Criminal Justice Reviews for the SBA Business Loan Programs and Surety Bond Guaranty Program, 63534-63539 [2023-19183]

Agencies

• SMALL BUSINESS ADMINISTRATION

[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 [www.gpo.gov]
[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: https://www.regulations.gov. 
Follow the instructions for submitting comments.
    SBA will post all comments on https://www.regulations.gov. If you 
wish to submit confidential business information (CBI) as defined in 
the User Notice at https://www.regulations.gov, please submit the 
information via email to [email protected]. 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 [email protected].

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? https://doi.org/10.1177/00027162221115378, 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\ https://onlinelibrary.wiley.com/doi/10.1002/pam.22438 
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