Loans for Parolees and Probationers

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Proposal would extend SBA Microloan eligibility to individuals on parole or probation.

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The Small Business Administration (SBA), a federal agency that provides loans to U.S. small businesses, is considering allowing many individuals on probation and parole to participate in its Microloan Program, hoping the Program will help these individuals find legal opportunities for success.

The SBA distributes hundreds of millions of dollars in loans each year to small businesses. Over half of all working Americans work in a small business, amounting to about 120 million people employed by one of 28 million small businesses. In 2012 alone, the SBA reported that it provided over $587 billion in loans.

The SBA recently proposed a new rule that would amend current requirements for its Microloan Program, which provides loans up to $50,000 to small business owners, entrepreneurs, and qualified childcare centers. According to the agency, the program is designed specifically to equip small businesses in “underserved markets, including borrowers with little to no credit history, low-income borrowers, and women and minority entrepreneurs in both rural and urban areas” that otherwise would be unable to secure private or government loans.

Under current regulations, businesses with an officer or director who is currently on probation or parole are ineligible for loan assistance from the SBA.

The proposed rule would continue to bar some individuals on probation or parole from receiving an SBA Microloan. For example, an individual on probation for fraud-related criminal activity would be unable to secure an SBA loan. Also, any childcare business with an officer or director on parole for an offense against a child would also remain ineligible. Furthermore, currently incarcerated or indicted individuals would not be able to secure an SBA loan.

Other SBA loan programs that deny eligibility to individuals based on their probation or parole status would be unaffected by the proposal.

The SBA states that the proposal to expand eligibility for SBA loans is connected to the agency’s participation on the Federal Interagency Reentry Council. The Reentry Council is a task force, headed by the Department of Justice and composed of twenty federal agencies, to remove federal barriers to successful reentry of those returning from prison.

The Reentry Council recognizes that a key component to successful reentry is assisting individuals who have recently been released from prison to become productive citizens. The SBA’s proposal highlights the specific correlation between successful reentry and employment: those who are able to secure a steady job after being released from jail are less likely to return to jail. In 2007, approximately 5.1 million Americans were on probation or parole, according to one The Pew Center on the States report.

Job prospects for ex-convicts are bleak. In 2011, the New York Times reported that studies “found unemployment rates of 50 percent or higher for former prisoners nine months or a year after their release.” Legal scholar Michelle Alexander notes in her book, The New Jim Crow, that employers can often legally discriminate against applicants with felony convictions.

Alexander’s point about the legality of non-governmental discrimination parallels an important caveat to the SBA’s proposal: the SBA requirements are only one barrier to an individual securing an SBA Microloan. The SBA does not directly loan money to applicants; rather, the agency provides funds to specially designated intermediary lenders who, in turn, provide the Microloans to qualified applicants. Applicants for a Microloan must meet the intermediary’s requirements, as well. Thus, applicants who meet the federal standards for a Microloan may still be ineligible if they do not meet the intermediary’s requirements.

The agency requires all intermediaries to be a nonprofit, quasi-public, or tribally owned entity, with experience making, servicing, and providing training on short-term, fixed rate microloans to small businesses. According to an SBA report, Microloan intermediaries distributed almost 4,000 Microloans in fiscal year 2012, totaling $44.7 million. While the maximum loan amount for a Microloan is $50,000, the average loan in fiscal year 2012 was about $11,000 with an 8.18% interest rate. Today, Microloans average around $13,000.

The proposed rule includes several other regulatory changes and technical amendments to conform to current statutory authority and clarify the requirements of the Microloan Program.

The SBA is seeking comment on its proposal through May 16, 2014.