CARES Act: SBA Further Revises Eligibility Criteria for PPP Applicants with Felony Criminal Histories | Practical Law

CARES Act: SBA Further Revises Eligibility Criteria for PPP Applicants with Felony Criminal Histories | Practical Law

The Small Business Administration (SBA) issued an interim final rule (IFR) further revising the eligibility criteria for Paycheck Protection Program (PPP) applicants with a criminal history. Applicants are ineligible for PPP loans if they are on probation or parole that began within the last five years for any felony involving fraud, bribery, embezzlement, or a false statement in a loan application or an application for federal financial assistance (financial felonies), and one year for other felonies (non-financial felonies). Secondly, PPP loan applicants are ineligible if they are presently subject to an indictment, criminal information, arraignment, or subject to formal criminal charges for felony offenses only, subject to look-back periods of one year for non-financial felonies and five years for financial felonies.

CARES Act: SBA Further Revises Eligibility Criteria for PPP Applicants with Felony Criminal Histories

by Practical Law Finance
Published on 26 Jun 2020USA (National/Federal)
The Small Business Administration (SBA) issued an interim final rule (IFR) further revising the eligibility criteria for Paycheck Protection Program (PPP) applicants with a criminal history. Applicants are ineligible for PPP loans if they are on probation or parole that began within the last five years for any felony involving fraud, bribery, embezzlement, or a false statement in a loan application or an application for federal financial assistance (financial felonies), and one year for other felonies (non-financial felonies). Secondly, PPP loan applicants are ineligible if they are presently subject to an indictment, criminal information, arraignment, or subject to formal criminal charges for felony offenses only, subject to look-back periods of one year for non-financial felonies and five years for financial felonies.
On March 27, 2020, the US government passed the CARES Act in response to the COVID-19 crisis. Under the CARES Act, the Small Business Administration (SBA) is offering loans under the Paycheck Protection Program (PPP). On April 2, 2020, the SBA issued an interim final rule (Initial Rule) outlining the key provisions for implementing the PPP. Subsequently, the SBA has issued additional interim final rules and guidance (see Practice Note, Road Map to the Coronavirus Aid, Relief, and Economic Security Act (CARES Act): Paycheck Protection Program (PPP)).
On June 12, 2020, the SBA issued an interim final rule (Initial Felony IFR) amending the Initial Rule to provide that when determining eligibility for a PPP loan, the look-back period for PPP loan applicants, or owners of applicants, with non-financial felony criminal histories is reduced from five years to one year. The look-back period is still five years for felonies involving fraud, bribery, embezzlement, or a false statement in a loan application or an application for federal financial assistance (financial felonies).
On June 24, 2020, the SBA issued an interim final rule (Second Felony IFR) further revising the eligibility criteria for PPP applicants with a criminal history. Applicants are ineligible if they are on probation or parole that began within the last five years for any financial felony, and one year for non-financial felonies. Secondly, PPP loan applicants are ineligible if they are presently subject to an indictment, criminal information, arraignment, or subject to formal criminal charges for felony offenses, subject to look-back periods of one year for non-financial felonies and five years for financial felonies. The IFR is effective immediately. Public comment on the proposed rule must be received on or before July 27, 2020.

Changes to Eligibility Requirements for Felony Criminal History

The initial PPP eligibility requirements provided that a loan will not be approved if an owner of 20 percent or more of the equity of the applicant has been convicted of a felony within the last five years. The Initial Felony IFR reduce the timeframe to one year for felonies that do not involve fraud, bribery, embezzlement, or a false statement in a loan application or an application for federal financial assistance.
The Second Felony IRF further revises that rule to provide that:
  • Under the previous rules, an applicant was ineligible for a PPP loan if an owner of 20 percent or more of the equity of the applicant is presently subject to an indictment, criminal information, arraignment, or other means by which formal criminal charges are brought in any jurisdiction. The Second Felony IRF limits this to pending criminal charges for felony offenses, subject to the one- and five-year time periods specified in the rules.
  • Also, under the previous rules, an applicant was ineligible for a PPP loan if an owner of 20 percent or more of the equity of the applicant is on probation or on parole. The Second Felony IFR limits this restriction to individuals whose probation or parole commenced within:
    • the last five years for any felony involving fraud, bribery, embezzlement, or a false statement in a loan application or an application for federal financial assistance; and
    • the last one year for other felonies.
The rule for ineligibility of applicants that are presently suspended, debarred, or proposed for debarment is not affected by these revisions.

Revised Text of Rule

The rule is revised to read as follows:
b. Could I be ineligible even if I meet the eligibility requirements in (a) above?
You are ineligible for a PPP loan if, for example:
* * * * *
iii. An owner of 20 percent or more of the equity of the applicant is presently incarcerated or, for any felony, presently subject to an indictment, criminal information, arraignment, or other means by which formal criminal charges are brought in any jurisdiction; or has been convicted of, pleaded guilty or nolo contendere to, or commenced any form of parole or probation (including probation before judgment) for, a felony involving fraud, bribery, embezzlement, or a false statement in a loan application or an application for federal financial assistance within the last five years or any other felony within the last year; or
* * * * *

Goals of the Rule Revisions

The SBA clarified that while neither lenders nor the SBA are conducting typical analysis of the characteristics of PPP applicants, these measures are intended to balance the need for mitigating the risk of default, fraud, or misuse of PPP loan funds with the need to assist in the rehabilitation of felons, who are working to become responsible and productive members of society.