assistance and support the flexibility
and access to capital for qualified justice-impacted business owners.
Section 123.101(i) When am I not eligible for a home disaster loan?
Current section 123.101(i), for the Disaster loan program states
that SBA considers ineligible any principal owners of the damaged
property that are presently incarcerated, or on probation or parole
following conviction for a serious criminal offense. SBA proposes to
revise section 123.101(i) to state that the applicant is ineligible to
receive a disaster loan only when any principal owner of a home that
sustained damage is currently incarcerated. The eligibility
requirements in 123.101 are cross referenced in 123.201 and 123.301;
therefore, this proposed change will also apply to business property
loans as well as economic injury loans. Notwithstanding SBA's proposed
change, in accordance with the requirements of Public Law 90-488
(August 1, 1968) and as reflected in 123.101(a), SBA will maintain its
existing prohibition against any person who has been convicted of
committing a felony during and in connection with a riot or civil
disorder for a period of one year after the date of their conviction.
This change will align the requirements proposed for all SBA loan
programs regarding persons currently incarcerated applicants currently
serving a term of incarceration and support the flexibility and access
to capital for qualified justice-impacted disaster survivors.
Section 123.502(c) Under what circumstances is your business ineligible
to be considered for a Military Reservist Economic Injury Disaster
Loan?
Current section 123.502(c), for the Disaster loan program states
that SBA considers ineligible any principal owners of the damaged
property that are presently incarcerated, or on probation or parole
following conviction for a serious criminal offense. SBA proposes to
revise section 123.502(c) to state that for Military Reservist Economic
Injury Disaster loans (MREIDL), the applicant is ineligible to receive
a disaster loan only when an Associate of a business that sustained
damage is currently incarcerated. Notwithstanding SBA's proposed
changes for disaster loans, in accordance with the requirements of
Public Law 90-488 (August 1, 1968) and as reflected in 123.502(a), SBA
will continue to consider as ineligible to receive any benefit under
any law of the United States providing relief for disaster victims, any
person who has been convicted of committing a felony during and in
connection with a riot or civil disorder for a period of one year after
the date of their conviction. This change will align the requirements
proposed for all SBA loan programs regarding individuals currently
incarcerated and support the flexibility and access to capital for
qualified justice-impacted small businesses.
Section 123.702(c)(1) and (2) What are the eligibility requirements for
any IDAP Loan?
Current section 123.702(c)(1) and (2), for IDAP loans state that
SBA considers ineligible any applicant business that has an Associate
that who is presently under indictment but not convicted, on parole or
probation; charged with, arrested for, convicted, placed on pretrial
diversion, and/or placed on any form of probation (including
adjudication withheld pending probation) for any criminal offense other
than a minor motor vehicle violation (including offenses which have
been dismissed, discharged, or not prosecuted). SBA proposes to revise
section 123.702(c)(1) and (2) to state that the applicant is ineligible
to receive an IDAP loan only when any principal owner of a home or
business that sustained damage is currently incarcerated.
Notwithstanding SBA's proposed change, in accordance with
[[Page 63537]]
the requirements of Public Law 90-488 (August 1, 1968) and as reflected
in 123.101(a), SBA will continue to consider as ineligible to receive
any benefit under any law of the United States providing relief for
disaster victims, any person who has been convicted of committing a
felony during and in connection with a riot or civil disorder for a
period of one year after the date of their conviction.
In addition to applicants in all programs certifying to having no
owners or Associates that are currently incarcerated, SBA proposes to
access certain external and widely acceptable and reliable databases to
verify eligibility regarding incarceration and criminal history status.
While increasing loan volume, SBA believes that these changes do not
compromise the credit quality and performance of the loan portfolios.
In fact, the Microloan and SBG programs have permitted loans to
businesses with individuals on parole or probation at no negative
impact to overall program performance.
As published in June 2021, The RAND Research Brief \5\ estimated
that over 200,000 small businesses were affected or disqualified from
participating in the Paycheck Protection Program due to SBA's rules
regarding current indictments and incarceration, and prior criminal
convictions and criminal justice system involvement current
incarcerations. Predictably, the survival rate of legitimate small
businesses that did not receive assistance during the pandemic is lower
than those that did receive support. Due to significant barriers to
employment for individuals with criminal history records, self-
employment and entrepreneurship are often vital avenues to successful
reentry and employment. In fact, 28 percent of individuals with
criminal history records are self-employed.\6\ Accordingly, SBA's
general and targeted loan programs must be a resource that provide
options that support economic success and growth for individuals and
communities, from basic self-employment to becoming employers within
communities, and that support successful reentry outcomes, thereby
strengthening public safety. Research is clear that reducing barriers
to employment reduces recidivism and supports successful reentry,
leading to better outcomes for individuals and communities \7\--all of
which underscore the necessity for SBA to revisit and update these
regulations to remove barriers to small-business employment and
business ownership.
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\5\ The Prevalence of Criminal Records Among Small Business
Owners [verbar] RAND How Many Business Owners, Businesses, and
Employees Are Affected by PPP Restrictions?
\6\ <a href="https://onlinelibrary.wiley.com/doi/10.1002/pam.22438">https://onlinelibrary.wiley.com/doi/10.1002/pam.22438</a>
Criminal Justice Involvement, Self-employment, and Barriers in
Recent Public Policy. Journal of Policy Analysis and Management,
42(1),11-4
\7\ Providing Another Chance: Resetting Recidivism Risk in
Criminal Background Checks [verbar] RAND
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Under the proposed rule, for each program, SBA, Lenders, CDCs,
Microloan intermediaries, Sureties, and ILP Intermediaries, will
consider the applicant business ineligible based on any criminal
history record only when there is an Associate that who is currently
incarcerated at the time of application or between the time of
application and disbursement of loan proceeds or bond execution.
SBA's proposed rule also streamlines SBA's lending criteria by
reducing the number of factors that are required to be applied in
determining eligibility based on criminal history records of small
business owners. Lenders, CDCs, and Microloan Intermediaries make risk-
based lending decisions. Some lenders include conducting criminal
history background checks and others do not. SBA's proposed revision
does not impact a lender's ability to continue to do so, in accordance
with their own policies, provided that they do so in a manner that
complies with the Equal Credit Opportunity Act and other relevant laws.
Compliance With Executive Orders 12866, 12988, 13132, and 13563, the
Paperwork Reduction Act (44 U.S.C., Ch. 35), and the Regulatory
Flexibility Act (5 U.S.C. 601-612)
Executive Order 12866
The Office of Management and Budget has determined that this rule
is a ``significant regulatory action'' under Executive Order 12866, as
amended by Executive Order 14094. SBA has drafted a Regulatory Impact
Analysis for the public's information in the next section. Each section
begins with a core question.
A. Regulatory Objective of the Proposal
Is there a need for this regulatory action?
In accordance with statutory mandates of 15 U.S.C. 631 above, the
Agency believes it needs to reduce regulatory restrictions for
applicants with Associates or Principals based on criminal histories
for the SBA Disaster, 7(a), 504, Microloan, ILP and SBG programs by
reducing the requirement for criminal history records consideration to
only applicants with a Principal or Associate currently incarcerated in
the manner proposed above or employment as an Associate at a small
business. Many formerly incarcerated persons experience significant
barriers in accessing employment and capital and credit often necessary
to start a business. SBA's proposed revisions will remove barriers to
access capital for qualified applicants and employment. SBA will reduce
the administrative burden on applicants as well as the need for
fingerprints by providing a single succinct directive that SBA
determines any applicant with a Principal or Associate that is
currently incarcerated to be ineligible with no further requirements
for disclosure of prior criminal records.
B. Benefits and Costs of the Rule
What are the potential benefits and costs of this regulatory
action?
SBA does not anticipate significant additional costs or impact on
the subsidy to operate the 7(a), 504, Microloan, ILP, SBG and Disaster
Loan Programs under these proposed regulations because all loans
submitted must always meet Loan Program Requirements. For the SBG
program, this change will benefit small contractors with Principals on
parole, probation or convicted of crimes who will now be able to apply
for small contracting opportunities.
SBA does not receive information from lenders on how many
applicants they decline for 7(a), 504, and Microloans. SBA has received
substantial feedback and research from stakeholders that its current
rules have presented broad barriers to otherwise qualified individuals
with criminal history records that seek financing to start, run, or
expand small businesses. This aligns with the statutory mandates in 15
U.S.C. 631 and supports the inference that reducing or removing
barriers will result in additional applications from those businesses
with justice-impacted owners who may have been deterred from applying
due to the current prohibitions related to criminal history records. In
the 7(a) and 504 programs, for formerly incarcerated individuals and
people not on parole or probation, out of more than 50,000 thousand
loans made annually, SBA lenders have submitted to SBA for review
approximately 586 Character determination requests containing
information on criminal history records involving felonies. SBA
declines on average only 17-23 of the requests per year due to the
nature of the offense or incomplete judicial records. SBA's Disaster
Loan Program has declined 93 individuals for criminal history record
[[Page 63538]]
background checks between 2018 and 2022, with an additional 1,026 files
withdrawn by applicants prior to review during the same period.
Microloan Intermediaries do not submit loans to SBA for approval, so
SBA does not have data for criminal history records of Microloan
applicants. Accordingly, SBA's proposed changes would result in the
same nominal concerns. Finally, Lenders, CDCs, and Microloan
Intermediaries make risk-based lending decisions. Some lenders include
conducting criminal history background checks and others do not. SBA's
proposed revision does not impact a lender's ability to continue to do
so, in accordance with their own policies, provided that they do so in
a manner that complies with the Equal Credit Opportunity Act and other
relevant laws.
C. Alternatives
What alternatives have been considered?
SBA considered the impact of maintaining the current rules that
deem as ineligible businesses with Principals or Associates currently
incarcerated, on parole or probation or convicted of certain financial
and other crimes. This would result in continuing barriers for small
businesses owned by individuals with criminal history records. Instead,
SBA's proposal to remove all except currently incarcerated Principals
or Associates as ineligible mitigates the risk to SBA of making
guarantees and loans to businesses whose Principals or Associates lack
the ability to manage and execute day-to-day business operations. And
for disaster survivors, SBA's proposed changes will increase equal
access and support for recovery.
Executive Order 12988
This action meets applicable standards set forth in sections 3(a)
and 3(b)(2) of Executive Order 12988, Civil Justice Reform, to minimize
litigation, eliminate ambiguity, and reduce burden. The action does not
have preemptive effect or retroactive effect.
Executive Order 13132
This rule does not have federalism implications as defined in
Executive Order 13132. It will not have substantial direct effects on
the States, on the relationship between the national government and the
States, or on the distribution of power and responsibilities among the
various levels of government, as specified in the Executive Order. As
such it does not warrant the preparation of a Federalism Assessment.
Executive Order 13563
A description of the need for this regulatory action and benefits
and costs associated with this action, including possible
distributional impacts that relate to Executive Order 13563, are
included above in the Regulatory Impact Analysis under Executive Order
12866.
Paperwork Reduction Act, 44 U.S.C. Ch. 35
SBA has determined that this proposed rule would require that the
following forms be revised: SBA Form 1919, ``Borrower Information
Form,'' SBA Form 1920, ``Lender's Application for Loan Guaranty for all
7(a) Loan Programs,'' SBA Form 1244, ``Application for Section 504
Loans,'' SBA Form 5--Disaster Business Loan Application, and SBA Form
5C--Disaster Home/Sole Proprietor Loan Application and SBA Form, SBA
Form 994 ``Application for Surety Bond Guarantee Assistance''.
SBA Forms 1919 and 1920 are approved under OMB Control number 3245-
0348. SBA Form 1244 is approved under OMB Control number 3245-0071. SBA
Form 5 is approved under OMB Control number 3245-0017 and SBA Form 5C
is approved under OMB Control number 3245-0018. SBA Form 994 is
approved under OMB Control number 3245-0007.
SBA will revise SBA Form 1919, SBA Form 1920, and SBA Form 1244 to
conform to the eligibility change at 13 CFR 120.110(n). When small
businesses apply for 7(a) or 504 loans, the estimated hour burden for
applicants and lenders will decrease because the criminal history
analysis and collection of data will no longer be required. SBA will
revise SBA Form 5 and 5C to conform to the eligibility change at 13 CFR
123.101(i). When disaster survivors apply for disaster loans, the
estimated hour burden for applicants will decrease because the criminal
history record analysis and collection of data will be reduced.
SBA will revise SBA Form 994 to conform to the eligibility change
at 13 CFR 115.13(a)(2)(i). When small businesses apply for surety bond
guarantees, the estimated hour burden for applicants will decrease
because the criminal history record analysis and collection of data
will no longer be required.
Regulatory Flexibility Act, 5 U.S.C. 601-612
When an agency issues a rulemaking proposal, the Regulatory
Flexibility Act (RFA), 5 U.S.C. 601-612, requires the agency to
``prepare and make available for public comment an initial regulatory
analysis'' which will ``describe the impact of the proposed rule on
small entities.'' Although the rulemaking may potentially impact a
small percentage of loans reviewed by 7(a) Lenders, CDCs, Microloan
Intermediaries, ILP Intermediaries, the 44 Sureties that participate in
the SBG Program, and SBA regarding the disaster loans, SBA does not
believe the impact will be significant because this proposal reduces
regulations and procedures. However, there may be impacts due to
increased loans for businesses with Principals or Associates that have
a criminal history record but are not currently incarcerated.
SBA reviews approximately 586 Character determination requests
annually and declines 3-4 percent, or 17-23 requests, due to the nature
of the offense or incomplete judicial records. The proposed revisions
to Sec. 120.110(n) will eliminate the need for 100 percent of these
character determination reviews. SBA Form 1919, ``SBA 7a Borrower
Information Form,'' is the application form for the 7(a) Loan Program.
SBA Form 1244, ``Application for Section 504 Loans,'' is the
application form for the 504 Loan Program. Each application includes 3
questions that Associates of the applicant must answer regarding their
criminal history records. Under the proposed revisions, SBA will
eliminate the three current questions and replace them with one new
question regarding incarceration. SBA estimates that all applicants for
the 7(a) Loan Program and 504 Loan Program will save 5 minutes
completing the applications due to these revisions. Intermediaries for
the Microloan Program use their own applications for Microloan
borrowers, but it is reasonable to assume similar time savings. The
7(a) Loan Program, 504 Loan Program, and Microloan Program make
approximately 68,677 loans per year. Saving 5 minutes for each
application will result in total time savings of 5,723 hours annually.
List of Subjects
13 CFR Part 109
Community development, Loan programs--business, Reporting and
recordkeeping requirements, Small businesses.
13 CFR Part 115
Claims, Reporting and recordkeeping requirements, Small businesses,
Surety bonds.
[[Page 63539]]
13 CFR Part 120
Community development, Loan programs--business, Reporting and
recordkeeping requirements, Small businesses.
13 CFR Part 123
Disaster assistance, Loan programs--business, Reporting and
recordkeeping requirements, Small businesses.
For the reasons stated in the preamble, SBA proposes to amend 13
CFR parts 109, 115, 120 and 123 as follows:
PART 109--INTERMEDIARY LENDING PILOT PROGRAM
0
1. The authority citation for 13 CFR part 115 continues to read as
follows:
Authority: 15 U.S.C. 634(b)(6), (b)(7), and 636(l).
0
2. Amend Sec. 109.400 by revising paragraph (b)(15) to read as
follows:
Sec. 109.400 Eligible Small Business Concerns
* * * * *
(b) * * *
(15) Businesses with an Associate who is currently incarcerated,
serving a sentence of imprisonment imposed upon adjudication of guilty;
* * * * *
PART 115--SURETY BOND GUARANTEES
0
3. The authority citation for 13 CFR part 115 continues to read as
follows:
Authority: 5 U.S.C. app.3: 15 U.S.C. 636i, 687b, 687c, 694a, and
694b, note.
0
4. Amend Sec. 115.13 by revising paragraph (a)(2)(i) to read as
follows:
Sec. 115.13 Eligibility of Principal.
* * * * *
(a) * * *
(2) * * *
(i) The Person is currently incarcerated, serving a sentence of
imprisonment imposed upon adjudication of guilty; or
* * * * *
PART 120--BUSINESS LOANS
0
5. The authority citation for 13 CFR part 120 continues to read as
follows:
Authority: 15 U.S.C. 634(b)(6), (b)(7), (b)(14), (h), and note,
636(a), (h) and (m), and note, 636m, 650, 657t, and note, 657u, and
note, 687(f), 696(3), and (7), and note, and 697, 697a and e, and
note; Pub. L. 116-260, 134 Stat. 1182.
0
6. Amend Sec. 120.110 by revising paragraph (n) to read as follows:
Sec. 120.110 What businesses are ineligible for SBA business loans?
* * * * *
(n) Businesses with an Associate who is currently incarcerated,
serving a sentence of imprisonment imposed upon adjudication of guilty;
or
* * * * *
0
7. Amend Sec. 120.707 by revising paragraph (a) to read as follows:
Sec. 120.707 What conditions apply to loans by Intermediaries to
Microloan borrowers?
(a) Except as otherwise provided in this paragraph, an Intermediary
may only make Microloans to small businesses eligible to receive
financial assistance under this part. A borrower may also use Microloan
proceeds to establish a nonprofit childcare business. An Intermediary
may not make Microloans to businesses with an Associate who is
currently incarcerated, serving a sentence of imprisonment imposed upon
adjudication of guilty, or to childcare businesses with an Associate
who is currently on probation or parole for an offense against
children. Proceeds from Microloans may be used only for working capital
and acquisition of materials, supplies, furniture, fixtures, and
equipment. SBA does not review Microloans for creditworthiness.
* * * * *
PART 123--DISASTER LOAN PROGRAM
0
8. The authority citation for 13 CFR part 123 continues to read as
follows:
Authority: 15 U.S.C. 632, 634(b)(6), 636(b), 636(d), 657n, and
9009.
0
9. Amend Sec. 123.101 by revising paragraph (i) to read as follows:
Sec. 123.101 When am I not eligible for a home disaster loan?
* * * * *
(i) You or other principal owners of the damaged property are
currently incarcerated, serving a sentence of imprisonment imposed upon
adjudication of guilty;
* * * * *
0
10. Amend Sec. 123.502 by revising paragraph (c) to read as follows:
Sec. 123.502 Under what circumstances is your business ineligible to
be considered for a Military Reservist Economic Injury Disaster Loan?
* * * * *
(c) Any of your business' principal owners is currently
incarcerated, serving a sentence of imprisonment imposed upon
adjudication of guilty;
* * * * *
0
11. Amend 123.702 by:
0
a. Revising paragraph (c)(1);
0
b. Removing paragraph (c)(2); and
0
c. Redesignating paragraphs (c)(3) through (5) as paragraphs (c)(2)
through (4).
The revision read as follows:
Sec. 123.702 What are the eligibility requirements for an IDAP loan?
* * * * *
(c) * * *
(1) is currently incarcerated, serving a sentence of imprisonment
imposed upon adjudication of guilty;
* * * * *
Isabella Casillas Guzman,
Administrator.
[FR Doc. 2023-19183 Filed 9-14-23; 8:45 am]
BILLING CODE 8026-03-P
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</html>Indexed from Federal Register on September 15, 2023.
This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.