Small business owners previously excluded from PPP granted application extension

Courts Covid-19 SBA CARES Act Small Business Lending

On June 29, the U.S. District Court for the District of Maryland issued a memorandum to address two similar suits, which will provide several small business owners with criminal records three additional weeks to apply for loans through the Paycheck Protection Program (PPP). The court ruled that previous versions of the Small Business Administration’s (SBA) rule that excluded felony convictions of applicants or owners of applicants were “arbitrary and capricious” because the rules contained no explanation for the criminal history exclusion. The ruling extends the PPP application deadline for the business owners to July 21 following the SBA’s issuance of an interim final rule (IFR)—effective June 24 (covered by InfoBytes here)—that, according to the court, “provides a reasoned explanation for a more limited criminal history exclusion.” The court rejected the SBA’s argument that the case is now moot, stating that even though the business owners are now eligible to apply for PPP loans, they “still face difficulties in applying at the last minute either because banks are no longer accepting applications or because banks are still using old forms with the prior criminal history exclusion. Therefore, the plaintiffs continue to face ongoing harm because of the allegedly unlawful prior iterations of the rule.”

However, the court disagreed with one of the business owner’s claim that the criminal history exclusion violates the CARES Act, finding that the SBA is within its rights to consider borrowers’ ability to repay PPP loans. “While the court agrees that the PPP functions differently than the SBA’s other loan programs, it is not unreasonable to consider ability to repay, because if the loans are not used for specified purposes, then they are not forgivable,” the court wrote. The court also declined to extend the PPP application deadline to all newly eligible individuals who were previously excluded, stating that “past harm cannot justify an injunction extending the application deadline,” since it is unclear “what harm to [the business] resulting from prior iterations of the criminal history exclusion will continue past June 30.”