November 7, 2018

Best Practices: Taking the Guesswork Out of Religious Eligibility Determinations

by Michelle Sergent Kaas

Pursuant to the First Amendment, “Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof. . .” (U.S. Const. Amend I). The First Amendment prohibits Congress from favoring one religion over another. Accordingly, an SBA lender cannot make a loan to a Small Business Applicant that is “principally engaged in teaching, instructing, counseling or indoctrinating religion or religious beliefs, whether in a religious or secular setting.” (13 CFR Section 120.110(k)). However, a Small Business Applicant is not ineligible for SBA financing “merely because it offers religious books, music, ceremonial items another religious articles for sale.” (SOP 50 10 5(J), Subpart B, Chapter 2, Section III(A)(11) . Determining whether a Small Business Applicant is principally engaged in teaching, instructing, counseling or indoctrinating religion is not an easy task.


The prior SOP, SOP 50 10 5(I), required lenders participating in the Preferred Lenders Program (“PLP”) to unilaterally make religious eligibility determinations. (SOP 50 10 5(I), Chapter 2, Section III(D)(3)(k)). SBA could review the lender’s determination during a request for guaranty purchase or lender oversight activities, leaving the lender open to a potential denial of its SBA guaranty, if the lender made an incorrect determination.


SOP 50 10 5(J) has taken the guesswork out of the religious eligibility determination for lenders. SOP 50 10 5(J) now requires that PLP lenders submit their documentation to the SBA for an eligibility determination. “If it appears an Applicant may be connected, associated or affiliated with a religious organization, or may have a religious component, the Lender must complete the Religious Eligibility Worksheet (SBA Form 1971), attached to [the] SOP as Appendix 8.” (SOP 50 10 5(J), Subpart B, Chapter 2, Section III(A)(11)). The Religious Eligibility Worksheet requires the lender to detail, inter alia, the use of proceeds, the relationship to any religious organization, the nature of the religious component and the quantity and extent of the religious component with regard to the entire business.


Prior to requesting a loan number, a PLP Lender “must submit the completed worksheet and supporting documentation to for an eligibility determination. Such supporting documentation includes, but is not necessarily limited to, Lender’s Credit Memorandum; the Applicant’s business plan; any mission statement of the Applicant; and, where applicable, a detailed statement of Applicant’s curriculum. SBA may request additional documentation as needed to complete the eligibility review. If SBA approves the submission, the PLP Lender can process the loan under its delegated authority. The PLP Lender must still maintain the worksheet and all supporting documentation in its loan file and submit the documentation to SBA with any request for a guaranty purchase. The PLP Lender also must present this documentation if required to do so during any lender oversight activities.


A Lender submitting its SBA loan application through general processing (“GP”) must continue to submit the completed Religious Eligibility Worksheet and the documentation described above with the application to the Loan Guaranty Processing Center (“LGPC”) where Center Counsel will review the documentation, make a recommendation and forward the matter to the Associate General Counsel for Litigation. The LGPC will then notify the Lender of the determination made by the Associate General Counsel for Litigation.
For more information on religious eligibility determinations in the context of SBA lending, please contact Michelle Sergent Kaas at 267.470.1167 or at