A National Community Reinvestment Coalition evaluation of small-business loan applications from a sample of seven banks in Washington, D.C., revealed that some lenders discriminate against applicants who have been charged at any time in their lives with a criminal offense.
An applicant is considered a lending risk for having been “ever charged” with any crime, other than a minor vehicle violation, no matter when it occurred. This practice is not only factually suspect, it is also discriminatory.
There is an important distinction between being charged with a crime and being convicted of a crime. A conviction occurs when a person is found guilty of committing a crime by a judge or jury, or pleads guilty. Being charged with a crime means there is evidence for a prosecutor to say that the defendant has possibly committed a crime, and to then have that evidence evaluated by the court system. People are often charged with crimes and later are found not guilty or see the charges dropped.
Interactions with the justice system have lasting implications. It is known that having a criminal record is a barrier to both housing and employment. There are few protections for people with a criminal record.
But what about people who have been charged and found not guilty, or had their charges dropped? What barriers do they face? Unfortunately, they face obstacles similar to those confronting people who have a criminal record, especially in the small business lending arena.
Loans administered by the Small Business Administration have broad criminal history restrictions. Analysis conducted by the Collateral Consequences Resource Center found that no statute requires criminal history to be used as a factor in determining creditworthiness. Instead, the Small Business Act uses the words “may verify the applicant’s criminal background.”
Furthermore, many restrictions that the SBA implements on interactions with the justice system are not codified. These restrictions are “either unannounced or only disclosed through FAQs published on the agency’s website … [or] through policy statements and application forms.”
Some commercial loan applications require an applicant to answer “yes” or “no” to a question about their criminal history. The question asks applicants if they have “ever been charged with a crime.” This language is too broad and violates the Equal Credit Opportunity Act. This language does not recognize situations where charges were dropped, or the person was found not guilty. For these types of situations, the applicant would still be required to respond “yes.” Otherwise, they are lying on their application, resulting in the applicant's failure to qualify for the loan. This question violates fair-lending laws, because it causes a disparate impact based on race and because it discourages applicants from applying.
Disparate impact occurs when a neutral policy has a disproportionately negative effect on a protected class. The disclosure language “ever been charged … for any criminal offense” results in a disparate impact on the Black applicants. Black people are disproportionately charged with crimes compared with white people. The New York Times highlighted that “African Americans make up only about 6% of San Francisco’s population, [yet] they accounted for 38% of cases filed by prosecutors between 2008 and 2014.”
This disclosure language includes people who are falsely charged. More Black people are falsely charged than white people. The NAACP found that “[a]s of October 2016, there have been 1,900 exonerations of the wrongfully accused, [and] 47% of the exonerated were African American.”
Furthermore, the language on these applications does not distinguish between a felony and a misdemeanor or the nature of the crime committed, like a financial crime or an assault. Also left out is the question of whether the applicant was a minor when the crime was committed and how long it has been since the crime was committed.
Financial institutions will assert a business justification for asking about an applicant’s criminal history, as it can significantly impact a person’s ability to repay a loan. Under the effects test, financial institutions can fulfill this business justification in a less discriminatory manner by adding language that does not leave the time period open-ended, distinguishes between a felony and a misdemeanor, distinguishes if the applicant was a minor at the time the crime was committed and provides a list of crimes that require disclosures.
The presence of the “ever charged” question can discourage potential applicants. Discouragement occurs because applicants believe that answering this question will deny them credit. Therefore, they do not apply. Discouragement is a form of discrimination under the equal credit act and its implementation in the Federal Reserve’s Regulation B.
Financial institutions need to review their applications to ensure that they are not violating fair-lending laws. But this is only part of the solution. Fair-lending-compliance programs need to ensure that when criminal history is used for credit decisions, its use is narrowly tailored in both time limit and specific crimes that are connected to financial risk, money laundering or terrorism. Financial institutions should not harm potential applicants who are creditworthy simply because they had some engagement in the past with the criminal justice system.
