Does a Felony Conviction Disqualify a Commercial Borrower?

In our small balance commercial program, one category of criminal record makes a borrower ineligible: a felony conviction related to financial fraud, where the release date falls within the past ten years. That is the whole rule on criminal history. There is no general character test, no catch-all for felonies of other kinds, and no sliding scale.

That answer is narrower than most borrowers expect, and the precision matters, because the alternative is guessing. A borrower who assumes any felony ends the conversation may never apply. A borrower who assumes a fifteen-year-old wire fraud conviction is invisible may spend money on an appraisal before finding out otherwise. Both are avoidable if you read the line exactly as it is written.

This page covers what the background search covers, who it runs on, the one disqualifying category and its time period, the separate screens that run at the same time and are often confused with it, and the several questions the guideline simply does not answer.

The rule as written

Three qualifiers do all the work in that sentence, and each one narrows it.

Felony. The line says felony. It does not say conviction. It does not say misdemeanor. A misdemeanor is not named anywhere in the eligibility criteria.

Related to any financial fraud. This is the category limit, and it is the reason the rule is narrower than the fear. The offence has to be tied to financial fraud. The guideline does not enumerate statutes, so an underwriter is reading the conviction record and deciding whether it falls in that category. A conviction with no financial-fraud element is not named in this rule.

Within the past 10 years, based on released date. The clock does not run from the date of the offence, and it does not run from the date of conviction. It runs from the release date. That distinction changes the arithmetic for anyone who served time. A conviction from twelve years ago with a release date six years ago sits inside the ten-year window. A conviction from eleven years ago with no custodial sentence, where the release date is the same period, sits outside it.

Read the three qualifiers together and the rule covers a specific and identifiable population: people convicted of a financial-fraud felony who were released fewer than ten years ago. It does not, on its face, reach anyone else.

What the background search is, and when it runs

The background search is not something triggered by a disclosure on the application. It is a standing requirement of guarantor qualification and a line item on the document checklist, described there as the Borrower and Guarantor's background check. It runs on the file whether or not anyone raises the subject.

The document checklist states the same exemption slightly differently: a background search is not required on a legal entity borrower incorporated less than six months before the final approval date. Note what that exemption covers. It is an exemption for the entity — a company that has existed for a matter of weeks has no meaningful record to search. It is not an exemption for the natural persons behind it.

Who the search runs on

This is where borrowers most often misjudge the scope, and it works in both directions.

The search reaches three groups:

1. All parties which control the borrower. No ownership percentage attaches to this clause. Control is the test, not equity.

2. Any party owning 25% or more, directly or indirectly. Indirect ownership counts, so a 40% member of an LLC that owns 70% of the borrowing entity is inside the threshold at 28%.

3. All entities within the layered ownership structure. The entities themselves, not only the people.

"Control" is defined elsewhere in the program in a way worth reading closely. A controlling holder or manager is any individual or entity with authority to direct the activities of the borrowing entity, or to act on its behalf — borrowing funds, dissolving the entity, removing members — without needing unanimous or majority member consent. A person who can do those things is searched even if they hold no membership interest at all.

The practical consequence: a manager brought in to run the entity, with no equity, is inside the search. A passive 10% member with no control rights is not named by the clause. Who ends up on the note and the guaranty is a separate question with its own thresholds, covered in [who has to sign a personal guaranty on a commercial loan](/blog/who-has-to-sign-a-personal-guaranty-on-a-commercial-loan).

What the guideline does not say

This is the more useful half of the page, and it needs to be stated as absence rather than as permission. The guideline is a document. Where it is silent, it is silent — that is not the same as a written allowance, and it is not the same as a prohibition either.

The eligibility criteria do not address:

• Misdemeanors. No misdemeanor of any kind is named as a disqualifier.
• Felonies with no financial-fraud element. Violent offences, drug offences, and other felony categories are not named in this rule. They are not listed as eligible either; they are simply not addressed by the criminal-history line.
• Arrests, charges, or indictments that did not result in conviction. The rule is written around convictions. A separate criterion addresses pending litigation, and it is a financial test, not a criminal one — see below.
• Expunged, sealed, vacated, or pardoned records. Nothing in the guideline describes how such a record is treated.
• A statutory list defining "financial fraud." The category is stated in plain words and applied by an underwriter to the record in front of them.
• A written exception or waiver path for this specific criterion. The guideline names exceptions in other places — for non-arm's-length transactions, for cash-out on inherited property — and does not name one here. Do not read that silence as an exception route, and do not read it as a guarantee that no discretion exists.

Legal questions belong with your attorney

Whether a record is expungeable in your state, whether a sealed or expunged conviction must be disclosed on a loan application, what a deferred adjudication or a withheld adjudication is deemed to be for these purposes, and how a pardon changes the record — these are legal questions with state-specific answers. They are your attorney's to answer, not ours, and not your loan officer's. We can tell you what the credit criteria say. We cannot tell you what your record legally is.

The screens that run alongside, and are not this rule

Several other criteria in the same section get confused with criminal history because they sound adjacent. They are separate tests with separate triggers.

The credit criteria run on their own terms and are unaffected by a background search result. A minimum FICO of 650 applies to the primary guarantor and 640 to all other guarantors, with rate and leverage set off the guarantor with the highest middle score. Personal credit reports must be dated within 120 days of the note date. Outstanding tax liens have their own treatment, covered in [how a tax lien affects a commercial real estate loan](/blog/how-a-tax-lien-affects-a-commercial-real-estate-loan).

The lookback windows, compared

Several eligibility criteria are structured as lookback periods, and they are easy to conflate. Measured in months, and each measured from the date the criterion specifies:

The financial-fraud window is by a wide margin the longest of the eligibility lookbacks, and it is the only one measured from a release date rather than a financial event. Chapter 13 carries a second measure — 24 months from the date of dismissal, as against 12 from discharge — which is why it appears shorter here than it may be in practice.

Where a record surfaces indirectly

There is one place a background search reaches beyond the current ownership group. Where the property or the entity's membership interests were transferred without an exchange of monetary value or adequate consideration — intra-family transfers, divorce, inheritance, estate planning, gifts, conveyances into trusts or business entities — all such transfers and ownership changes must be reviewed regardless of timeline. In connection with that review we may require credit and background reports for all prior vested owners, and may reduce LTV or cash-out proceeds where the review warrants it.

So a file with a no-consideration transfer in its chain of title can pull a prior owner into the background search even though that person has no current interest in the borrower. Note the hedging in the source: may require, may reduce. It is not automatic, and the guideline does not specify what triggers it.

How to handle this on a live file

Three things are worth doing before an application, in order.

Establish the two facts. Offence category and release date, from the record. If the offence has no financial-fraud element, or the release date is more than ten years back, the criterion as written does not reach you.

Map who is inside the search. Everyone with control of the borrowing entity, everyone at 25% or more directly or indirectly, and every entity in the ownership chain. If your structure has three layers, all three are searched. Newly formed entities under six months old are exempt from the entity-level search; the people behind them are not.

Raise it at application rather than later. The search runs on every file. Nothing about the sequence changes the answer, but it does change how much money is spent before you get one. Third-party reports on a commercial file — appraisal, environmental screening, title — are ordered well before closing, and a decline that lands after they are ordered is a more expensive decline for everyone than one that lands at application. Note also that loan documents in this market routinely carry carve-outs transferring personal liability for fraud or intentional misrepresentation; an inaccurate application is a separate problem from the underlying record, and a worse one.

What this page does not do

This is not an approval, a pre-qualification, or a quote, and nothing here commits us to any particular decision on any particular file. Underwriting is a whole-file judgment; a borrower can clear the criminal-history criterion and be declined on credit, property, cash flow, structure, or state eligibility.

It does not tell you how a specific conviction will be categorised. Whether a given offence is "related to financial fraud" is applied by an underwriter to your actual record, and this page cannot pre-decide it.

It does not answer legal questions. Expungement, sealing, disclosure obligations, the legal effect of a pardon or a deferred adjudication — those go to your attorney.

It does not cover who is required to sign a guaranty, which follows its own ownership and control thresholds, and it does not cover the treatment of tax liens, judgments, bankruptcies, or foreclosures, each of which has separate criteria. It does not address background or licensing requirements imposed by anyone other than us — a franchisor, a state licensing board, a ground lessor, or a title insurer may apply tests of their own that we do not control and do not speak to here.

And it does not address the criteria of any other program. This page states the small balance commercial criteria effective 8/3/2026 and nothing else.

Guideline SBC 08/03/2026 · Reviewed August 31, 2026

Published September 1, 2026 · Updated September 1, 2026