Criminal Justice Reviews for the SBA Business Loan Programs, Disaster Loan Programs, and Surety Bond Guaranty Program, 34094-34102 [2024-09009]

Agencies

• SMALL BUSINESS ADMINISTRATION

[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 [www.gpo.gov]
[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 [email protected].

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?, https://doi.org/10.1177/00027162221115378, 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 regulations.gov. 
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.
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    \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 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.

    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
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.

    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
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.

    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
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