Best Practices: Character Determination Under SOP 50 10 5(K)

The Small Business Administration (“SBA”) is known throughout the United States as a champion of small business. In order to uphold the integrity of the program, the SBA requires that a small business be owned and managed by individuals with good character to be eligible for a SBA loan. The SBA prohibits lenders from providing SBA loans to businesses which are owned and/or managed by individuals with bad character, as determined by the applicant’s answers on SBA Form 1919 or EIB-SBA Joint Form 84-1 (for Export Working Capital Loans).

SBA Form 1919 includes a character assessment. The SBA requires that the following individuals complete SBA Form 1919: for a sole proprietorship- the sole proprietor; for a partnership- all general partners, all limited partners owning 20% or more of the equity of the firm or any partner that is involved in management of the applicant business; for a corporation- all owners of 20% or more of the corporation and each officer and director; for a limited liability company- all members owning 20% or more of the company, each officer, director, and managing member; for a small business owned by a trust- any trustor; and anyone hired to manage day-to-day operations (“key employee”).

Question 17 on SBA Form 1919 asks if the individual is “presently subject to an indictment, criminal information, arraignment, or other means by which formal criminal charges are brought in any jurisdiction.” If any individual completing SBA Form 1919 answers yes to this question, then the loan is ineligible for SBA financing. If any individual completing SBA Form 1919 is currently under indictment, on parole or on probation, the loan is ineligible for SBA financing.

Question 18 on SBA Form 1919 asks if the individual has “been arrested in the last 6 months for any criminal offense.”

Question 19 on SBA form 1919 asks if the individual has “ever 1) been convicted [of a criminal offense]; 2) pleaded guilty [to a criminal offense]; 3) pleaded nolo contendere [to a criminal offense]; 4) been placed on pretrial diversion [for a criminal offense]; or 5) been placed on any form of parole or probation (including probation before judgment) [for a criminal offense].”

If any individual completing SBA Form 1919 answers yes to Questions 18 or 19, then that individual must complete SBA Form 912 (Statement of Personal History). The individual must submit a completed SBA Form 912, signed and dated within 90 days of submission to the SBA and a “detailed written statement, which is separately signed and dated by the Subject Individual, describing the events and circumstances of any “Yes” response, which must include the following: i) date(s) of each offense; ii) city or county and state where the offense(s) occurred; iii) the specific charge(s) and final conviction(s) (e.g. DUI, assault, forgery, etc.) and the level of each charge and conviction (either a misdemeanor or felony); and iv) disposition of the charge(s) and conviction(s), including all sentencing, conditions, or requirements of the court.” The individual must also submit documentation from the court which evidences that all conditions of the court have been met. If the individual has not met the conditions of the court, then the loan is ineligible for SBA financing. If the individual cannot obtain documentation from the court because it is not available, then the individual is required to submit a written statement from the court stating why documentation is not available and verification that he/ she has no outstanding warrants, unpaid fines or other unsatisfied conditions.

A lender may process the 912 package on its own if the lender reviews the 912 package and determines that the case resulted in “one or multiple misdemeanor convictions whose conditions were met more than 6 months prior to receipt of the application, and the convictions did not involve a crime against a minor …b) reduction of the original felony charge(s) to misdemeanor(s); or c) dismissal of the charges.” If the lender processes the 912 package on its own, then the lender is required to keep the entire 912 package for the life of the loan.

If the case resulted in “a) felony conviction(s); b) misdemeanor conviction(s) within 6 months of the date of the loan application; c) charge(s) filed and final disposition against the Subject Individual has been completed within 6 months of the date of the loan Application; and/or d) misdemeanor conviction(s) for crime(s) against a minor..”, then the lender must submit the entire 912 package and a FBI Fingerprint Background Check to the SBA for a background investigation. The lender cannot disburse SBA loan proceeds unless and until it receives written clearance from the SBA. If the lender receives SBA clearance, then the Lender must retain a copy of the character determination in its loan file for the life of the loan.

For assistance with SBA compliance matters, contact the attorneys at Starfield & Smith at 215.542.7070 or visit us at  www.starfieldsmith.com.