February 19, 2021

Bottom Line: The Consolidated Appropriations Act, 2021 does not significantly reduce the religious liberty-related concerns that SBA loan programs pose to faith-based loan applicants. In fact, changes in executive and legislative priorities may have increased cause for concern in this area.

Many faith-based organizations have considered accepting federal financial assistance through the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act loan programs (the Paycheck Protection Program, or “PPP,” and the Economic Injury Disaster Loans, or “EIDL”) and the new relief under the Consolidated Appropriations Act, 2021 (the “2021 Act”).  

The leaders of these organizations must discern whether “strings attached” to the funds will compromise their organization’s ability to carry out its mission in a manner consistent with the organization’s sincerely-held religious beliefs.  

One way these “strings attached” can impact borrowers is through the imposition of new oversight authority. PPP and EIDL borrowers become subject to the reporting requirements and even audits by the Small Business Administration (“SBA”). For faith-based organizations that are not required to file the IRS Form 990, such review could be a significant challenge. In another example, borrowers must certify they will implement certain federal government policies during the term of the loan. In some cases, this could mean a program could not require its participants to sign a statement of faith or to even be practicing the organization’s faith.  

The CARES Act did not directly address these and other key issues implicated by faith-based nonprofits’ participation in the loan programs. As a result, these organizations had to rely on agency regulations and informal guidance in their decisions. Napa Legal discussed these issues in previous posts (here and here).

The recent Consolidated Appropriations Act, 2021 (the “2021 Act”) includes two specific provisions related to faith-based organizations and the loan programs. However, the Act does not significantly reduce the original religious liberty concerns.

Three areas of continued concern include: eligibility, affiliation requirements, and conditions for borrowers (in other words, “strings attached”).  

1. Eligibility.  

The Small Business Administration (“SBA”) historically did not allow religious organizations to participate in the loan programs that the CARES Act expanded into the PPP and EIDL.  

In the Sec. 311(c)(2) of the 2021 Act, Congress formally removed the prohibition with respect to religious organizations’ participation in the PPP. While this is certainly good news, the development does not significantly change the status quo. Religious organizations have already participated in the PPP under the assumption that they are eligible

Notably, the 2021 Act did not reference the EIDL prohibition on loans to religious borrowers (contained in 13 CFR 123.301(g)). Informal SBA guidance under the previous administration indicated the SBA would not enforce that prohibition, but the new administration has the discretion to change that position.  

2. Affiliation.  

The first round of PPP is limited to borrowers of under 500 employees and the second round is limited to borrowers of under 300 employees.  

Ordinarily, the SBA requires its borrowers to include “affiliates” when determining whether the organization’s size is small enough to qualify for the programs.  

This posed a problem for certain religious organizations that, though separate civilly and/or canonically, could be grouped as affiliates for purposes of PPP borrowing due to the ecclesiastical authority exercised over such organizations. Thus, in some circumstances, parishes within a diocese could have been treated as affiliated for purposes of these rules.  

Recognizing this reality and the harm which could result, the SBA issued regulations exempting religious organizations from the affiliation requirements when determining their size eligibility.  

Through a “sense of Congress” resolution included in the 2021 Act, Congress informally stated its approval of these regulations. However, notably, Congress declined to formally incorporate the regulations into the law.  

3. Borrower Conditions.  

Under 13 CFR § 112 and 113, all SBA program borrowers, including PPP and EIDL participants, are considered recipients of federal financial assistance. Accordingly, during the terms of the loan, the borrowers must commit to operating their organizations according to certain federal policy positions.  

Occasionally, the federal policy positions may conflict with an organization’s sincerely-held religious beliefs and free exercise.  

For example, consider a youth summer camp which has borrowed funds under the PPP. Under 13 CFR § 113.3(a), during the term of the loan, the camp may not be able to require its program participants to be practicing Catholics. Such a requirement would discriminate based on religion in the provision of services and accommodations offered and thus violate 13 CFR § 113.3(a).  

The 2021 Act did not address these concerns or establish any religious exemptions or accommodations.  

Accordingly, the borrower conditions outlined in 13 CFR §§ 112 and 113 are of continued, perhaps greater, concern than under the original CARES Act.  

Of course, in some contexts, the conditions may arguably violate borrower’s First Amendment rights. However, if the new administration takes the position that the conditions are constitutional and should be upheld, the SBA will enforce the conditions despite objections. Litigation may be necessary to settle the questions of constitutionality. For organizations looking to avoid or minimize uncertainty, this ambiguity may be a serious drawback to participating in either the PPP or the EIDL.  

Further Reading:  

CARES Act  

Consolidated Appropriations Act, 2021  

13 CFR § 112  

13 CFR § 113

13 CFR § 123.301

15 U.S. Code § 636

Frequently Asked Questions for Faith Based Organizations