Best Practices: SBA Implements Changes to the Criminal Background Review Process

Effective May 30, 2024, the criminal background review process for those applying for SBA guaranteed loans will undergo a significant change.  It removes restrictions the SBA deems limit access to capital to otherwise qualified individuals with a prior criminal record.  Incorporated in the Final Rule on Criminal Justice Reviews for the SBA Business Loan Programs, Disaster Loan Programs, and Surety Bond Guaranty Program published on April 30, 2024, these changes seek to increase opportunities for certain groups of applicants who historically may not have had an equitable opportunity for small business ownership.  89 FR 34094.  For 7(a) and 504 loans, the amended rule removes eligibility restrictions on businesses with an Associate or Principal who is on probation or on parole for a prior criminal conviction.

Under the current rule for 7(a) and 504 loans, businesses are deemed ineligible for SBA business loans where an Associate or Principal of the Applicant is currently incarcerated, on probation, on parole or under indictment but not convicted for a felony or any crime involving or relating to financial misconduct or a false statement.  The SBA is removing those individuals “on probation or parole” from this section of the eligibility rule.  Effective with the new rule, only business with “an Associate who is currently incarcerated, serving a sentence of imprisonment imposed upon adjudication of guilt, or under indictment for a felony or a crime involving or relating to financial misconduct or a false statement” will be deemed ineligible.  13 CFR 120.110(n).

The SBA articulated two primary goals associated with the rule change.  First, increase access to capital by removing restrictions that limit access to capital to individuals with prior criminal records but who have completed their sentences and served their time and are otherwise qualified.  Second, provide employment opportunities for individuals by expanding entrepreneurial access.  According to the Final Rule, 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.” 89 FR 34095.

While the information regarding prior criminal conduct will come in the form of a certification from the Applicant, the rule change does not preclude lenders from conducting their own criminal background checks pursuant to their own internal policies.  Additionally, lenders can continue to deny loans when, for example, the criminal history together with other information from the Applicant possess an unacceptable credit risk to the lender.  Along those lines, the SBA will also continue to access certain external, acceptable, and reliable databases to verify eligibility regarding incarceration and criminal history status.

By way of summary, following the effective date of the Final Rule on May 30, 2024, lenders must consider the Applicant business to be ineligible based on criminal history only when and Associate or Principal is currently incarcerated or under indictment.  SBA intends to revise the SBA Form 1919 to reflect the new requirements.  The Final Rule amends several other programs under the SBA umbrella not addressed in this article.  For more information regarding the Final Rule, contact the attorneys at Starfield & Smith at 215.542.7070.