Current small business loans discriminate by prohibiting loans to people with criminal backgrounds.
The United States Small Business Administration (SBA) restricted access to its loan programs – which are essential lifelines for small businesses – for those affected by the criminal justice system. These policies subtract racial disparities, are out of step with anti-discrimination law and should be reformed.
Each year, hundreds of thousands of people in the United States are published from prison. They face daunting obstacles to reintegration into society, including exclusion from employment, housing and other opportunities. Due to structural inequalities and systemic racism, the population released from prison is disproportionately African American and Hispanic. For example, African Americans to understand about 38 percent of all federal prisoners, but reconcile only 13% of the American population. As a result, loan policies that exclude people with criminal histories tend to have outsized negative effects on people of color.
Anti-discrimination laws such as the Fair Housing Actthe Equal Credit Opportunity Actand Title VII Civil Rights Act can help those released from prison to overcome these negative impacts. These laws bar intentional discrimination based on race and other protected characteristics in housing, loans and employment. They too bar seemingly neutral policies – those that do not explicitly target a particular group – that have a “disparate impact” on protected groups, such as racial minorities, or otherwise affect them negatively and disproportionately. Entities can be held liable for disparate impact if a seemingly neutral policy does not meet a legitimate business need or if there are less discriminatory alternatives that would meet that business need. While much more work remains to be done, for decades the disparate impact framework has helped dismantle unnecessary and discriminatory barriers to opportunity.
Disparate Impact Principles have increased equitable housing and employment opportunities by limiting overreliance on criminal history in these contexts. For example, the Equal Employment Opportunity Commission in the United States has Publishedguidance explaining that blanket employment and housing bans for people with criminal backgrounds are illegal. The US Department of Housing and Urban Development (HUD) has Published similar direction. Housing Advocates Succeeded disputed overly broad tenant selection policies that unnecessarily limit housing options for those affected by the criminal justice system.
Unfortunately, blunt criminal history bans persist in small business lending, in part because of the SBA’s criminal history criteria. As with employment and housing, access to secure credit can be vital for economic progress. Owning a small business can to augment income, wealth and independence. Small businesses also provide employment opportunities and vital services to the communities they serve. To start and scale their business activities, small business owners need access to capital, and they access this capital primarily through debt.
The SBA operates two loan programs designed to increase small businesses’ access to capital: the 7(a) Loan programand the 504 Loan Program. While both programs provide much-needed capital to small businesses, the SBA’s current treatment of criminal history is not in line with standard disparate impact principles, as described above.
Two Aspects of SBA Rules are particularly problematic. First, applicants on probation or parole for any crime are categorically Rod to receive SBA 7(a) and 504 loans. Second, applicants with a prior felony must undergo a “personality determination” conducted by the SBA, with no publicly available standards to guide that determination.
These policies likely have a disparate impact on candidates of color. The question, then, is whether the SBA’s criminal history rules are necessary to achieve a substantial, non-discriminatory interest. HUD guidance teaches that this interest “cannot be hypothetical or speculative” or be “based on generalizations or stereotypes”. Management too ordered that there must be evidence that “the policy actually achieves that interest”.
The SBA has a legitimate interest in ensuring that borrowers are creditworthy and will repay their loans. But as the Consumer Financial Protection Bureau (CFPB) recently observed, “there is little evidence to suggest that criminal history lowers creditworthiness.” Indeed, given the lack of evidence, any attempt to link applicants’ probation or parole status to their ability to repay is likely based on “generalizations and stereotypes”. Similarly, the mere fact that a person has been convicted of a crime says nothing about that person’s likelihood of future repayment.
As a result, the SBA policy is too broad and most likely short violates anti-discrimination laws by failing to properly distinguish “between criminal behavior that indicates a demonstrable risk” of non-reimbursement and “criminal behavior that does not.”
The overbreadth of the SBA policy is a major problem. As the CFPB has Noted, more than 1.1 million small business owners have criminal histories, and people returning from incarceration are 50% more likely to become entrepreneurs than people who have never been incarcerated. Additionally, some financial institutions have looked to the SBA rules to develop their own internal policies on lending to business applicants with criminal backgrounds, indicating that the SBA’s criminal background rules have a significant impact on the beyond its own programs.
The SBA recently Shrunk his criminal history exclusions that apply to the Paycheck Protection Program (PPP), which is designed to help businesses during the COVID-19 crisis. The original SBA rule Rod anyone convicted of a crime within the past five years and anyone on probation or parole to receive a PPP loan. The SBA later Shrunk the exclusion to only prohibit loans to persons guilty of crimes for “fraud, corruption, embezzlement or misrepresentation in a loan application”, unless the owner has been convicted or has started his parole or probation for a crime in the previous year. Despite these improvements to PPP rules, the SBA’s problematic standards for its core programs persist.
What should the SBA do about the criminal history policies that apply to its core programs? Given the discriminatory effect that consideration of criminal history can have, the SBA should not consider it unless there is a solid, non-speculative basis to believe that it achieves a substantial interest. and non-discriminatory.
At a minimum, this change would mean defining a bespoke list of types of convictions that could result in a loan being denied. This list should not be broader than the SBA Restricted List listing financial crimes prohibited for PPP loans. Even then, the SBA should conduct individualized assessments of prior convictions in a manner that takes into account creditworthiness factors, including the nature and seriousness of the conduct, the time elapsed since the conduct, and other past history. applicant’s credit. The SBA should be transparent about these criteria and how these assessments are conducted, and it should provide reasonable opportunities to challenge unfavorable decisions. Such an approach to criminal history would broaden access to credit and reduce the risk of the SBA violating the Equal Credit Opportunity Act and other anti-discrimination laws, while respecting the interests of the SBA and other lenders to be repaid.
If the SBA were to adopt these changes, positive effects would ripple through the credit industry.
This essay is part of a six-part series entitled Promote economic justice.