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CORONAVIRUS RELIEF ALERT — CARES Act Alert #6: SBA Issues Guidance on Affiliation Rules and Religious Nonprofits

| Apr 4, 2020 | Firm News |

To explain the key relief for 501(c)(3)s and small businesses in the recently enacted $2 Trillion CARES Act (complete text), we published our CARES Act Alert #1 (Help for Small Businesses & 501(c)(3)s via the PPP); CARES Act Alert #2 (Get Ready to Apply); CARES Act Alert #3 (PPP vs EIDL), CARES Act Alert #4 (initial Guidance from Treasury), and CARES Act Alert #5 (SBA Issues Interim Final Rule). Over $350 billion of the CARES Act is meant for small entities – mostly small businesses and 501(c)(3) nonprofits – with no more than 500 employees.  Most of the money flows through two main loan/grant programs administered by the Small Business Administration (SBA), including the Paycheck Protection Program (PPP). Our Alert #5 from earlier today said that “still further guidance is forthcoming for religious organizations – perhaps as early as today.” Some of that guidance just arrived, as described in this Alert #6.

In a second Interim Final Rule, this one on Affiliation (IFR-Affiliation), posted by SBA here and by Treasury here, the SBA Administrator concluded that faith-based organizations (FBOs) that otherwise qualify for the $350 billion PPP will be exempt from the SBA’s affiliation rules. (In general, to determine if an Applicant’s total number of employees exceeds the size limit for a PPP loan, the Applicant is considered together with its “affiliates.”) This IFR-Affiliation carefully weighs religious freedom principles to determine if and how to apply affiliation rules to FBOs.  Following are two excerpts from the Rule:

    • This rule exempts otherwise qualified faith-based organizations from the SBA’s affiliation rules, including those set forth in 13 CFR part 121, where the application of the affiliation rules would substantially burden those organizations’ religious exercise. This exemption is required, or at a minimum authorized, by the Religious Freedom Restoration Act (RFRA) (P.L. 103-141), which provides that the “[g]overnment shall not substantially burden a person’s exercise of religion” unless the government can “demonstrate[] that application of the burden” to the person is both “in furtherance of a compelling governmental interest” and “the least restrictive means of furthering that compelling governmental interest.” [Page 6]
    • [T]he SBA’s affiliation rules, including those set forth in 13 CFR part 121, do not apply to the relationship of any church, convention or association of churches, or other faith-based organization or entity to any other person, group, organization, or entity that is based on a sincere religious teaching or belief or otherwise constitutes a part of the exercise of religion. This includes any relationship to a parent or subsidiary and other applicable aspects of organizational structure or form. A faith-based organization seeking loans under this program may rely on a reasonable, good faith interpretation in determining whether its relationship to any other person, group, organization, or entity is exempt from the affiliation rules under this provision, and SBA will not assess, and will not require participating lenders to assess, the reasonableness of the faith-based organization’s determination. [Page 9-10]

From a practical perspective, this IFR-Affiliation addresses some focused concerns that may have discouraged some FBOs from applying for PPP loans. Further SBA guidance is expected very soon.

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For assistance, please contact one of our attorneys: Nancy LeSourdMatthew SzymanskiScott Ward, or Derek Gaubatz. Our CARES Act Team also includes our non-attorney consultant Phil Eskeland. Mr. Szymanski and Mr. Eskeland bring experience from their past service, respectively, as the chief of staff and the deputy chief of staff of the Small Business Committee of the U.S. House of Representatives, including during the legislative response to 9/11. More Alerts to follow.