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Research Shows Unnecessary PPP Loan Exclusions Exacerbated Racial Disparities

Black and Latino business owners were more likely to face exclusion from the SBA-administered Paycheck Protection Program.

With a drug conviction dating back to 2004, Maryland small business owner Altimont Wilks had assumed the past was behind him. After 14 years in prison, the 49-year-old had turned the page by opening Carmen’s Corner Store in Hagerstown, earning positive press and even a handshake from the mayor.

Exactly one year ago, Wilks was being celebrated by local civic and business leaders, as well as state and federal elected officials, for successfully starting his business and giving back to his community. This year, in the midst of a global pandemic and economic downturn, his business — like so many others — was dealt a serious blow. But, unlike others, he could not turn to the federal government for financial relief, even as it sprang into action to help save small businesses.

Wilks, it turned out, was excluded from the Small Business Administration’s (SBA) Paycheck Protection Program (PPP) because of his history with the criminal justice system. Initially, PPP loans were not available to a sizable demographic of individuals with criminal convictions, probation, or pending charges in recent years.

Without funds from the SBA, Wilks struggled to pay his employees and keep his corner store open. He wasn’t sure if his business would survive.

Criminal disqualifications

Political leaders across the spectrum support the idea that people with criminal histories deserve a second chance, believing that state, local, and federal governments should help those who leave jails and prisons reintegrate into society. In recent years, with initiatives such as Clean Slate winning policy victories across the country, much of the reintegration focus has been on helping people gain access to job opportunities and achieve economic security.

When Congress authorized hundreds of billions of dollars for small business relief during COVID-19 through the CARES Act, it included specifics about who was and was not eligible for loans. But it mandated nothing related to criminal record exclusions. It was the SBA that quietly imposed restrictions on applicants with an arrest or conviction history applying to receive PPP loans. Originally, the SBA disqualified business owners with any felony convictions in the past five years, as well as owners who had been placed on pretrial diversion or any form of parole or probation.

Research on the SBA’s COVID-19 relief efforts — particularly on PPP loans, an unprecedented effort to distribute cash quickly — supports advocates’ claims that that these broad exclusions may have had devastating and racially disparate consequences.

Michael Mueller-Smith, an economist at the University of Michigan and founder of the Criminal Justice Administrative Records System (CJARS), said that the data from seven key states reflects racial inequities in how the SBA designed eligibility for loans.

In a recently-released report funded by Arnold Ventures, Mueller-Smith and two colleagues found that around 3 percent of business owners could be ineligible for the PPP under the original rules, due to “current or prior criminal justice involvement.”

800,000

Individuals nationwide were potentially unable to access small business funds.

6X
Black men in Michigan were 6X more likely to be excluded from PPP loans than white men.
3.5X
Black men in Texas were 3.5X more likely to be excluded from PPP loans than white men.

This translates to around 800,000 individuals nationwide who were potentially unable to access small business funds.

Black and Latino people, particularly men, were disproportionately excluded due to criminal histories. In Michigan, Black men were six times more likely to be excluded from PPP loans than white men, while in Texas, Black men were 3.5 times more likely.

“You do see the disparate racial impact very clearly,” said Mueller-Smith, pointing to the state of Michigan, where 40 percent of filers in the study have had some contact with the justice system.

Mueller-Smith said that the research included only people categorized for tax purposes as sole proprietors and is therefore likely an undercount of those ineligible for the loans, given that businesses with partial owners with criminal records were also excluded. The study was part of a larger data infrastructure project between his university and the U.S. Census. The study also found that people with criminal records are more likely than other subgroups to be small business owners in the first place, given the disadvantages they face when seeking employment.

“People have talked about the idea that [those with] criminal records rely more often on self-employment income, starting a business, and entrepreneurship, because of the discrimination they face in the labor market,” he said.

“While there’s been qualitative evidence before on this hypothesis, this is the first study to document that empirically,” Mueller-Smith added. “Thirteen percent of individuals with disqualifying criminal records reported having self-employment income. For certain subgroups of Black and Hispanic women with criminal justice backgrounds, it’s in excess of 25 percent.”

‘Quick and careless’

In March, Margaret Love, Executive Director of the Collateral Consequences Resource Center, first began hearing “horror stories about people who had started businesses, trying to get on their feet” who could not access SBA loans because of past criminal histories.

Love said several of those individuals were merely on probation or not even convicted.

“It’s amazing and confounding that our government could have been so quick and careless in just deciding to rule out a whole class of people who, above all, deserve some support - without any legal basis at all,” she said. “It is not clear whether it is attributable to ignorance or incompetence.”

Some SBA loans make ineligible anyone currently on parole or probation, and have certain “good character” requirements. Others, like the Microloan Program, actually expanded eligibility criteria in 2015 to allow small business owners on probation or parole to access microloans. As SBA spokesman Miguel A. Ayala said of the eligibility expansion, “Small business ownership and self-employment are paths toward wealth creation and independence. This option can be particularly useful for citizens who may have difficulty finding employment after returning to their community from prison. With millions of Americans looking to start over after incarceration or move past their criminal records, the SBA is removing barriers so that citizens can achieve economic security and be successful members of society.”

And so, when PPP regulations came out, it was surprising to see they had introduced additional disqualifiers — including considering any conviction within the past five years or participation in a pretrial diversion program, much broader exclusions that confused applicants and struck experts as sloppy.

Expanded access took public pushback and a lawsuit

Numerous groups from across the political spectrum, including the Collateral Consequences Resource Center, Americans for Prosperity, the American Civil Liberties Union, the Justice Action Network, as well as multiple members of Congress, called attention to the SBA exclusions and asked the SBA to change its rules.

The issue was also actively litigated by Jared McClain, an attorney with the nonprofit civil rights group New Civil Liberties Alliance (NCLA), who represented Altimont Wilks in a suit filed against the SBA on June 10 — the same day U.S. Treasury Secretary Steven Mnuchin testified to the Senate Small Business and Entrepreneurship Committee on forgiving loans for borrowers and highlighted the successful rollout of the PPP program.

“PPP is supporting the employment of approximately 50 million workers and more than 75 percent of the small business payroll in all 50 states. This is an extraordinary achievement,” said Mnuchin. “As you might expect with a program of this magnitude executed on a national scale in record time, we initially experienced some complications. We resolved them quickly.”

But in a filing with the U.S. District Court for the District of Maryland, the NCLA alleged that Wilks, among others, was unlawfully barred from relief under the CARES Act.

In a measured decision on June 26, a judge ruled that “SBA was required to pre-approve and set aside funds for our client,” said McClain. Thanks to the judge’s ruling, “Altimont was able to get a loan from his bank.”

McClain added that Wilks was “thrilled” to get his piece of the $659 billion small business bailout package. But, he said, “It feels like SBA has intentionally evaded the rule of law.”

The NCLA lawyer said his client’s wrongdoing did not constitute a “financial crime” and “has nothing to do with PPP.”

“Congress didn’t ask the SBA to craft rules,” said McClain. “There should not have been any restrictions on loans that were set out in the statute.”

He also called out the “standards arbitrariness” of the SBA in seeming to follow “institutional inertia” by discriminating against people who are historically disfavored.

The SBA has since changed its PPP application rules to be less broadly restrictive of criminal histories. Businesses are now eligible to apply if their owners have not been convicted of a felony or started community supervision in the past year, as opposed to the past five years. The only felony convictions still disqualifying over the longer five-year time period include offenses arguably more relevant to federal financial assistance, such as bribery or embezzlement.

Of the people initially disqualified from PPP due to criminal convictions, Arnold Ventures Criminal Justice Manager Carson Whitelemons said that the vast majority are likely now eligible to apply to the program through early August.

“While the SBA changing its policy is a significant victory, we fear that ongoing confusion about the changing rules makes it harder for people with records to access [SBA] resources,” Whitelemons added. “For some small business owners with criminal records, the damage has already been done. By drawing attention to this example, future exclusions are less likely to go unnoticed and can be prevented in the first place.”

In the spring, Wilks put a new window on his store for no-contact checkout. With his new loan and the extension of the program, the SBA window may stay open — if just a crack — for others like him.

The deadline to apply for PPP loans through the Small Business Administration is Aug. 8. Individuals previously rejected can now re-apply, and those who assumed that they were ineligible — based on the former rules — can also still apply for PPP. Please visit the SBA website for more information.