Late regulation would make religious businesses eligible for taxpayer-backed SBA loans

The U.S. Small Business Administration has proposed new rules that would permanently allow religious businesses to receive taxpayer-backed small business loans, forcing the Biden administration into a politically sensitive debate that raises questions about separation of church and state.

The proposed regulation, made public Tuesday afternoon on President Donald Trump’s last full day in office, would do away with restrictions preventing taxpayer-backed loans from going to “businesses principally engaged in teaching, instructing, counseling or indoctrinating religion or religious beliefs, whether in a religious or secular setting.”

If the rule were finalized, it would open up seven SBA loan programs to a range of religious-affiliated businesses such as Christian publishers and for-profit schools affiliated with religious organizations. It’s unclear whether the rules would also apply to tax-exempt places of worship, such as churches, or nonprofit health-care organizations such as Catholic hospitals.

Outgoing SBA Administrator Jovita Carranza characterized the regulation as an effort to give religious businesses the same rights as other businesses.

“America’s faith-based small businesses and organizations play a vital role in providing employment opportunities, products, and essential educational, training and youth social services that benefit both our local communities and the overall national economy,” Carranza said.

The proposed rule “would ensure that these businesses and organizations are not forced to choose between their faith and the SBA financial assistance that they need to continue serving the public and employing our neighbors,” she said.

The proposed rule still needs to undergo a lengthy approval process, starting with a public comment period ending Feb. 18. Even when that process concludes, it will fall to an SBA headed by Biden-appointed Administrator Isabel Guzman, a former small business owner who was SBA chief of staff in the Obama administration, to decide whether and how to move forward.

Even so, the last-minute regulation effectively forces the Biden administration into a thorny debate that is sure to elicit strong feelings within religious communities that have seen barriers to public funding as a violation of their First Amendment rights to religious expression and freedom. Conversely, it will also stir activism among those who will see the subsidies as a threat to the First Amendment’s ban on government-established religion. The Supreme Court has said the government is banned from favoring one religious view over another or favoring religion over non-religion.

The regulation mirrors a separate policy from the Department of Education, which would make religious-affiliated charter schools eligible for certain grant programs.

Both proposals rely heavily on two recent Supreme Court decisions from 2017 and 2020, which determined that religious organizations should not be excluded from government programs solely on the basis of their status as a religious group.

John Inazu, a professor of law and religion at Washington University in St. Louis, said the Supreme Court has been gradually lessening restrictions on funding for religious organizations over the past decade. But he added that the Trump administration took an “aggressive” interpretation of recent court decisions and pushed new policies favored by religious conservatives.

“The Trump administration has been signaling these kinds of policy moves as an appeal to evangelicals,” Inazu said.

The new SBA regulation would also institutionalize a key aspect of the Paycheck Protection Program, a massive coronavirus relief program that offered well over $500 billion in loans to a range of business and nonprofits.

The Treasury Department under President Donald Trump waived the religious affiliation rules when it implemented PPP, something that allowed not only religious-affiliated businesses but also churches to receive help.

Churches, mosques and other faith-based organizations benefited widely from SBA loans as the massive PPP program has been implemented over the past year. All told, more than $7 billion went to roughly 90,000 religious groups last year through the program.

Almost 5,000 Catholic organizations received a total of $828 million through PPP, much of it going to Catholic schools, according to a Washington Post analysis of data made public by the SBA. Just over 10,000 Baptist organizations received PPP loans for a total of $735 million. Jewish and Muslim-affiliated organizations received $124 million and $20 million, respectively.

Some megachurches and large Catholic organizations received multimillion-dollar loans individually. One of them is Harvest Christian Fellowship Church in Riverside, Calif., which received $2.9 million to pay several hundred employees. In a typical year, Harvest Riverside employs about 370 people, including pastors, teachers, video production staff, maintenance, phone counselors and others.

In an email forwarded by a representative, Harvest Riverside pastor John Collins praised the SBA’s support of religious organizations, which he says helped avert “a more severe pandemic of despair and hopelessness” throughout the crisis.

“I think our politicians—Democrats and Republicans—ought to be very proud that they were able to create such an unprecedented program,” Collins said. “I also am grateful they recognized the indispensable role that faith based, not-for-profit organizations and places of worship have in serving their communities during a crisis.”