Applicability of Federal Civil Rights Laws to Recipients of CARES Act Loans
Legal Sidebari
Applicability of Federal Civil Rights Laws to
Recipients of CARES Act Loans
May 1, 2020
The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) authorizes the Small Business
Administration (SBA) to provide economic assistance temporarily to eligible organizations. Section 1102
of the CARES Act establishes the Paycheck Protection Program (PPP), which enlarges the SBA’s
authority to guarantee loans under Section 7(a) of the Small Business Act. Section 1110 of the CARES
Act broadens SBA’s authority to distribute Economic Injury Disaster Loans (EIDL) under Section 7(b)(2)
of the Small Business Act. Applicants for the latter loan can receive an emergency grant advance that the
recipient does not have to repay, even if the loan is denied. Congress expanded the funding for these
accounts in the Paycheck Protection Program and Health Care Enhancement Act.
This extension of federal funds to new recipients raises questions about what obligations may accompany
the issuance of such loans. Various federal civil rights laws condition the receipt of federal funds on
recipients’ adherence to certain antidiscrimination mandates. This Sidebar examines the potential
application of these civil rights laws to recipients of EIDL grants and PPP and EIDL loans. It also
considers potential limits on the scope of these obligations.
The Small Business Act and the CARES Act
The SBA guarantees loans for certain small businesses under Section 7(a) of the Small Business Act.
SBA-guaranteed loans are then distributed to recipients by third-party lenders. The CARES Act amends
Section 7(a) to authorize the SBA to guarantee loans under the PPP for a broader pool of entities. Subject
to various conditions and limitations, PPP loans are forgivable if recipients keep their employees on
payroll and use the funds for payroll, rent, mortgage interest, or utilities. The CARES Act also amends
Section 7(b)(2) of the Small Business Act, which authorizes SBA to distribute loans directly to eligible
organizations that suffer economic injury due to a disaster. It also expands eligibility for these EIDL loans
and awards applicants grant advances that need not be repaid (even if a loan application is not approved).
SBA Regulations and Civil Rights Laws
Federal civil rights laws prohibit various types of discrimination in any program or activity that receives
federal financial assistance. For instance, Title VI of the Civil Rights Act of 1964 (Title VI) prohibits
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discrimination based on race, color, or national origin; Title IX of the Education Amendments of 1972
(Title IX) bars discrimination based on sex in educational programs; the Age Discrimination Act of 1975
proscribes discrimination based on age; and Section 504 of the Rehabilitation Act forbids discrimination
based on a disability. These statutes are generally enforced against recipients of financial assistance in two
ways: (1) by the federal agencies that distribute the assistance; and (2) through private rights of action
brought against recipients in federal court. In the latter case, plaintiffs may seek injunctive relief,
monetary damages, or other relief against the recipient.
SBA regulations currently prohibit entities that receive federal financial assistance from discriminating
based on a number of considerations. Three antidiscrimination regulations have similar compliance
procedures: 13 C.F.R. Section 112 implements Title VI; 13 C.F.R. Section 117 implements the Age
Discrimination Act; and Subpart A of 13 C.F.R. Section 113 appears to operate as a catch-all provision,
barring discrimination based on race, color, religion, sex, handicap, or national origin. Recipients must
keep records and produce compliance reports at SBA’s request concerning these requirements; they must
also permit SBA access to records and facilities. Persons who believe a recipient has discriminated against
them can file a complaint with the SBA. If the SBA’s investigation reveals a violation, the SBA may,
among other things, suspend payments to the recipient or accelerate the maturity of a recipient’s
obligation (the SBA might also attempt less formal means to ensure compliance).
Subpart B of 13 C.F.R. Section 113 operates somewhat differently. That regulation implements Title IX
and bars discrimination based on sex in education programs. Entities subject to this provision are subject
to similar compliance procedures as set forth above, and also must (1) designate an employee to
coordinate compliance with the regulation; (2) adopt and publish grievance procedures for complaints of
violations of the regulations; and (3) notify students, employees, and applicants for admission that the
entity is barred from discriminating based on sex.
Do EIDL Loans and Grants and PPP Loans Constitute Federal Financial
Assistance?
In the absence of a statutory definition, precisely what constitutes federal financial assistance such that an
entity becomes subject to federal civil rights laws is a question that has elicited considerable contention.
As an initial matter, receipt of federal grants and loans from a federal agency is generally considered
under case law to be federal financial assistance under Title IX, Title VI, the Age Discrimination Act, and
Section 504 of the Rehabilitation Act. SBA regulations also define federal financial assistance as
including grants and loans of federal funds. Thus, at least under the terms of these statutes and
implementing regulations, emergency grants and loans under the EIDL program disbursed directly from
SBA appear to constitute federal financial assistance. As such, the SBA may be able to enforce
antidiscrimination requirements for recipients of loans and grants under the EIDL program.
But less certain is whether receipt of guaranteed loans under the PPP subjects a recipient to these civil
rights requirements. As mentioned above, PPP loans are guaranteed by the SBA but actually disbursed by
third-party lenders. Because recipients of PPP loans receive federal funds from third parties rather than
directly from the government, they may not be subject to the same requirements.
Adding to the uncertainty, Title IX, Title VI, and the Age Discrimination Act appear to exempt
“contract[s] of insurance or guaranty” from their requirements, and those exemptions may apply to
guaranteed loans. Section 504 of the Rehabilitation Act lacks an express exemption, but Department of
Justice implementing regulations nevertheless include it. Courts have taken differing approaches in
deciding whether the lack of the exemption in Section 504 means that banks that distribute federally
guaranteed loans are subject to the statute. SBA regulations are also inconsistent. Some, such as those
implementing Title VI, include the exemption, while other regulations implementing civil rights law
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requirements do not. Thus, the precise reach of these statutory and regulatory civil rights requirements for
entities that receive PPP loans, but do not also receive EIDL loans or grants, is difficult to predict.
That said, as a practical matter, applicants for PPP loans must nonetheless agree “not to discriminate in
any business practice, including employment practices and services to the public on the basis of
categories cited in 13 C.F.R., Parts 112, 113, and 117 of SBA Regulations.” As mentioned above, the
categories in those regulations extend to age, race, color, religion, sex, handicap, or national origin. Aside
from whether specific civil rights statutes are directly enforceable against recipients of loans issued under
the PPP program, the SBA might argue that recipients nonetheless are contractually obligated not to
discriminate on the basis of these categories. The remedy for noncompliance might conceivably arise in a
lawsuit brought by the government to enforce the contractual terms or via the administrative procedures
outlined in SBA regulations. However, to the extent a recipient is only obligated to follow these
nondiscrimination provisions through the force of a contract, rather than because a statute directly applies
to an entity, potential victims of discrimination may not have a cause of action to enforce these statutes.
In sum, recipients of EIDL grants and loans are likely subject to the statutory and regulatory civil rights
requirements discussed above. At least some of those requirements may not apply to recipients who only
receive PPP loans, meaning that aggrieved individuals might not be able to sue recipients under those
statutes. However, because recipients of PPP loans agree to abide by certain nondiscrimination provisions
in SBA regulations, the SBA might nonetheless be able to enforce those requirements against recipients.
Enforcement of Civil Rights Laws in Court
Besides federal agency enforcement, Title VI, Title IX, Section 504 of the Rehabilitation Act, and the Age
Discrimination Act are all also enforceable through private suit. As noted above, while it is uncertain
whether these statutes’ requirements attach to recipients of PPP loans, the statutes likely apply to entities
participating in the EIDL program, as they receive grants and loans directly from the SBA. The
constitutional authority for enactment of these civil rights statutes is the Spending Clause of the
Constitution, which reviewing courts have construed to not only enable Congress to distribute federal
funds, but also to impose conditions on the use of that assistance. Federal courts have analyzed Spending
Clause legislation by drawing upon the concept of a contract.
The Supreme Court has drawn upon the contract metaphor to reason that Title VI, Title IX, and Section
504 are each “an arrangement in the nature of a contract” between Congress and the recipient of federal
funds (and has noted that the Age Discrimination Act is defined identically). Drawing upon this
conception of Spending Clause statutes as akin to contracts, the Court has reasoned that these statutory
requirements extend to the intended recipients of federal financial assistance, whether transmitted directly
or indirectly (e.g., a university receiving federal funds initially granted to students), but do not extend to
parties who merely benefit from the extension of that aid to others. For instance, in Department of
Transportation v. Paralyzed Veterans of America, the Court held that Section 504 of the Rehabilitation
Act did not apply to commercial airlines because they were not recipients of federal financial assistance.
The Court noted that while airport operators accepted federal funds and were therefore recipients under
the law, commercial airlines did not do so. Benefiting from funds given to airport operators, in and of
itself, did not mean that the airlines were themselves recipients.
In addition, the Court has cited the contractual nature of Spending Clause civil rights statutes as a basis
for narrowly construing the liability of recipients. For instance, in Gebser v. Lago Vista Independent
School District, the Court crafted a restrictive damages remedy in a private suit brought under Title IX for
sexual harassment. (Title IX contains no express private right of action; rather, such lawsuits were
judicially implied and thus have largely been shaped by judicial construction.) In that case, the Court
emphasized the contractual nature of Title IX to hold that a recipient could only be liable for damages if
they have actual notice of harassment. The Court rejected theories of constructive notice or respondeat
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superior and instead required plaintiffs seeking damages to show that recipients were deliberately
indifferent to sexual harassment.
Similarly, the Supreme Court has interpreted Spending Clause legislation that imposes conditions on
states that accept federal funds according to a contract model. The Court has indicated that the “financial
inducement offered by Congress” may not be impermissibly coercive such that the offer compels
compliance. Given the nature of states as sovereign entities, the Court’s recognition of limits on the
federal government’s power to coerce states may not similarly constrain the federal government’s
relationship with private entities. But because the Court’s reasoning in these decisions turned in part on
the nature of Spending Clause statutes as contracts, the decisions might also be instructive in how a court
could construe requirements for private entities that receive federal funds.
Nevertheless, in light of the Court’s reliance on principles of contract law to interpret the reach of civil
rights statutes that apply to federal funding recipients, it is likely that at least some contract principles
would apply in a situation where an individual brings an antidiscrimination suit against a recipient of
CARES Act funds. In general, this means that any conditions for recipients of financial assistance must be
unambiguous in order to establish damages liability. Recipients must have notice both of the potential
remedies available against them and the “scope of conduct” for which they may be held liable.
More broadly, many recipients of CARES Act funds will presumably receive one loan or grant (rather
than continuously accepting funds over time, as certain entities do). Neither the CARES Act nor civil
rights statutes explicitly address the duration of obligations, although one interpretation of an SBA
regulation is that these requirements expire upon repayment or forgiveness of the loan. Assuming that
recipients are only obligated to comply with these requirements during that time, the potential
applicability of federal civil rights requirements may be somewhat limited, as the abbreviated time period
in which an entity could actually be considered a recipient of federal financial assistance restrains the
avenues for litigation.
In sum, because these nondiscrimination statutes rest on Congress’s Spending Clause power, courts have
generally interpreted their operation in accordance with contract law principles. This means that the
conditions imposed on recipients of federal financial assistance must be unambiguous for individuals to
prevail in a lawsuit alleging violation of these requirements. However, due to the potentially abbreviated
nature of financial assistance under the CARES Act, the effect of these nondiscrimination provisions on
entities that receive federal funds may be relatively limited.
Considerations for Congress
Given the uncertainty surrounding which entities are subject to federal civil rights requirements, Congress
might consider clarifying these statutes’ scope. For CARES Act funding recipients, Congress could
explicitly provide that recipients of certain categories of assistance are (or are not) subject to particular
civil rights requirements (e.g., specifying whether CARES Act funds qualify as “federal financial
assistance” for purposes of a specific statute). Alternatively, Congress could clarify who is subject to
federal civil rights laws more broadly by providing a definition of “federal financial assistance” for
various civil rights laws. Likewise, Congress could more specifically define the precise legal obligations
that arise under civil rights laws for recipients of federal financial assistance, rather than let courts and
federal agencies shape and define the relevant standards. The parameters of the Supreme Court’s
Spending Clause decisions would necessarily limit Congress’s discretion in this area—as the Court has
established limits on the conditions that such legislation may impose on states.
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Author Information
Jared P. Cole
Legislative Attorney
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