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Rule2024-09009

Criminal Justice Reviews for the SBA Business Loan Programs, Disaster Loan Programs, and Surety Bond Guaranty Program

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Published

April 30, 2024

Effective

May 30, 2024

Issuing agencies

Small Business Administration

Abstract

On September 15, 2023 the U.S. Small Business Administration (SBA or Agency) published a notice of proposed rulemaking ("NPRM" or "proposed rule") 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, and the Disaster Loan Program (except for the COVID-19 Economic Injury Disaster Loan (EIDL) Program) for criminal background reviews. The proposed rule introduced amendments to improve equitable access based on criminal background review of applicants seeking to participate in one or more of these programs. This final rule implements proposed regulatory changes and addresses comments SBA received.

Full Text

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<title>Federal Register, Volume 89 Issue 84 (Tuesday, April 30, 2024)</title>
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[Federal Register Volume 89, Number 84 (Tuesday, April 30, 2024)]
[Rules and Regulations]
[Pages 34094-34102]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2024-09009]

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SMALL BUSINESS ADMINISTRATION

13 CFR Parts 109, 115, 120, and 123

RIN 3245-AI03

Criminal Justice Reviews for the SBA Business Loan Programs,
Disaster Loan Programs, and Surety Bond Guaranty Program

AGENCY: U.S. Small Business Administration.

ACTION: Final rule.

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SUMMARY: On September 15, 2023 the U.S. Small Business Administration
(SBA or Agency) published a notice of proposed rulemaking (``NPRM'' or
``proposed rule'') 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, and the Disaster Loan Program (except for the COVID-19
Economic Injury Disaster Loan (EIDL) Program) for criminal background
reviews. The proposed rule introduced amendments to improve equitable
access based on criminal background review of applicants seeking to
participate in one or more of these programs. This final rule
implements proposed regulatory changes and addresses comments SBA
received.

DATES: This final rule is effective May 30, 2024.

FOR FURTHER INFORMATION CONTACT: Alejandro C. Contreras, Acting
Director, Office of Financial Assistance, Small Business
Administration, at (202) 205-6436 or <a href="/cdn-cgi/l/email-protection#b6d7dad3dcd7d8d2c4d998d5d9d8c2c4d3c4d7c5f6c5d4d798d1d9c0"><span class="__cf_email__" data-cfemail="82e3eee7e8e3ece6f0edace1edecf6f0e7f0e3f1c2f1e0e3ace5edf4">[email&#160;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 to ``preserve free competitive
enterprise'' and ``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 the 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, so
long as the loans are of sound value. Congress provided SBA with
authority to promulgate rules to carry out these provisions. See 15
U.S.C. 634(b)(6).
SBA has comprehensively reviewed its capital programs' current
policies on individuals with criminal history records to ensure that
the policies promote SBA's statutory mandates 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. See 15 U.S.C. 631(a), 636(a)(1)(B), 636(b)(1)(A), 636(l),
636(m), 694(b), and 695. It is SBA's position that this final rule
supports these Federal statutory mandates. The final rule also supports
and reflects changing conditions in how State and local governments and
the private sector have broadened access to business capital for
qualified people with certain criminal history records and Federal laws
and policies, including bipartisan legislation, such as the Second
Chance Act of 2008 and the First Step Act of 2018, that have reduced
barriers to successful reentry in order to reduce the risk of future
criminal justice system involvement. This final rule helps facilitate
employment opportunities for individuals with criminal history records
and is supported by data and empirical research demonstrating the
public safety and economic benefits of doing so.
Based on its review of SBA capital programs' current policies on
individuals with criminal history records, SBA recognizes the need to
update regulations to reduce barriers to participation in these
programs for equitable support for qualified small

[[Page 34095]]

business owners with certain criminal history records and issued a
proposed rule for public comment. 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, including front-end detection protocols conducted by SBA.
These safeguards are in addition to ones set and implemented by lenders
and local, State, and Federal laws. Currently, the ILP Intermediary
Program considers as ineligible businesses with an Associate (as
defined by 13 CFR 109.20) that is incarcerated, on parole or probation,
or that has been indicted but not convicted for a felony or a crime of
moral turpitude; for the Surety Bond Guaranty Program, SBA considers an
applicant ineligible if any of the Principals (as defined by 13 CFR
115.10) are under indictment but not convicted, previously convicted of
a felony or have received civil judgment regarding business
transactions; 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 an Associate who is
incarcerated, an Associate who is on probation or parole for an offense
involving fraud or dishonesty; and for the Disaster Loan Program in 13
CFR 123.101(i) (adopted by reference in 13 CFR 123.201 and 123.301) and
123.502(c), 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 offense, with
additional specific restrictions for Immediate Disaster Assistance
Program (IDAP) loans, that include presently being 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).
Although 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 refute the concerns that 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 regulatory barrier
against individuals with criminal history records. Specifically,
research demonstrates that employment increases success during reentry,
decreases the risk of recidivism, and strengthens both public safety
and economic opportunity. Research also demonstrates that
entrepreneurship provides 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 preventing recidivism (see for example, Local Labor Markets
and Criminal Recidivism \2\ in the Journal of Public Economics).
Moreover, because individuals with criminal history records may face
barriers in obtaining employment, entrepreneurship can be a productive
option, and SBA found several studies showing the potential for
entrepreneurship among individuals with criminal records (see for
example From Prison to Entrepreneurship \3\ in the American Academy of
Political and Social Science).
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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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After conducting its review of SBA capital programs' current
policies on people with certain criminal history records, SBA posted a
proposed rule for public comment. Given the lack of data suggesting
program performance issues and the breadth of research indicating the
benefits, SBA is removing unnecessary restrictions that limit access to
capital for qualified people with certain criminal history records.
Furthermore, the proposed rule sought to provide employment
opportunities for qualified people with certain criminal history
records because expanding access to entrepreneurship strengthens
individual and community economic opportunity and growth while also
strengthening public safety by facilitating successful reentry and
thereby reducing the risk of future criminal justice system
involvement.
The Agency received 19 comments on all aspects of the revisions in
the proposed rule and on any related issues affecting the 7(a) Loan,
504 Loan, Microloan, ILP, Surety Bond Guarantee Program, and Disaster
Loan Programs. (88 FR 63534) There were 17 comments received from
separate individuals or entities as follows: three Community
Development Companies (CDCs), one trade association, one government
entity, seven advocacy non-profit groups, six individuals, and the
Federal Register posting itself which tallies as a comment. There was
one invalid comment received which was not posted to <a href="http://regulations.gov">regulations.gov</a>.
The comments received are tallied by each proposal in the section-by-
section analysis below. SBA has reviewed and considered those comments
and is now issuing a final rule to implement those changes. Throughout
this final rule, ``currently incarcerated'' means ``a person who is
currently serving a sentence of imprisonment imposed upon an
adjudication of guilt.''
Pursuant to its statutory authority to promulgate rules to carry
out its mandate, and after considering public comments, SBA is revising
several regulatory provisions. See 15 U.S.C. 634(b)(6). SBA is updating
the 7(a), 504, Microloan, ILP, Surety Bond Guarantee Program, 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.''

[[Page 34096]]

SBA is revising 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 or parole; 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 has been 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 or on parole; 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; and 13 CFR 123.101(i) for physical and
economic injury and 13 CFR 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 IDAP loans, in 13 CFR 123.702(c)(1) and (2), SBA
will remove restrictions for businesses with an Associate who is
presently 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).
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. These
changes will further the goals of SBA's statutory mandates. 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 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 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 did not 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 practices it recently
implemented 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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II. Comments That Apply to Every Section

SBA received comments requesting modifications for each section of
the proposed rule. As the same modifications were repeated for each
section, they are addressed in this overview rather than in the
section-by-section analysis. Each of the requested modifications or
requests and the reason for accepting or not accepting the modification
or request is provided below:
(1) SBA should consider retaining the ability to conduct criminal
background checks of program applicants and allow additional time to
review the information contained therein for the expanded categories of
individuals. SBA considered but did not accept the modification
proposed by these comments. As SBA noted in the preamble of the final
rule Lenders, CDCs, and Microlender Intermediaries may continue
background checks if it is in their lending policies to do so. The
final rule makes clear that, as the SBA expands access to capital to
more qualified entrepreneurs, SBA continues to implement additional
reforms to mitigate the risk of fraud in its traditional capital
programs, including front-end detection protocols conducted by SBA, and
these additional SBA front-end safeguards are in addition to ones set
and implemented by lenders and local, State, and Federal laws.
(2) SBA should consider expanding access to capital to small
business owners with criminal convictions only if ten years or more
have elapsed since the last conviction. SBA considered but did not
accept the modification suggested by these comments because (a) the
comment did not provide any empirical support as to why a ten-year
period (as opposed to another period of time) would strengthen either
public safety or economic opportunity; (b) the comment did not provide
any empirical support as to why other fact-specific and individualized
indicia of rehabilitation and success during reentry in a shorter
timespan after conviction should not be given more weight by SBA and
the lender than an arbitrary number of years after conviction; (c) SBA
determined that a categorial ten-year bar would undermine SBA's
ability, through this rulemaking, to honor and incorporate the
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; and (d)
small business applicants commented, and SBA agrees, that this ten-year
categorical bar would be overburdensome for compliance. Requiring an
additional waiting period for loan eligibility delays access to
capital.
(3) SBA should provide additional guidance to lenders, beyond the
proposed rule, on how exclusions for criminal convictions may cause a
broad disparate impact for persons of color. SBA considered but did not
accept this request because the research and analysis proposed by the
commenter goes beyond the scope of SBA's authority in this regulatory
rulemaking. This final rule is limited to improving equitable access
based on criminal background review of applicants seeking to
participate in one or more of the programs addressed by this rule.
(4) SBA should develop and issue guidance on this final rule in
order to provide clarity to lenders to ensure that they implement its
provisions with fidelity. Although enforcement goes beyond the scope of
this regulatory rulemaking, SBA will provide future guidance on
compliance in Standard Operating Procedures and training by specific
programs.
(5) The SBA should work with lenders to reassess their underwriting
standards to mirror changes to proposed rule. SBA does not accept this
request because SBA does not have authority to mandate changes to
lenders' safeguards and standards, and lenders are not obligated to
adopt the changes SBA proposed. Lenders' authority to set and implement
safeguards and standards is

[[Page 34097]]

independent, which SBA recognizes and respects.

III. Section-by-Section Analysis

Section 109.400(b)(15) Eligible Small Business Concerns

The current Sec. 109.400(b)(15) for the ILP Program states that
ineligible businesses are those with an Associate who is currently
incarcerated, on probation, on parole, or has been indicted but not
convicted of a felony or crime of moral turpitude. SBA is revising this
regulation to remove those barriers while maintaining the prohibition
against only those businesses with an Associate who is currently
incarcerated or who is indicted but not convicted of a felony or crime
of moral turpitude. SBA considered removing the prohibitions related to
Associates under indictment in the NPRM. However, upon reconsideration
based on its evaluation of public and interagency comments, SBA has
decided to retain the existing language related to indictments. 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 Program from an existing
Intermediary with remaining funds to lend. The proposed rule received a
total of 17 public comments of which nine or 53 percent were in
support, 5 or 29 percent were in support with modifications and 3 or 18
percent were neutral and did not comment this on proposed rule
specifically. The summary overview explains why the modifications were
not incorporated into the final rule. SBA is finalizing the rule as
proposed while retaining current prohibitions against businesses with
an Associate indicted for certain crimes.

Section 115.13(a)(2)(i) Eligibility of Principal

The current Sec. 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. Through this final rule, SBA is removing those
barriers while maintaining the prohibition against only those
businesses with a Principal who is currently incarcerated or who is
under indictment for a felony. SBA considered removing the prohibitions
related to Principals under indictment in the NPRM. However, upon
reconsideration based on its evaluation of public and interagency
comments, SBA has decided to retain the existing language related to
indictments. This revision is narrowly tailored to reduce barriers to
access for qualified small business owners with certain criminal
history records to compete for Federal and other contract opportunities
by obtaining guarantees for surety bid and final payment and/or
performance bonds. The proposed rule change received a total of 17
public comments of which 9 or 53 percent were in support, 5 or 29
percent supported with modification and 3 or 18 percent were neutral or
did not comment on the proposed rule. The summary overview explains why
the modifications were not incorporated into the final rule. SBA is
finalizing the rule as proposed while retaining current prohibitions
against businesses with an Associate indicted for certain crimes.

Section 120.110(n) What businesses are ineligible for SBA business
loans?

The current Sec. 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. Through this
final rule, SBA is revising this regulation to address the challenges
people on probation or on parole have accessing capital while
maintaining the prohibition against businesses with an Associate who is
currently incarcerated or who is under indictment for a felony or any
crime involving or relating to financial misconduct or a false
statement. SBA considered removing the prohibitions related to
Associates under indictment in the NPRM. However, upon reconsideration
based on its evaluation of public and interagency comments, SBA has
decided to retain the existing language related to indictments. This
revision is narrowly tailored to reduce barriers to access for
qualified small business owners with certain criminal history records.
Under 15 U.S.C. 636(a)(1)(B), the SBA may verify an applicant's
criminal history background, but it does not require such verification,
nor does it prohibit loans for people with criminal history records.
Lenders, CDCs, and Microloan Intermediaries make risk-based lending
decisions. SBA's final rule revision does not impact a Lender's, a
CDC's or a Microloan Intermediary's ability to conduct a criminal
history background check, 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 and does not result in an
unjustified discriminatory effect on a protected class group. Lenders
can continue to deny loans, for example, where criminal history, when
considered along with other information, presents an unacceptable
credit risk. The proposed rule received a total of 17 public comments,
of which 12 or 71 percent were in support, and 5 or 29 percent support
with modifications. No commenters opposed. The summary overview
explains why the modifications were not incorporated into the final
rule SBA is finalizing the rule as proposed.

Section 120.707(a) What conditions apply to loans by Intermediaries to
Microloan borrowers?

SBA proposed to revise Sec. 120.707(a) to increase access to
capital to businesses with an Associate who is on probation or parole
for an offense involving fraud or dishonesty while maintaining the
prohibition against a business with an Associate who is incarcerated.
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 revised 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 business owners with criminal history records. The proposed
rule received a total of 17 public comments, of which 9 or 53 percent
were in support, 5 or 29 percent were in support with modifications, 3
or 18 percent were neutral/did not comment and none were opposed. The
summary overview explains why the modifications were not incorporated
into the final rule. SBA is finalizing the rule as proposed.

Section 123.101(i) When am I not eligible for a home disaster loan?

The current Sec. 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. In this final
rule, SBA revises Sec. 123.101(i) to state that the applicant is
ineligible to receive a disaster loan when any principal owner of a
home that sustained damage is currently incarcerated. The eligibility
requirements in Sec. 123.101 are cross

[[Page 34098]]

referenced in Sec. Sec. 123.201 and 123.301; therefore, this final
rule change will also apply to business property loans as well as
economic injury loans. Notwithstanding SBA's final rule change, in
accordance with statutory provisions that bar loans to those with
certain convictions, SBA will maintain its existing prohibition where
such prohibition is required by law. This final rule will align the
requirements for all SBA loan programs regarding currently incarcerated
applicants and support the flexibility and access to capital for
qualified disaster survivors with criminal history records. The
proposed rule received a total of 17 public comments, of which 9 or 53
percent were in support, 5 or 29 percent were in support with
modifications, and 3 or 18 percent were neutral/did not comment. The
summary overview explains why the modifications were not incorporated
into the final rule. SBA is finalizing the rule as proposed.

Section 123.502(c) Under what circumstances is your business ineligible
to be considered for a Military Reservist Economic Injury Disaster
Loan?

The current Sec. 123.502(c) for the Disaster Loan Program states
that SBA considers ineligible any principal owners of the damaged
property who are presently incarcerated, or on probation or parole
following conviction for a serious criminal offense. In this final
rule, SBA revises Sec. 123.502(c) to state that for Military Reservist
Economic Injury Disaster loans (MREIDL), the applicant is ineligible to
receive a disaster loan when an Associate of a business that sustained
damage is currently incarcerated. Notwithstanding SBA's final rule
changes for disaster loans, in accordance with statutory provisions
that bar loans to those with certain convictions, SBA will continue to
consider as ineligible applicants whose eligibility is prohibited by
law. This final rule 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 small
business owners with criminal history records. The proposed rule
received a total of 17 public comments, of which 9 or 53 percent were
in support, 5 or 29 percent were in support with modifications, 3 or 18
percent were neutral/did not comment and none were opposed. The summary
overview explains why the modifications were not incorporated into the
final rule. SBA is finalizing the rule as proposed.

Section 123.702(c)(1) and (2) What are the eligibility requirements for
any IDAP loan?

The current Sec. 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). In the final rule, SBA
revises Sec. 123.702(c)(1) and (2) to state that the applicant is
ineligible to receive an IDAP loan when any principal owner of a home
or business that sustained damage is currently incarcerated. SBA will
continue to consider as ineligible applicants who are presently under
indictment or whose eligibility is prohibited by law. SBA considered
removing the prohibitions related to applicants under indictment in the
NPRM. However, upon reconsideration based on its evaluation of public
and interagency comments, SBA has decided to retain the existing
language related to indictments.

Policy Discussion

In addition to applicants in all programs certifying to having no
owners or Associates that are currently incarcerated, SBA will access
certain external and widely acceptable and reliable databases to verify
eligibility regarding incarceration and criminal history status. While
the implementation of the final rule will expand access and thereby
increase loan volume, SBA believes that these changes do not compromise
the credit quality and performance of the loan portfolios. For example,
the Microloan and Surety Bond Guaranty 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 (PPP) due to SBA's
rules regarding current indictments and incarceration, and prior
criminal convictions and criminal justice system involvement.
Predictably, the survival rate of legitimate small businesses that did
not receive assistance during the pandemic is lower than those that did
receive support. There are several key distinctions between the PPP
program and the SBA loan and surety programs at issue here. For
example, PPP loans were forgivable while loans in the other SBA loan
programs are not, and SBA has developed and implemented additional
front-end detection protocols to strengthen program integrity since
PPP. This RAND study is useful to highlight the number of otherwise
qualified applicants who were ineligible to apply but required SBA
assistance in order to survive.
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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?
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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\ SBA's general and targeted loan programs should be a
resource that provides 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.
---------------------------------------------------------------------------

\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 final rule, for each program, SBA, Lenders, CDCs,
Microloan Intermediaries, Sureties, and ILP Intermediaries, must
consider the applicant business ineligible based on criminal history
record when there is an Associate or Principal who is currently
incarcerated or, depending on the program, under indictment.
SBA's final 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 as part of their

[[Page 34099]]

existing and continuing protocols. Some lenders include conducting
criminal history background checks and others do not. SBA's final rule
revision does not impact a Lender's, CDC's or Microloan Intermediary's
authority or 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. This proposed
rule received a total of 17 public comments, of which 9 or 53 percent
were in support, 5 or 29 percent were in support with modifications, 3
or 18 percent were neutral or did not comment on this section and none
were opposed. The summary overview explains why the modifications were
not incorporated into the final rule. SBA is finalizing the rule as
proposed.

IV. Severability

One comment recommended that SBA include in this rule an express
provision addressing the effect of a judicial declaration of invalidity
as to any section or portion of this rule or to parts 109, 115, 120 and
123. The question of severability addresses whether a judicial finding
of a provision's invalidity should extend to other provisions or
applications or whether it should be limited to the invalid provision
or application, leaving in effect the remainder of the rule.
Like the entirety of parts 109, 115, 120 and 123, this rule seeks
to implement, to the maximum extent possible, the stated congressional
purposes of the Small Business Act and the Small Business Investment
Act--i.e., ``to . . . aid, counsel, assist, and protect, insofar as is
possible, the interests of the small-business concerns in order to
preserve free competitive enterprise'' and ``to foster economic
development and to create or preserve job opportunities in both urban
and rural areas by providing long-term financing for small business
concerns.'' See 15 U.S.C. 631 and 695.
This rule includes numerous enhancements to the ILP Program, the
Surety Bond Guaranty Program the Business Loan Programs, and the
Disaster Loan Programs. The individual sections added or modified in
this rule, and those which remain in parts 109, 115, 120 and 123 from
prior rulemakings, shall operate independently in service of the stated
congressional purposes and the objectives set forth above for this
rule.
Accordingly, in the event that any portion or application of the
rule is declared invalid or unenforceable as applied to any person or
circumstance, SBA intends for the provision to be construed so as to
continue to give the maximum effect to the provision permitted by law,
including as applied to persons not similarly situated or to dissimilar
circumstances, unless such holding is that the provision of these
paragraph is invalid and unenforceable in all circumstances. Further,
SBA intends that the various other provisions and applications of parts
109, 115, 120 and 123, including those added or modified in this rule,
be severable from the unlawful portion, unless such declaration of
invalidity renders another section or provision meaningless or deprives
that other section or provision of its functionality though only in
such circumstances. Moreover, such collateral invalidity is intended
only to the extent required by logic or loss of functionality.
As an illustration, if a court were to find unlawful this rule's
revisions to the criminal background provisions in the Business Loan
Programs (Sec. 120.110), such finding would have no effect upon this
rule's revisions to the criminal background provisions in the
Intermediary Lending Pilot (Sec. 109.400), the Surety Bond Guarantee
(Sec. 115.3) and the Disaster Loan (Sec. Sec. 123.101, 123.502 and
123.702) Programs, or various other provisions which in no way are
dependent upon the criminal background provisions. To further this
illustration, if a court were to find unlawful this rule's revisions to
the criminal background provisions in the Business Loan Programs (Sec.
120.110), such finding would have no effect upon any of the other
provisions and applications of parts 109, 115, 120 and 123 (e.g.,
Eligible uses of proceeds as set forth in 13 CFR 120.120). The
foregoing are merely examples and do not express an intent that any
other provision be considered non-severable. SBA reiterates that where
any provision of this part is declared invalid, any collateral
invalidity is intended to the least extent necessary, in order to
advance program objectives to the maximum extent possible. Such
provisions would help mitigate uncertainty that may result from future
court decisions if a lawsuit occurs.

Compliance With Executive Orders 12866, 12988, 13132, and 13563, the
Congressional Review Act (5 U.S.C. Sec. Sec. 801-808), the Paperwork
Reduction Act (44 U.S.C., Ch. 35), and the Regulatory Flexibility Act
(5 U.S.C. Sec. Sec. 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 included in the proposed rule and
presents in the final rule 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(a),
636(a)(1)(B), 636(b)(1)(A), 636(l), 636(m), 694(b), and 695, 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 Surety Bond Guaranty programs
by reducing the requirement for criminal history records consideration
to only applicants with a Principal or Associate currently incarcerated
or, depending on the program, under indictment, in the manner proposed
above. Many formerly incarcerated persons experience significant
barriers in accessing employment and capital and credit often necessary
to start a business. The revisions in SBA's final rule will remove
barriers to access capital and employment for qualified applicants. 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 or, depending on the program, under indictment,
to be ineligible with no further requirements for disclosure of prior
criminal history 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, Surety Bond
Guaranty and Disaster Loan Programs under these proposed regulations
because all loans submitted must always meet Loan Program Requirements.
In general, the final rule benefits otherwise qualified entrepreneurs
who would not otherwise be eligible to apply for these programs due to
outdated restrictions that were not evidence-informed, and therefore it
strengthens our economy and our public safety.
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

[[Page 34100]]

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 final rule
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 otherwise qualified small business owners with
criminal history records 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 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
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. SBA's final rule provides clarity for borrowers who might
have otherwise withdrawn their application based on eligibility
concerns. Finally, Lenders, CDCs, and Microloan Intermediaries make
risk-based lending decisions. The statistics above do not account for
any checks conducted by lenders or any resultant applications being
withdrawn. 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 final rule balances that concern against 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 due to their current incarceration. SBA's final rule also
supports disaster survivors during recovery with increased equal access
to capital.

Congressional Review Act

The Office of Management and Budget's (OMB) Office of Information
and Regulatory Affairs has determined that this rule is not a major
rule under Subtitle E of the Small Business Regulatory Enforcement
Fairness Act of 1996 (also known as the Congressional Review Act), 5
U.S.C. 804(2). The annual effect on the economy is less than $100
million.

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 final 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 final rule would require that the
following forms be revised: SBA Form 1919, ``Borrower Information
Form,'' SBA Form 1244, ``Application for Section 504 Loans,'' SBA Form
5, ``Disaster Business Loan Application,'' SBA Form 5C, ``Disaster
Home/Sole Proprietor Loan Application,'' and SBA Form 994,
``Application for Surety Bond Guarantee Assistance''.
SBA Form 1919 is 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, 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, 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 Surety Bond
Guaranty Program, and SBA regarding the disaster loans, SBA does not
believe the impact will be significant because this rule streamlines
regulatory burdens. 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 or under indictment.
SBA reviews approximately 586 Character determination requests
annually and declines 3 or 4 percent, or 17 to 23 requests, due to the
nature of the offense or incomplete judicial records. The revisions to
Sec. 120.110(n) will eliminate the need for 100 percent of these
character determination

[[Page 34101]]

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 final rule revisions, SBA will eliminate the three current
questions and replace them with one new question regarding
incarceration or being under indictment. 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.

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 amends 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 109 continues to read as
follows:

Authority: 15 U.S.C. 634(b)(6), (b)(7), and 636(l).

0
2. Add Sec. 109.15 to read as follows:

Sec. 109.15 Severability.

Any provision of this part held to be invalid or unenforceable as
applied to any person, entity, or circumstance shall be construed so as
to continue to give the maximum effect to such provision as permitted
by law, including as applied to persons or entities not similarly
situated or to dissimilar circumstances, unless such holding is that
the provision of this part is invalid and unenforceable in all
circumstances, in which event the provision shall be severable from the
remainder of this part and shall not affect the remainder thereof.

0
3. 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,
or is under indictment for a felony or a crime of moral turpitude;
* * * * *

PART 115--SURETY BOND GUARANTEE

0
4. 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
5. Add Sec. 115.3 to read as follows:

Sec. 115.3 Severability.

0
6. 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 under indictment
for a felony; or
* * * * *

PART 120--BUSINESS LOANS

0
7. 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), 650, 687(f), 696(3) and (7), and 697(a) and
(e); sec. 521, Pub. L. 114-113, 129 Stat. 2242; sec. 328(a), Pub. L.
116-260, 134 Stat. 1182.

0
8. Add Sec. 120.4 to read as follows:

Sec. 120.4 Severability.

0
9. 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 is under indictment for a felony or any crime involving or relating
to financial misconduct or a false statement;
* * * * *

0
10. 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) General. Except as otherwise provided in this paragraph (a), 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.
* * * * *

[[Page 34102]]

PART 123--DISASTER LOAN PROGRAM

0
11. 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
12. Add Sec. 123.22 to read as follows:

Sec. 123.22 Severability.

0
13. 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
14. 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
15. Amend Sec. 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, or is presently under indictment;
* * * * *

Isabella Casillas Guzman,
Administrator.
[FR Doc. 2024-09009 Filed 4-29-24; 8:45 am]
BILLING CODE 8026-09-P

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