Rule2026-19878
Removing Constitutional Concerns From SBA Programs
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
September 29, 2026
Effective
September 29, 2026
Issuing agencies
Small Business Administration
Abstract
The U.S. Small Business Administration (SBA) is publishing this final rule to remove certain unnecessary and potentially unlawful regulatory provisions requiring affirmative action by SBA program applicants or recipients, and to revise a regulatory provision to make technical corrections.
Full Text
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<title>Federal Register, Volume 91 Issue 187 (Tuesday, September 29, 2026)</title>
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[Federal Register Volume 91, Number 187 (Tuesday, September 29, 2026)]
[Rules and Regulations]
[Pages 61295-61302]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2026-19878]
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SMALL BUSINESS ADMINISTRATION
13 CFR Part 112
RIN 3245-AI72
Removing Constitutional Concerns From SBA Programs
AGENCY: U.S. Small Business Administration.
ACTION: Final rule.
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SUMMARY: The U.S. Small Business Administration (SBA) is publishing
this final rule to remove certain unnecessary and potentially unlawful
regulatory provisions requiring affirmative action by SBA program
applicants or recipients, and to revise a regulatory provision to make
technical corrections.
DATES: The final rule is effective on September 29, 2026.
FOR FURTHER INFORMATION CONTACT: Paul Fitzpatrick, Associate
Administrator, Office of Entrepreneurial Development,
<a href="/cdn-cgi/l/email-protection#6a3a0b1f06442c031e101a0b1e180309012a19080b440d051c"><span class="__cf_email__" data-cfemail="e9b9889c85c7af809d9399889d9b808a82a99a8b88c78e869f">[email protected]</span></a>.
SUPPLEMENTARY INFORMATION:
I. Executive Summary
SBA is removing and revising certain provisions from its
regulations codified in 13 CFR part 112 (``Nondiscrimination in
Federally Assisted Programs of SBA--Effectuation of Title VI of the
Civil Rights Act of 1964'') to more closely align its regulations with
the language that Congress enacted in Title VI prohibiting
intentionally discriminatory conduct, see 42 U.S.C. 2000d. On December
10, 2025, the Department of Justice (DOJ) issued revisions to its Title
VI regulations. 90 FR 57141. SBA agrees with the rationale provided in
that rule and issues its own rule to address similar issues within
SBA's Title VI regulations.
As noted in DOJ's rule, there are serious statutory and
constitutional concerns with the legality of provisions in SBA's Title
VI regulations that go beyond intentional discrimination by prohibiting
conduct that has an unintentional disparate impact and that encourage,
and sometimes mandate, the use of race without requiring that use be
narrowly tailored to remedy the effects of specifically identified past
discrimination. This rule accordingly rescinds those portions of the
regulations, which are in considerable tension with both the statute
and the Constitution and do not sufficiently serve the public interest.
First, this rule rescinds the full text of 13 CFR 112.3(b)(3),
which authorizes and, in some instances, requires affirmative action
based on race, color, or national origin. Second, this rule makes a
technical correction to the first sentence of 13 CFR 112.4 and rescinds
the third sentence of that section, the latter of which addresses
employment practices of Federal funding recipients. Third, this rule
rescinds the full text of 13 CFR 112.7(a), which provides an
illustrative example of applying the regulations to employment
practices previously covered under the third sentence of 13 CFR 112.4.
Fourth, this rule rescinds the full text of 13 CFR 112.7(d), which
provides illustrative examples of the affirmative action authorized or
required under 13 CFR 112.3(b)(3).
The rule's revisions also conform to Executive Order 14281,
Restoring Equality of Opportunity and Meritocracy, 90 FR 17537 (Apr.
23, 2025). That Order stated that ``[i]t is the policy of the United
States to eliminate the use of disparate-impact liability in all
contexts to the maximum degree possible to avoid violating the
Constitution, Federal civil rights laws, and basic American ideals.''
Id. at 17537. Though SBA would take this action independent of
Executive Order 14281, the Order supports this action.
The practical impact of this rule's modifications will be to make
clear to SBA Federal funding recipients that the SBA Title VI
regulations do not prohibit conduct or activities that have a disparate
impact. Instead, they prohibit only intentional discrimination, and SBA
thus will not pursue Title VI disparate-impact liability against its
Federal funding recipients.
II. Discussion
A. Statutory History of Title VI
Title VI of the Civil Rights Act of 1964, as amended, provides:
``No person in the United States shall, on the ground of race, color,
or national origin, be excluded from participation in, be denied the
benefits of, or be subjected to discrimination under any program or
activity receiving Federal financial assistance.'' 42 U.S.C. 2000d.
Title VI also directs Federal departments and agencies that extend
Federal financial assistance to ``effectuate the provisions of'' Title
VI ``by issuing rules, regulations, or orders of general
applicability.'' 42 U.S.C. 2000d-1. The section of Title VI that sets
forth the prohibited conduct, 42 U.S.C. 2000d, specifically prohibits
intentional discrimination and makes no reference to unintentional
disparate effects or impact. See Alexander v. Sandoval, 532 U.S. 275,
280 (2001) (``[I]t is . . . beyond dispute--and no party disagrees--
that [Title VI] prohibits only intentional discrimination.''). The
statute does not provide any Federal department or agency with
authority to prohibit unintentional disparate impact. And despite ample
opportunities, Congress has enacted no subsequent amendments to Title
VI to impose disparate-impact liability.
B. Relevant Supreme Court Decisions
The Supreme Court has concluded that Title VI, 42 U.S.C. 2000d,
does not prohibit facially neutral policies that result in disparate
outcomes when there is no discriminatory intent. Rather, it prohibits
only intentional discrimination. In 1978, the Supreme
[[Page 61296]]
Court concluded that Congress intended Title VI to prohibit ``only
those racial classifications that would violate the Equal Protection
Clause'' if committed by a government actor. Regents of the Univ. of
Cal. v. Bakke, 438 U.S. 265, 287 (1978) (Powell, J., announcing the
judgment of the Court); id. at 325, 328, 352-53 (Brennan, White,
Marshall, and Blackmun, JJ., concurring in part and dissenting in
part); see also Students for Fair Admissions, Inc. v. President &
Fellows of Harvard Coll., 600 U.S. 181, 198 n.2 (2023) (SFFA). Shortly
before Bakke's Title VI holding, the Supreme Court held that the Equal
Protection Clause requires proof of intentional discrimination and that
``a law or other official act'' that has a ``racially disproportionate
impact'' alone does not violate that Clause. Washington v. Davis, 426
U.S. 229, 239 (1976); see also Vill. of Arlington Heights v. Metro.
Hous. Dev. Corp., 429 U.S. 252, 265 (1977) (``Proof of racially
discriminatory intent or purpose is required to show a violation of the
Equal Protection Clause.''). Taken together, these Supreme Court cases
establish that Title VI's statutory prohibition, like the Equal
Protection Clause, extends only to intentional discrimination.
In 2001, the Supreme Court, in Alexander v. Sandoval, reaffirmed
that settled understanding. 532 U.S. at 280 (``[I]t is . . . beyond
dispute . . . that [Title VI] prohibits only intentional
discrimination.''). In Sandoval, the Supreme Court held that private
plaintiffs lacked a private right of action to enforce DOJ's
``disparate-impact regulations.'' Id. at 285-87. Though the Supreme
Court had previously found a private cause of action to enforce Title
VI's bar on intentional discrimination, id. at 279-80, that conclusion
did not extend to enforcing DOJ's ``disparate-impact regulations.'' Id.
at 285. As the Supreme Court explained, it is ``clear'' that ``the
disparate-impact regulations do not simply apply'' the statutory
prohibition, as the regulations ``forbid conduct that [Title VI]
permits,'' so it is equally ``clear that the private right of action to
enforce [Title VI] does not include a private right to enforce these
regulations.'' Id. Although the Supreme Court in Sandoval
``assume[d],'' without deciding, that DOJ's disparate-impact
regulations were valid, the Court explained that the regulations are in
``considerable tension'' with the Supreme Court's Title VI precedents.
Similarly, the regulations do not ``authoritatively'' construe Title VI
because the regulations ``forbid conduct''--namely, policies that
unintentionally result in a disparate impact--that Title VI
``permits.'' Id. at 281-82, 284-85; see also id. at 286 n.6 (``[Title
VI] permits the very behavior that the regulations forbid.'').
In 2023, the Court emphasized that ``the equal protection clause
requires equality of treatment before the law for all persons without
regard to race or color.'' SFFA, 600 U.S. at 205 (cleaned up). In
reviewing the admissions policies of certain higher education
institutions, the Court explained that the Constitution requires
``eliminating all'' racial discrimination. Id. at 206. To that end, it
held that ``[a]ny exception to the Constitution's demand for equal
protection must survive a daunting two-step examination known in our
cases as `strict scrutiny,''' which requires that racial
classifications ```further compelling government interests''' and be
```narrowly tailored'--meaning `necessary'--to achieve [such]
interest[s].'' Id. at 206-07. Moreover, the Court explained that its
``precedents have identified only two compelling interests that permit
resort to race-based government action,'' only one of which is relevant
in general government administration: ``remediating specific,
identified instances of past discrimination that violated the
Constitution or a statute.'' Id. at 207.
Finally, in 2024, the Supreme Court overruled Chevron U.S.A. Inc.
v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984). See
Loper Bright Enters. v. Raimondo, 603 U.S. 369, 409-12 (2024). In
reaching that result, the Supreme Court made clear that ``statutes . .
. have a single, best meaning'' that is ```fixed at the time of
enactment.''' Id. at 400 (quoting Wis. Cent. Ltd. v. United States, 585
U.S. 274, 284 (2018)). Thus, Title VI's bar on discrimination can have
only one meaning. And under Supreme Court precedent, the single, best
meaning of Title VI is that it ``prohibits only intentional
discrimination'' and ``permits'' facially neutral policies that result
in disparate outcomes when there is no discriminatory intent. Sandoval,
532 U.S. at 280, 286 n.6.
C. Executive Order 14281
On April 23, 2025, the President issued Executive Order 14281. This
Order restated the ``bedrock principle of the United States . . . that
all citizens are treated equally under the law.'' 90 FR at 17537. The
Order explained that this ``principle guarantees equality of
opportunity, not equal outcomes,'' and ``promises that people are
treated as individuals, not components of a particular race or group.''
Id.
The Order also explained that disparate-impact liability
``endangers this foundational principle.'' Id. Disparate-impact
liability, the Order reasoned, ``all but requires individuals and
businesses to consider race and engage in racial balancing to avoid
potentially crippling legal liability.'' Id. As the Order explained,
disparate-impact liability ``not only undermines our national values,
but also runs contrary to equal protection under the law and,
therefore, violates our Constitution.'' Id.
The Order relayed that because of disparate-impact liability's
problems, ``[i]t is the policy of the United States to eliminate the
use of disparate-impact liability in all contexts to the maximum degree
possible to avoid violating the Constitution, Federal civil rights
laws, and basic American ideals.'' Id. The Order directed the Attorney
General to, among other things, review Title VI regulations and
``initiate appropriate action to repeal or amend'' them ``to the extent
they contemplate disparate-impact liability.'' Id. at 17538.
Section 3 of the Order also specifically revoked prior Presidential
approvals of the disparate-impact regulations promulgated under Title
VI. Id. Section 5 of the Order directed the Attorney General to
``initiate appropriate action to repeal or amend the implementing
regulations for Title VI of the Civil Rights Act of 1964 for all
agencies to the extent they contemplate disparate-impact liability.''
Id. Accordingly, this rule revises SBA's currently existing Title VI
regulations to effectuate the Order's policy and purpose.
In any event, SBA would have independently initiated steps toward
making these changes regardless of Executive Order 14281. Even if
Executive Order 14281 did not exist, in other words, SBA would have
taken steps to adopt the policy to eliminate the use of disparate-
impact liability under Title VI. The Order states, and SBA firmly
agrees, that a ``bedrock principle of the United States is that all
citizens are treated equally under the law. This principle guarantees
equality of opportunity, not equal outcomes. It promises that people
are treated as individuals, not components of a particular race or
group. It encourages meritocracy and a colorblind society,'' not race-,
color-, or national-origin-based favoritism. 90 FR at 17537. And
adherence to this principle, including in the issuance of grants, ``is
essential to creating opportunity, encouraging achievement, and
sustaining the American Dream.'' Id.
Imposing disparate-impact liability endangers these policy
objectives. Disparate-impact liability also raises
[[Page 61297]]
serious constitutional concerns, is in considerable tension with the
single, best meaning of Title VI, creates confusion, increases the
costs of compliance, and does not serve the public interest. After
considering the relevant issues and factors and weighing the relevant
considerations, SBA concludes that these reasons together support
eliminating disparate-impact liability from SBA's Title VI regulations.
In any event, SBA concludes that each reason is a separate and
independent basis for eliminating disparate-impact liability from SBA's
Title VI regulations.
D. Need for Rulemaking
SBA's regulation at 13 CFR 112.3, entitled ``Discrimination
prohibited,'' contains a provision at section 112.3(b)(3) that
encourages and even requires unlawful discrimination in the form of
affirmative action, permitting the ``consideration of race, color, or
national origin if the purpose and effect are to remove or overcome the
consequences of practices or impediments'' that have limited
participation in federally funded programs by individuals of racial
groups. Id. 112.3(b)(3). But the provision does not expressly specify
that the funding recipient must narrowly tailor such race-based
considerations to serve a compelling governmental interest, as is
required to satisfy strict scrutiny. See id. Section 112.4 addresses
prohibited discriminatory employment practices and extends beyond
intentional discrimination to prohibiting conduct that ``tends'' to
have a discriminatory effect. Id. 112.4. In addition, section 112.4
requires a technical correction because it references an incorrect
subsection in section 112.2. Section 112.7(a) provides an illustration
of prohibited employment practices without limiting that application to
employment practices where the primary purpose of the financial
assistance is for employment, as required by 42 U.S.C. 2000d-3. Id.
112.7(a). Finally, section 112.7(d) provides an illustration of the
application of affirmative action requirements set forth in section
112.3(b)(3), which this rule rescinds. Id. 112.7(d).
There are serious statutory and constitutional concerns with the
legality of SBA's Title VI disparate-impact regulations. SBA also has
serious policy concerns with its current disparate-impact regulations
because they create confusion, undermine public confidence in the
nation's civil rights laws and the rule of law, and produce burdensome
litigation and compliance costs.
1. Serious Legal Concerns
There are serious statutory concerns as to whether Title VI
authorizes the disparate-impact provisions of the current regulations.
As the Supreme Court has made clear, Title VI prohibits ``only
intentional discrimination'' and ``permits'' facially neutral policies
that result in disparate outcomes when there is no discriminatory
intent. Sandoval, 532 U.S. at 280, 286 n.6. That is the ``single, best
meaning'' of Title VI. Loper Bright, 603 U.S. at 400. As summarized
above, Sandoval calls into serious doubt the legality of SBA's
``disparate-impact regulations.'' 532 U.S. at 281-82, 284-85 (noting
that DOJ's regulations, which SBA's regulations mirror, are in
``considerable tension'' with the Supreme Court's Title VI precedents);
see also id. at 286 n.6 (``[Title VI] permits the very behavior that
the regulations forbid.''). Although Sandoval resolved only the
question of private enforceability, subsequent cases such as Loper
Bright have made clear that SBA cannot extend Title VI beyond its
single, best meaning. See 603 U.S. at 412-13 (holding that ``courts
must . . . ensur[e] that [an] agency acts within'' its statutory
authority). And even in the absence of Supreme Court precedent, SBA
would have concluded that the best reading of Title VI is that it
prohibits only intentional discrimination.
Title VI authorizes agencies to promulgate regulations ``to
effectuate'' the statute's prohibition of intentional discrimination.
42 U.S.C. 2000d-1. The current regulations' extension of prohibited
conduct to include conduct with an unintentional disparate impact
reaches a vastly broader range of conduct than the statute itself. This
range is too broad to be considered a simple prophylactic measure aimed
at preventing intentional discrimination. See Sandoval, 532 U.S. at 286
n.6 (``[Title VI] permits the very behavior that the regulations
forbid.''). Thus, the disparate-impact regulations do not
``effectuate'' Title VI. 42 U.S.C. 2000d-1.
There are also serious concerns about whether SBA's Title VI
regulations pass constitutional muster under the Equal Protection
Clause. As the Supreme Court recently held in SFFA, ``the Equal
Protection Clause . . . applies without regard to any differences of
race, of color, or of nationality--it is universal in its
application,'' and the ``guarantee of equal protection cannot mean one
thing when applied to one individual and something else when applied to
a person of another color.'' 600 U.S. at 206 (internal quotation marks
omitted) (first quoting Yick Wo v. Hopkins, 118 U.S. 356, 369 (1886);
and then quoting Bakke, 438 U.S. at 289-90 (Powell, J.)). Despite the
promises of the Equal Protection Clause, a funding recipient's risk of
disparate-impact liability under SBA's regulations is triggered by
unintentional disparate outcomes, which the recipient may not even know
about without investigation. To evaluate and avoid this risk, the
funding recipient must incur investigatory costs, such as conducting an
impact analysis, and is coerced to proactively consider race, color,
and national origin, and potentially use it to change the unintended
disparate outcomes.
In short, disparate-impact liability encourages and, in some cases,
requires covered entities to engage in the intentional use of race and
racial balancing to eliminate those disparate outcomes by treating
certain racial groups differently from others--the exact conduct the
Equal Protection Clause forbids. See id. This serious constitutional
concern further confirms that the best reading of Title VI is that it
prohibits only intentional discrimination and does not authorize SBA to
impose disparate-impact liability. See Edward J. DeBartolo Corp. v.
Fla. Gulf Coast Bldg. & Constr. Trades Council, 485 U.S. 568, 575
(1988) (``[W]here an otherwise acceptable construction of a statute
would raise serious constitutional problems, the Court will construe
the statute to avoid such problems unless such construction is plainly
contrary to the intent of Congress.'' (citing NLRB v. Catholic Bishop
of Chi., 440 U.S. 490, 499-501, 504 (1979))).
This use of race, color, or national origin violates the Equal
Protection Clause unless it survives review under the ``daunting''
strict-scrutiny standard. SFFA, 600 U.S. at 206; see also Free Speech
Coal., Inc. v. Paxton, 606 U.S. 461, 484 (2025) (``Strict scrutiny--
which requires a restriction to be the least restrictive means of
achieving a compelling governmental interest--is `the most demanding
test known to constitutional law.''' (quoting City of Boerne v. Flores,
521 U.S. 507, 534 (1997))). The use of race, color, or national origin
necessitated by the disparate-impact provisions runs into serious
issues with the requirement of narrow tailoring to achieve a compelling
interest. SFFA, 600 U.S. at 206-07. Importantly, SBA's affirmative
action provision authorizes and sometimes requires the intentional use
of race without requiring that this use be narrowly tailored to serve a
recognized compelling interest. Instead, it encourages intentional
racial balancing
[[Page 61298]]
``to overcome the consequences of'' unintended racial disparities. 13
CFR 112.3(b)(3).
As summarized above, there are serious statutory and constitutional
concerns with SBA's disparate-impact regulations. But even if the
regulations were legal, SBA finds that eliminating the potential
constitutional concerns addressed above would independently justify the
amendment of the regulations. Cf. U.S. Tel. Ass'n v. FCC, 188 F.3d 521,
528 (D.C. Cir. 1999) (concluding it was not ``arbitrary and
capricious'' to adopt a certain policy in order to ``avoid[] raising a
non-trivial constitutional question''). And even if the regulations did
not raise serious constitutional concerns, SBA finds that eliminating
the costs and confusion caused by the mismatch between the statute and
the disparate-impact regulations would independently justify the repeal
of the regulations.
2. Serious Policy Concerns
SBA also has serious policy concerns with the Title VI regulations'
imposition of disparate-impact liability. Although SBA expresses its
policy concerns with disparate-impact liability independent of
Executive Order 14281, that Order sets forth many valid policy concerns
with disparate-impact liability. As noted in section 1 of the Order,
``[o]n a practical level, disparate-impact liability has hindered
businesses from making hiring and other employment decisions based on
merit and skill, their needs, or the needs of their customers because
of the specter that such a process might lead to disparate outcomes,
and thus disparate-impact lawsuits. This has made it difficult, and in
some cases impossible, for employers to use bona fide job-oriented
evaluations when recruiting, which prevents job seekers from being
paired with jobs to which their skills are most suited--in other words,
it deprives them of opportunities for success.'' 90 FR at 17537.
Moreover, the legal concerns identified above have caused uncertainty
and confusion for Federal funding recipients as to whether and when
they need to comply with the disparate-impact regulations and when they
can or must consider race, color, and national origin. As explained
above, Sandoval casts substantial doubt on the validity of the
disparate-impact regulations that many Federal departments and agencies
have promulgated pursuant to Title VI. 532 U.S. at 280-82.
Additionally, in practice, and as explained above, disparate-impact
liability leads covered entities to engage in racial balancing even as
Title VI forbids intentional racial discrimination. This tension tends
to create confusion, undermine public confidence in the nation's civil
rights laws, and undermine public confidence in the rule of law itself,
as the law seems to both forbid and require the same conduct.
These problems are amplified by the arbitrary nature of the racial
and ethnic categories typically used to measure disparate effects,
which, by virtue of their arbitrariness, typically lack a meaningful
connection to a compelling interest. See, e.g., SFFA, 600 U.S. at 216-
17 (explaining that the ``[racial] categories'' at issue were
``themselves imprecise in many ways'' and ``the use of these opaque
racial categories undermine[d], instead of promote[d], [their]
goals''). This lack of clarity undermines the law's ability to
encourage nondiscrimination and is evident in, among other things, many
of the notices of funding opportunities (NOFOs) that SBA published in
past years. Many of the NOFOs explicitly targeted certain racial
groups. For instance, the Fiscal Year 2021 NOFO for the Community
Navigator Pilot Program required grantees to submit performance reports
to SBA throughout the performance period. The NOFO stated that SBA
sought to measure the outputs and outcomes of the grant through metric
crosscuts including race. SBA believes that repealing certain parts of
its regulation would reduce the need for such race-based measurements--
thereby removing the incentive for covered entities to engage in racial
balancing--and maintain clarity and public confidence in the nation's
civil rights laws.
SBA has considered the view that looking at disparate effects can
sometimes be useful in uncovering or deterring subtle intentional
discrimination or intentional indifference to unnecessary and arbitrary
barriers. But any alleged benefits are outweighed by the other issues
and factors SBA has considered. And in any event, the concern is
mitigated by the fact that eliminating disparate-impact liability does
not preclude the use of data on disparate outcomes to help prove
intentional discrimination. Both SBA and private litigants rely on such
data as a potential indicator of intentional discrimination. This use
of statistical disparity to help establish, as an evidentiary matter,
liability for intentional discrimination materially differs from using
such disparity to impose liability for an unintentional disparate
impact.
SBA has also considered the alternative of trying to adopt a
modified version of disparate-impact liability, for example, by
requiring covered entities to remedy unintentional discrimination for
only certain types of cases involving specific protected classes, or
where unintentional discrimination is tied to specific categories of
activity with quantifiable disparate impacts. But any version of
disparate-impact liability is inconsistent with Title VI's single, best
meaning. Regardless, SBA has determined that any benefits from a
regulation adopting alternative versions of disparate-impact liability
are outweighed by SBA's legal and policy concerns. Even if possible,
developing such a rule would not solve the confusion or rule-of-law
concerns expressed above, nor reduce the compliance and litigation
costs that covered entities face. SBA believes that the better course
is to avoid the complexities, costs, and litigation associated with
this alternative, even if eliminating disparate-impact liability
ultimately would leave some problems unaddressed and others
inadequately addressed.
SBA has additionally considered the potential reliance interests of
funding recipients and others in the disparate-impact regulations. The
Sandoval decision, however, cast serious doubt on the continuing
viability of the regulations more than 25 years ago. Executive Order
14281 also directed all agencies to ``deprioritize enforcement of all
statutes and regulations to the extent they include disparate-impact
liability.'' 90 FR at 17538. SBA accordingly believes that any reliance
interests are minimal. Further, each of SBA's concerns, whether
considered cumulatively or separately, outweighs any reliance
interests.
SBA notes that Sandoval has also led to a divergence between Title
VI enforcement by private plaintiffs and enforcement by Federal
departments and agencies. After Sandoval, private plaintiffs can
enforce only Title VI's statutory prohibition on intentional
discrimination, while SBA has continued to pursue disparate-impact
liability. Repealing the disparate-impact regulations would eliminate
this incongruent enforcement.
Overall, after considering the relevant issues and factors and
weighing the relevant considerations, SBA finds that, regardless of the
legality of SBA's disparate-impact regulations, the above summarized
policy concerns, when viewed separately or cumulatively, independently
justify the repeal of its disparate-impact regulations.
III. Regulatory Amendments
This rule's regulatory changes address the concerns regarding the
statutory
[[Page 61299]]
authority that the Supreme Court questioned in Sandoval and the other
legal and policy concerns discussed above; harmonize the implementing
regulations' scope with the conduct that Congress intended Title VI to
prohibit; promote consistent enforcement of Title VI among private
plaintiffs and Federal departments and agencies; and provide much
needed clarity to the courts and Federal funding recipients and
beneficiaries.
For the reasons summarized below, SBA amends the following
provisions in its Title VI implementing regulation that explain
particular types of discrimination prohibited, located at 13 CFR 112.3,
112.4, and 112.7.
A. Table Summarizing Amendments
The table below indicates the exact wording changes. For each
section indicated in the left column, the text shown in the right
column is removed/revised:
------------------------------------------------------------------------
Section Remove/Revise
------------------------------------------------------------------------
112.3(b)(3)....................... Full text of paragraph (3) is
removed.
112.4............................. Text of first sentence is revised as
follows, ``Small business concerns
and development companies which
apply for or receive any financial
assistance of the kind described in
Sec. 112.2(b)(1) and (2),
including concerns which are
identifiable beneficiaries of loans
made under Sec. 112.2(b)(2), may
not discriminate on the grounds of
race, color, or national origin in
their employment practices.''
Full text of third sentence is
removed, ``Where a primary
objective of the Federal financial
assistance is not to provide
employment, . . . and
nondiscriminatory treatment.''
112.7(a).......................... Full text of paragraph (a) is
removed.
112.7(b).......................... Paragraph (b) is redesignated as
paragraph (a).
112.7(c).......................... Paragraph (c) is redesignated as
paragraph (b).
112.7(d).......................... Full text of paragraph (d) is
removed.
------------------------------------------------------------------------
B. Section-by-Section Analysis
Section 112.3(b)(3) and Section 112.7(d)
Sections 112.3(b)(3) and 112.7(d) deal with affirmative action. The
first sentence of section 112.3(b)(3) authorizes a funding recipient to
engage in affirmative action, even in the absence of a finding of prior
discrimination in a program, ``to remove or overcome the consequences
of practices or impediments which have restricted the availability of,
or participation in, a program or activity receiving Federal financial
assistance, on the grounds of race, color, or national origin.'' This
provision points not to intentional discrimination, but rather to the
unintentional ``consequences of practices or impediments.'' Likewise,
section 112.7(d)(2) authorizes giving ``special consideration to race,
color, or national origin'' ``[e]ven though an applicant or recipient
has never used discriminatory policies.'' Both provisions consequently
encourage intentional racial classifications, racial preferences, and
other race-based actions without specifying the compelling governmental
interest and narrow tailoring that the Equal Protection Clause demands.
These sections have long been unlawful under an Equal Protection Clause
analysis.
The second sentence of 13 CFR 112.3(b)(3) imposes ``an obligation''
upon the recipient ``to take reasonable action to remove or overcome
the consequences of the prior discriminatory practice or usage''
``[w]here previous discriminatory practice or usage tends, on the
grounds of race, color, or national origin, to exclude individuals from
participation in, to deny them the benefits of, or to subject them to
discrimination under any program or activity to which this regulation
applies.'' Likewise, section 112.7(d)(1) requires recipients ``to take
additional steps to make equal opportunity fully available to racial
and nationality groups previously subjected to discrimination'' ``[i]n
some situations even though past discriminatory practices have been
abandoned.'' These provisions go beyond the Equal Protection Clause,
which, in limited circumstances permits, but does not mandate, a
government to take narrowly tailored action to remedy the effects of
its identified past discrimination. See, e.g., Bakke, 438 U.S. at 307
(Powell, J.). Moreover, even putting aside the mandatory language,
these provisions do not expressly require narrow tailoring to counter
particular past discrimination. The provisions accordingly promote
potentially illegal race, color, and national-origin discrimination.
Moreover, in some instances, they may even coerce recipients to
consider and use race preferences when the recipient does not want to.
This is contrary to the SBA's goal of promoting and defending a culture
of nondiscrimination and is destructive to the public's understanding
of and faith in the nation's civil rights laws. This rule, therefore,
removes sections 112.3(b)(3) and 112.7(d).
Section 112.4 and 112.7(a)
Sections 112.4 and 112.7(a) address prohibited discriminatory
employment practices. The first two sentences of section 112.4 prohibit
intentionally discriminatory employment practices in a program when a
primary objective of the Federal financial assistance that program
receives is to provide employment. The first sentence of section 112.4
requires a technical correction because it incorrectly refers to
subsection 112.2(a), which does not describe any kind of financial
assistance as section 112.4 suggests. The correct reference is to
subsection 112.2(b). For this reason, that sentence will be revised to
read ``Small business concerns and development companies which apply
for or receive any financial assistance of the kind described in Sec.
112.2(b)(1) and (2), including concerns which are identifiable
beneficiaries of loans made under Sec. 112.2(b)(2), may not
discriminate on the grounds of race, color, or national origin in their
employment practices.''
The third sentence of section 112.4 extends the prohibition on
discrimination to employment practices of funding recipients even
``[w]here a primary objective of the Federal financial assistance is
not to provide employment'' if discrimination in the nonfunded
employment practices ``tends, on the grounds of race, color, or
national origin, to exclude individuals from participation in, to deny
them the benefits of, or to subject them to discrimination under any
program to which this regulation applies . . . to the extent necessary
to assure equality of opportunity and nondiscriminatory treatment.''
This paragraph does not prohibit only intentional discrimination but
rather extends the prohibition to conduct that ``tends'' to have a
discriminatory effect.
Moreover, SBA notes that the regulation's application to employment
practices where the Federal funding's
[[Page 61300]]
primary objective is not to provide employment conflicts with the
statutory limitation found in 42 U.S.C. 2000d-3. That section states
that ``[n]othing contained in [Title VI] shall be construed to
authorize action under [Title VI] by any department or agency with
respect to any employment practice of any employer, employment agency,
or labor organization except where a primary objective of the Federal
financial assistance is to provide employment.'' 42 U.S.C. 2000d-3; see
also Johnson v. Transp. Agency, Santa Clara Cnty., 480 U.S. 616, 627-28
n.6 (1987) (citing the statutory limitation and noting Congress's
intent that Title VI not ``impinge'' on Title VII, which prohibits
discriminatory employment practices). The same issue arises in section
112.7(a), which applies Title VI to employment practices, ``including
recruitment or recruitment advertising, employment, layoff or
termination, upgrading, demotion, or transfer,'' without any limitation
to employment practices where the primary purpose of the Federal
financial assistance is employment.
For these reasons, the rule deletes the third sentence of section
112.4 and the entire paragraph in section 112.7(a) to amend the
regulation so that it more closely adheres to the scope of conduct
Congress prohibited under Title VI and to address the legal and policy
considerations and determinations described in this document. Further,
since SBA is removing paragraph (a) of section 112.7, SBA is
redesignating paragraphs (b) and (c) as paragraphs (a) and (b),
respectively.
IV. Severability
SBA's position is that each of the amendments made by this rule
serves a vital, related, but distinct purpose. SBA also confirms that
each of the amendments is intended to operate independently of each
other and that the potential invalidity of one amendment should not
affect the other amendments. SBA would adopt any of the amendments
independent and regardless of the invalidity of any separate amendment.
V. Administrative Procedure Act
SBA issues this final rule without prior public notice and comment
or a delayed effective date pursuant to the exception in the
Administrative Procedure Act (APA) for rules ``relating to agency
management or personnel or to public property, loans, grants, benefits,
or contracts.'' 5 U.S.C. 553(a)(2).
Title VI concerns nondiscrimination conditions on the receipt of
Federal financial assistance, and more particularly to the receipt of
Federal ``[g]rants and loans,'' ``property,'' ``personnel'' and ``[a]ny
Federal agreement, arrangement, or other contract which has as one of
its purposes the provision of assistance.'' 13 CFR 112.2(b); see also
13 CFR 112.8 (requiring funding recipient sign contractual assurance of
compliance with Title VI); Cummings v. Premier Rehab Keller, P.L.L.C.,
596 U.S. 212, 217-18 (2022) (observing that Congress enacted Title VI
``[p]ursuant to its authority to `fix the terms on which it shall
disburse federal money''' (internal citation omitted)). Cf. Education
Programs or Activities Receiving or Benefitting from Federal Financial
Assistance, 82 FR 46655 (Oct. 6, 2017) (invoking the section 553(a)(2)
exception to amend Title IX regulations to ``promote consistency in the
enforcement of Title IX for [the Department of Agriculture] financial
assistance recipients''); Preserving Community and Neighborhood Choice,
85 FR 47899 (Aug. 7, 2020) (invoking the exception to repeal a Housing
and Urban Development rule regarding Federal grantees); Participation
by Minority Business Enterprise in Department of Transportation
Programs, 53 FR 18285 (May 23, 1988) (invoking the exception to expand
coverage of a Department of Transportation regulation regarding the
Federal Aviation Administration's airport financial assistance
program); Nondiscrimination on the Basis of Handicap in Federally
Assisted Programs--Suspension of Guidelines with Respect to Mass
Transportation, 46 FR 40687 (Aug. 11, 1981) (invoking the exception to
suspend DOJ guidelines regarding prohibiting disability discrimination
in transportation programs and activities receiving Federal financial
assistance).
Invoking 5 U.S.C. 553(a)(2) is consistent with the definition for
Federal financial assistance provided by the U.S. Office for Management
and Budget (OMB) in 2 CFR 200.1, which defines Federal financial
assistance with the same categories as the APA's exception for rules
``relating to agency management or personnel or to public property,
loans, grants, benefits, or contracts,'' 5 U.S.C. 553(a)(2). With
potentially limited exceptions not applicable to SBA, all the forms of
Federal financial assistance set forth under 2 CFR 200.1 that SBA
administers would fall under the ``public property, loans, grants,
benefits, or contracts'' exception. Thus, SBA issues this final rule
without prior public notice and comment or a delayed effective date
under 5 U.S.C. 553(a)(2).
VI. Regulatory Certifications
A. Executive Orders 12866 and 13563
Executive Orders (EOs) 12866, Regulatory Planning and Review, 58 FR
51735 (Oct. 4, 1993), and 13563, Improving Regulation and Regulatory
Review, 76 FR 3821 (Jan. 21, 2011), direct agencies to assess costs and
benefits of available regulatory alternatives and, if regulation is
necessary, to select regulatory approaches that maximize net benefits
(including potential economic, environmental, public health and safety
effects, distributive impacts, and equity). E.O. 13563 emphasizes the
importance of quantifying both costs and benefits, of reducing costs,
of harmonizing rules, and of promoting flexibility. OMB has determined
that this rule will be a significant regulatory action and, therefore,
is subject to review under section 6(b) of E.O. 12866, though it is not
significant under section 3(f)(1) of that order. Accordingly, this rule
has been submitted to OMB for review.
Cost-Benefit Analysis
Need for Regulatory Action: SBA is removing four regulatory
provisions from 13 CFR part 112 that either raise serious
constitutional difficulties under existing equal protection
jurisprudence or cannot be reconciled with the best reading of the
underlying statutory authority. SBA has determined that retaining them
in the CFR would be contrary to constitutional and statutory authority
and contrary to the public interest.
Baseline: The baseline for this analysis is the regulatory and
practical environment that would exist absent this action. The
provisions being removed have been cited extremely infrequently in any
agency action regarding an applicant for or recipient of SBA funding.
They do not reflect current SBA enforcement practice, and any attempt
to enforce them in the manner their text might suggest would be
constitutionally infirm under existing Supreme Court precedent.
Accordingly, the baseline is a world in which these provisions are
already effectively inoperative: they impose no meaningful compliance
obligations that are being followed, they are not enforced by SBA, and
they generate no material regulatory behavior by program participants.
Incremental Effects: Costs. Because the removed provisions are not
currently enforced and any compliance activity or reliance by
applicants and
[[Page 61301]]
recipients is minimal, removing and revising them should not impose new
costs on any party. There are no new compliance requirements, reporting
obligations, or operational changes required of small businesses,
financial assistance applicants, recipients, States, local governments,
or other regulated entities. SBA does not anticipate any transition
costs or administrative costs associated with implementation of this
rule. Accordingly, the estimated annualized compliance costs of this
rule are negligible.
Incremental Effects: Benefits. The primary benefits of this rule
are qualitative. By removing constitutionally suspect provisions from
the CFR, SBA:
(1) Eliminates regulatory text that could mislead applicants and
recipients into believing they are authorized or required to engage in
racial classifications that are unconstitutional under existing law,
thereby reducing litigation risk and legal uncertainty.
(2) Improves the clarity and internal consistency of the CFR,
consistent with the goals of E.O. 13563, which directs agencies to
identify and revise regulations that are ``outmoded, ineffective,
insufficient, or excessively burdensome, and to modify, streamline,
expand, or repeal them in accordance with what has been learned.''
(3) Reduces the administrative burden on SBA and program
participants of maintaining, interpreting, and applying provisions that
have no operative legal effect.
Because the removed provisions are not currently enforced and
impose no compliance obligations that regulated entities are actually
meeting, this rule does not eliminate any social benefits that the
existing regulatory provisions are generating. This rule has no
monetized benefits.
B. Executive Order 14192
E.O. 14192, Unleashing Prosperity Through Deregulation, 90 FR 9065
(Jan. 31, 2025), requires an agency, unless prohibited by law, to
identify at least 10 existing regulations to be repealed when the
agency publicly promulgates a new regulation. In furtherance of this
requirement, section 3(c) of the Order requires that ``any new
incremental costs associated with new regulations shall, to the extent
permitted by law, be offset by the elimination of existing costs
associated with at least 10 prior regulations.'' Id. By revising SBA's
current Title VI regulations, which extend prohibited conduct to
include unintentional disparate impacts and thus expand the scope of
those regulations to a vastly broader range of conduct than the statute
prohibits, this rule eliminates unnecessary regulation. See supra Part
VI.A (conducting cost-benefit analysis).
Accordingly, SBA expects this rule to be a deregulatory action
under E.O. 14192.
C. Executive Order 12988
This action meets the standards set forth in sections 3(a) and
3(b)(2) of E.O. 12988, Civil Justice Reform, 61 FR 4729 (Feb. 7, 1996).
SBA has taken the necessary steps to minimize litigation, eliminate
drafting errors and ambiguity, reduce burden, and provide a clear legal
standard for affected conduct, and has ``specifie[d] in clear language
the preemptive effect . . . to be given to the law.'' Id. at 4731.
D. Executive Order 13132
This final rule does not have federalism implications as defined in
E.O. 13132, Federalism, 64 FR 43255 (Aug. 10, 1999). It would not have
substantial direct effects on the States, on the relationship between
the national government and the States, or on the distribution of power
and responsibilities among the various levels of government, as
specified in the Order. As such it does not warrant the preparation of
a Federalism Assessment. Additionally, the rule will not require new
compliance activities or reporting by State, local, or tribal
governments.
E. Executive Order 12250
Pursuant to E.O. 12250, Leadership and Coordination of
Nondiscrimination Laws, 45 FR 72995 (Nov. 4, 1980), DOJ has the
responsibility to ``review . . . proposed rules . . . of the Executive
agencies'' implementing nondiscrimination statutes such as Title VI in
order to identify those which are inadequate, unclear or unnecessarily
inconsistent.'' DOJ has reviewed and approved this rule.
E. Paperwork Reduction Act, 44 U.S.C. 3501-3520
Pursuant to the Paperwork Reduction Act, agencies must consider
whether a rule will create additional burdens related to recordkeeping,
paperwork, or information collection. SBA has determined that this
final rule does not affect any existing collection of information and
does not create any new collection of information triggering the
requirements of the Act.
F. Regulatory Flexibility Act, 5. U.S.C. 601-612
The Regulatory Flexibility Act (RFA), 5 U.S.C. 601 et seq.,
requires agencies to consider the effect of their actions on small
entities, small nonprofit enterprises, and small local governments.
Pursuant to the RFA, when an agency issues a rulemaking, the agency
must prepare a regulatory flexibility analysis that describes the
impact of the rule on small entities. However, the RFA requires such
analysis only where notice and comment rulemaking is required. As
discussed above, notice and comment are not required for this rule.
Accordingly, SBA is not required to conduct a regulatory flexibility
analysis.
G. Congressional Review Act, 5 U.S.C. 801-808
Subtitle E of the Small Business Regulatory Enforcement Fairness
Act of 1996, also known as the Congressional Review Act, 5 U.S.C. 801
et seq., provides that, before a rule may take effect, the agency
promulgating the rule must submit a rule report, which includes a copy
of the rule, to each House of Congress and to the Comptroller General
of the United States. SBA will submit a report containing this
rulemaking and other required information to the U.S. Senate, the U.S.
House of Representatives, and the Comptroller General of the United
States. The Office of Information of Regulatory Affairs has reviewed
this rulemaking and found that it does not meet the criteria set forth
in 5 U.S.C. 804(2).
List of Subjects in 13 CFR Part 112
Civil rights, Reporting and recordkeeping requirements, Small
businesses.
For the reasons set forth in the preamble, SBA amends 13 CFR part
112 as follows:
PART 112--NONDISCRIMINATION IN FEDERALLY ASSISTED PROGRAMS OR
ACTIVITIES OF SBA--EFFECTUATION OF TITLE VI OF THE CIVIL RIGHTS ACT
OF 1964
0
1. The authority citation for part 112 continues to read as follows:
Authority: Sec. 602, 78 Stat. 252 (42 U.S.C. 2000d-1).
Sec. 112.3 [Amended]
0
2. Amend Sec. 112.3 by removing paragraph (b)(3).
0
3. Revise Sec. 112.4 to read as follows:
Sec. 112.4 Discrimination in employment.
Small business concerns and development companies which apply for
or receive any financial assistance of the kind described in Sec.
112.2(b)(1) and (2), including concerns which are identifiable
beneficiaries of loans made
[[Page 61302]]
under Sec. 112.2(b)(2), may not discriminate on the grounds of race,
color, or national origin in their employment practices. Such
assistance is deemed to have as a primary objective the providing of
employment.
Sec. 112.7 [Amended]
0
4. Amend Sec. 112.7 by removing paragraphs (a) and (d) and
redesignating paragraphs (b) and (c) as paragraphs (a) and (b),
respectively.
Kelly Loeffler,
Administrator.
[FR Doc. 2026-19878 Filed 9-28-26; 8:45 am]
BILLING CODE 8026-09-P
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