On January 19, 2021, in one of the Trump administration’s last actions to protect religious liberty, the U.S. Small Business Administration (SBA) published a notice of proposed rulemaking (NPRM) to conform several of its regulations to the First Amendment’s Free Exercise Clause. SBA released this press release on the matter. If finalized, the proposed rule would remove five regulatory provisions that exclude certain religious businesses and organizations from multiple SBA programs. The affected programs include SBA’s Business Loan and Economic Injury Disaster Loan (EIDL) programs, which have become very important during the COVID-19 pandemic. Comments on the proposed rulemaking are due on February 18, 2021.

This action is the latest installment of rulemaking activity that agencies have undertaken in response to the Supreme Court’s decision in Trinity Lutheran Church of Columbia, Inc. v. Comer (2017). In Trinity Lutheran, a church and its preschool and daycare center sought a state grant to resurface their playground, and the state denied the application. The state “had a policy of categorically disqualifying churches and other religious organizations from receiving grants under its playground resurfacing program,” and the question presented was whether that discriminatory policy passed muster under the Free Exercise Clause. The Court held that it did not, reaffirming that the First Amendment generally prohibits the government from denying access to public benefits solely on the basis of religious status.

In holding for the church, the Court rejected the state’s attempted reliance on Locke v. Davey (2004). Locke upheld a state’s refusal to fund devotional theology degrees in its scholarship program. The Trinity Lutheran majority distinguished Locke as upholding a restriction on a religious use of funds — not a restriction based on the religious status of the student — and one that “lay at the historic core of the Religion Clauses” because it resembled support of clergy. But that’s not to say that such religious-use restrictions are required by the Establishment Clause. Indeed, Locke concluded that the Establishment Clause would have permitted the state to fund devotional theology degrees in its neutral scholarship program, which placed the choice of degree in the hands of the students.

SBA’s proposed rule pertains to five regulations that “render ineligible to participate businesses that are ‘[p]rincipally engaged in’—or businesses whose ‘principal activity’ is—‘teaching, instructing, counseling or indoctrinating religion or religious beliefs, whether in a religious or secular setting.’” NPRM (citing 13 C.F.R. 109.400(b)(11), 120.110(k), 123.301(g), 123.502(n), 123.702(b)(6)). SBA previously notified Congress of its decision not to enforce two of them. The proposed rule would remove them all.

As SBA’s notice of proposed rulemaking explains, the provisions fall under Trinity Lutheran rather than Locke. That is because they hinge not on what applicants do with program funds, but rather on what they do generally. “[T]hese exclusions of otherwise-eligible participants are based not on any religious use of business loan funds or disaster assistance, but rather are based on the religious activities in which they generally engage, precluding them from even secular uses of business loan funds and disaster assistance.” In other words, “they categorically disqualify otherwise-eligible faith-based organizations from receiving business loan funds and disaster assistance solely on account of their religious status.” That places them within Trinity Lutheran rather than Locke

SBA concluded that “any interest in prohibiting religious uses of funds cannot justify such a sweeping, status-based exclusion." Indeed, as the Court recently held in Espinoza v. Montana Department of Revenue (2020), ‘[s]tatus-based discrimination remains status based even if one of its goals or effects is preventing religious organizations from putting aid to religious uses.’” In its proposal, SBA further observed that it “cannot identify any other possible interest underlying the subject provisions, much less one that would pass muster under the ‘strictest scrutiny’ that the Court applies to such religious-status-based exclusions.”

A notable aspect of the proposed rule is its choice not to propose any Locke-style religious-use restrictions as a replacement. Citing authoritative Office of Legal Counsel opinions that dealt with analogous federal loan and disaster-assistance programs, the notice of proposed rulemaking concluded that the Establishment Clause does not require religious-use restrictions for the secular and neutral programs at issue. And it noted that current regulations already define—in secular terms—the permissible uses of loan and disaster-assistance funds, so religious-use restrictions would create needless regulation. 

Those interested in commenting on the proposed rule may do so at the Federal eRulemaking Portal using RIN 3245-AH60. Comments also may be mailed to Valerie Mills, Executive Operations Officer, Office of General Counsel, U.S. Small Business Administration, 409 Third Street SW, Washington, DC 20416.