[Federal Register Volume 69, Number 131 (Friday, July 9, 2004)]
[Rules and Regulations]
[Pages 41712-41718]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-15677]



[[Page 41711]]

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Part IV





Department of Housing and Urban Development





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24 CFR Parts 5 and 570



Equal Participation of Faith-Based Organizations; Final Rule

  Federal Register / Vol. 69, No. 131 / Friday, July 9, 2004 / Rules 
and Regulations  

[[Page 41712]]


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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

24 CFR Parts 5 and 570

[Docket No. FR-4881-F-02]
RIN 2501-AD03


Equal Participation of Faith-Based Organizations

AGENCY: Office of the Secretary, HUD.

ACTION: Final rule.

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SUMMARY: This final rule implements executive branch policy that, 
within the framework of constitutional church-state guidelines, faith-
based organizations should be able to compete on an equal footing with 
other organizations for Federal funding. Executive Order 13279, 
entitled ``Equal Protection of the Laws for Faith-Based and Community 
Organizations,'' establishes fundamental principles and policymaking 
criteria to guide Federal agencies in formulating and developing 
policies that have implications for faith-based and community 
organizations to ensure the equal protection of the laws for these 
organizations in federally-assisted social service programs. Consistent 
with the Executive Order, this final rule describes HUD's policy for 
the participation of faith-based organizations in HUD programs and 
activities. In addition, this final rule makes a conforming amendment 
to regulations for the State Community Development Block Grant (CDBG) 
program regarding the equal participation of faith-based organizations 
in the program. The final rule follows publication on March 3, 2004, of 
a proposed rule and takes into consideration the public comments 
received on the proposed rule. After careful consideration of the 
public comments, HUD has decided to adopt the proposed rule without 
change.

DATES: Effective Date: August 9, 2004.

FOR FURTHER INFORMATION CONTACT: Ryan Streeter, Director, Center for 
Faith-Based and Community Initiatives, Department of Housing and Urban 
Development, Room 10184, 451 Seventh Street, SW., Washington, DC 20410-
0001; telephone (202) 708-2404 (this is not a toll-free number). 
Hearing- or speech-impaired individuals may access this number through 
TTY by calling the toll-free Federal Information Relay Service at (800) 
877-8339.

SUPPLEMENTARY INFORMATION:

I. Background

    On March 3, 2004 (69 FR 10126), HUD published a proposed rule for 
public comment describing HUD's policy for the equal participation of 
faith-based organizations in HUD's programs and activities. The 
proposed rule was published to implement Executive Order 13279, 
entitled, ``Equal Protection of the Laws for Faith-Based and Community 
Organizations,'' which was signed by President George W. Bush on 
December 12, 2002, and published in the Federal Register on December 
16, 2002 (67 FR 77141). The Executive Order establishes fundamental 
principles and policymaking criteria to guide executive branch agencies 
in formulating and developing policies that have implications for 
faith-based and community organizations and to ensure the equal 
protection of the laws for these organizations in programs receiving 
Federal financial assistance.
    Executive Order 13279 is part of the Administration's broader 
Faith-Based and Community Initiative. President Bush has directed the 
executive branch agencies, including HUD, to take steps to ensure that 
Federal policies and programs are fully open to faith-based and 
community organizations in a manner that is consistent with the 
Constitution. The Administration believes that all eligible 
organizations, including faith-based organizations, should be able to 
participate in Federal programs and activities and compete, where 
required, for Federal financial assistance on an equal footing.

II. This Final Rule

    This final rule follows publication of the March 3, 2004, proposed 
rule and takes into consideration the public comments received on the 
proposed rule. After careful consideration of the public comments, HUD 
has decided to adopt the proposed rule without change. Section IV of 
this preamble contains a discussion of the public comments received on 
the proposed rule and HUD's responses to the significant issues raised 
by those who commented.

A. New Sec.  5.109 Regarding Equal Participation of Faith-Based 
Organizations

    The final rule adds a new Sec.  5.109 to HUD's regulations in 24 
CFR part 5, subpart A. The regulations in subpart A of part 5 contain 
the definitions and Federal requirements generally applicable to all of 
HUD's programs. By placing the requirements of Executive Order 13279 in 
those HUD regulations that contain across-the-board requirements, HUD 
is ensuring the broadest application of the faith-based requirements of 
Executive Order 13279.
    The equal participation policies and requirements set forth in 
Sec.  5.109 are generally applicable to faith-based organizations, 
which are referred to in the rule text as ``religious organizations'' 
that participate in HUD's programs or activities. More specific 
policies and requirements regarding the participation of faith-based 
organizations in individual HUD programs may be provided in the 
individual regulations for those programs. The policies and 
requirements set forth in Sec.  5.109 are similar, and in many cases 
identical, to those contained in HUD's September 30, 2003, final rule 
(68 FR 56396) regarding the equal participation of faith-based 
organizations for several of its Community Planning and Development 
programs. Section III of this preamble provides an overview of the 
specific policies and requirements contained in the new Sec.  5.109.
    Two of the HUD programs that are affected by the regulatory changes 
are the Section 202 Supportive Housing for the Elderly Program and the 
Section 811 Supportive Housing for Persons with Disabilities Program. 
The regulations for these programs are located in 24 CFR part 891. 
Specifically, the equal participation requirements contained in this 
final rule permit faith-based organizations to take part in these 
programs as project owners. This is a change from the existing 
procedures governing these two programs, which prohibit a project owner 
from having a religious purpose in its articles of incorporation.
    This final rule does not apply to HUD's Native American housing 
programs. HUD has determined that making the policies and procedures 
contained in this proposed rule applicable to its Native American 
programs requires prior consultation with Indian tribal governments in 
accordance with Executive Order 13175 (entitled ``Consultation and 
Coordination with Indian Tribal Governments''). The Executive Order 
requires Federal departments and agencies, to the greatest extent 
practicable and permitted by law, to consult with tribal governments 
prior to taking actions that have substantial direct effects on 
Federally recognized tribal governments. HUD has consulted with Indian 
tribal governments regarding the applicability of these regulatory 
changes to its Native American housing programs and on June 21, 2004 
(69 FR 34543) published a separate proposed rule to address the equal 
participation of faith-based organizations in these programs based on 
the outcome of the consultations.

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B. Conforming Change to State CDBG Program Regulations

    In addition to the establishment of new Sec.  5.109, this final 
rule makes a conforming change to the regulations for the State 
Community Development Block Grant (CDBG) program regarding the equal 
participation of faith-based organizations. The final rule would 
clarify that the amendments made by HUD's September 30, 2003, final 
rule apply to the State CDBG program.

III. Overview of New 24 CFR 5.109

    The specific policies and requirements codified in new Sec.  5.109 
by this final rule are as follows. As noted above, these requirements 
are unchanged from the proposals contained in HUD's March 3, 2004, 
proposed rule.

A. Equal Participation of Faith-Based Organizations in HUD Programs and 
Activities

    This final rule clarifies that faith-based organizations are 
eligible, on the same basis as any other organization, to participate 
in HUD's programs and activities. The phrase ``participate in HUD's 
programs and activities'' and its variants are used in this rule to 
mean the full range of HUD programs and activities, including programs 
that make funds available through contracts, grants, cooperative 
agreements, or other instruments for eligible goods, services, and 
activities, and programs that do not make funds available, but involve 
other forms of benefit or resources. For example, certain Federal 
Housing Administration (FHA) programs do not provide funds, but make 
mortgage insurance or foreclosed properties available to qualifying 
organizations. Neither the Federal government, nor a State or local 
government, nor any other entity that administers any HUD program or 
activity shall discriminate against an organization on the basis of the 
organization's religious character or affiliation. Nothing in the rule, 
however, would preclude those administering Department-funded programs 
from accommodating religious organizations in a manner consistent with 
the Establishment Clause.

B. Inherently Religious Activities

    Organizations that receive direct HUD funds under a HUD program or 
activity may not engage in inherently religious activities, such as 
worship, religious instruction, or proselytization, as part of the 
programs or services directly funded under the HUD program or activity. 
If an organization conducts such activities, the activities must be 
offered separately, in time or location, from the programs, activities, 
or services supported by direct HUD funds, and participation must be 
voluntary for the beneficiaries of these programs, activities, or 
services.
    As used in this final rule, the term ``direct HUD funds'' refers to 
direct funding within the meaning of the Establishment Clause of the 
First Amendment. For example, direct HUD funding may mean that the 
government or an intermediate organization with similar duties as a 
governmental entity under a particular HUD program selects an 
organization and purchases the needed services straight from the 
organization (e.g., via a contract or cooperative agreement). In 
contrast, indirect funding scenarios may place the choice of service 
provider in the hands of a beneficiary, and then pay for the cost of 
that service through a voucher, certificate, or other similar means of 
payment.

C. Independence of Faith-Based Organizations

    New Sec.  5.109 clarifies that a faith-based organization that 
participates in a HUD program or activity will retain its independence 
from Federal, State, and local governments, and may continue to carry 
out its mission, including the definition, practice, and expression of 
its religious beliefs, provided that it does not engage in any 
inherently religious activities, such as worship, religious 
instruction, or proselytization, as part of the programs or services 
supported by direct HUD funds. Among other things, faith-based 
organizations may use space in their facilities to provide services 
under a HUD program, without removing religious art, icons, scriptures, 
or other religious symbols. In addition, a faith-based organization 
participating in a HUD program retains its authority over its internal 
governance, and it may retain religious terms in its organization's 
name, select its board members and otherwise govern itself on a 
religious basis, and include religious references in its organization's 
mission statements and other governing documents.

D. Exemption From Title VII Employment Discrimination Requirements

    This final rule clarifies that a faith-based organization's 
exemption from the Federal prohibition on employment discrimination on 
the basis of religion, set forth in section 702(a) of the Civil Rights 
Act of 1964 (42 U.S.C. 2000e-1), is not forfeited when the organization 
participates in a HUD program. Some HUD programs, however, contain 
independent statutory provisions that impose certain nondiscrimination 
requirements on all grantees. Accordingly, grantees should consult with 
the appropriate Department program office to determine the scope of any 
applicable requirements.

E. Nondiscrimination Requirements

    This final rule clarifies that an organization that receives direct 
HUD funds shall not, in providing program assistance, discriminate 
against a program beneficiary or prospective program beneficiary on the 
basis of religion or religious belief. Organizations participating in 
HUD programs and activities must also comply with any other applicable 
Federal fair housing and nondiscrimination requirements.

F. Acquisition, Construction, and Rehabilitation of Structures

    HUD funds may not be used for the acquisition, construction, or 
rehabilitation of structures to the extent that those structures are 
used for inherently religious activities. HUD funds may be used for the 
acquisition, construction, or rehabilitation of structures only to the 
extent that those structures are used for conducting eligible 
activities under a HUD program or activity. Where a structure is used 
for both eligible and inherently religious activities, HUD funds may 
not exceed the cost of those portions of the acquisition, construction, 
or rehabilitation that are attributable to eligible activities in 
accordance with the cost accounting requirements applicable to the HUD 
program or activity. Sanctuaries, chapels, and other rooms that a HUD-
funded religious congregation uses as its principal place of worship, 
however, are ineligible for HUD-funded improvements. Disposition of 
real property after use for the authorized purpose, or any change in 
use of the property for the authorized purpose, is subject to 
government-wide regulations governing real property disposition (see, 
e.g., 24 CFR parts 84 and 85).

G. Commingling of Federal and State and Local Funds

    This final rule clarifies that if a State or local government 
voluntarily contributes its own funds to supplement federally funded 
activities, the state or local government has the option to segregate 
the Federal funds or commingle them. However, if the funds are 
commingled, the requirements of new Sec.  5.109 will apply to all of 
the commingled funds. If a state or local government is required to 
contribute matching funds to supplement a Federally funded activity, 
the matching

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funds are considered commingled with the Federal assistance and 
therefore subject to the requirements of new Sec.  5.109. Some HUD 
program requirements govern any project or activity assisted under 
those programs. Accordingly, grantees should consult with the 
appropriate HUD program office to determine the scope of applicable 
requirements.

IV. Discussion of the Public Comments on the March 3, 2004, Proposed 
Rule

    The public comment period on the March 3, 2004, proposed rule 
closed on May 3, 2004. HUD received eight comments on the proposed 
rule. Comments were received from private individuals as well as from 
organizations concerned with civil rights, church-state, and free 
speech issues. This section of the preamble presents a summary of the 
significant issues raised by the public comments on the March 3, 2004, 
proposed rule and HUD's responses to these issues.

A. General Comments

    Comment: Support for proposed rule. Two commenters expressed 
general support for the proposed rule, applauding both the goals of the 
rule and the specific proposed regulatory changes.
    HUD Response. HUD appreciates the support of the commenters. HUD 
agrees that the final rule will clarify the Department's policy 
regarding the participation of faith-based organizations in HUD 
programs and activities. As noted earlier, after careful consideration 
of the public comments on the proposed rule, HUD has decided to adopt 
the proposed rule without changes.
    Comment: Opposition to rule on constitutional grounds. Several 
commenters expressed concern that the proposed regulatory changes would 
conflict with the Establishment Clause and related Supreme Court 
decisions. Some of the commenters wrote that the rule impermissibly 
would authorize Federal funding for churches and other ``pervasively 
sectarian organizations.'' Other commenters were concerned that the 
regulatory changes would lead to excessive entanglement between the 
Federal government and religious institutions.
    HUD Response. HUD does not agree with these comments. As more fully 
discussed in the responses to the individual comments below, HUD 
believes that the policies and procedures contained in this final rule 
are fully within the bounds of constitutional church-state guidelines 
and consistent with recent Supreme Court decisions concerning the 
Establishment Clause.
    Comment: Ensure the availability of secular alternative service 
providers. Several commenters wrote that HUD should ensure that 
beneficiaries have the ability to receive services from a different or 
non-religious provider. The commenters wrote that without reasonable 
secular alternatives, beneficiaries might be forced to participate in 
programs provided by faith-based organizations where they may be 
required to participate in religious activity in order to receive 
essential government-funded benefits.
    HUD Response. HUD has not revised the rule in response to these 
comments. Under this final rule, directly funded religious 
organizations are prohibited from discriminating against program 
beneficiaries on the basis of ``religion or religious belief.'' In 
addition, the rule provides that religious organizations may not use 
direct funding from HUD for inherently religious activities, that such 
activities must be offered separately, in time or location, from 
services directly funded by HUD, and that no beneficiary served by a 
HUD-funded provider directly funded by HUD will be required to 
participate in inherently religious activities as a condition of 
receiving services. These requirements sufficiently protect the rights 
of program beneficiaries. Moreover, HUD's general objective is to 
eliminate barriers to faith-based organizations, to welcome their 
participation in HUD programs, and most important, to ensure they are 
treated like other program participants. The commenters' 
recommendations run counter to the objectives that HUD is trying to 
achieve through this rule. To prevent a faith-based organization from 
providing HUD-funded programs or services unless there is a secular 
organization also providing the same programs or services would defeat 
the ``neutrality'' objective sought by this rulemaking.
    Comment: Rule fails to establish adequate safeguards for indirect 
Federal funding of faith-based organizations. Three commenters wrote 
that the rule lacks regulatory safeguards to ensure that indirect HUD 
funding to faith-based organizations is not used inappropriately. One 
of the commenters wrote that the rule, in effect, establishes a 
mechanism for the provision of vouchers without meeting the 
requirements established by the Supreme Court for such programs (e.g., 
that the program be completely neutral with respect to religion, that 
use of the vouchers at a religious institution be a wholly genuine and 
independent private choice, and that the voucher programs not provide 
incentives to choose a religious institution over a non-religious one, 
etc.). Other commenters were primarily concerned that the prohibition 
on discriminating against a program beneficiary on the basis of 
religious belief applies solely to direct HUD funds. These commenters 
wrote that the nondiscrimination requirements should be valid whether 
the funding is direct or indirect.
    HUD Response. HUD has not revised the rule in response to these 
comments. Any HUD-funded programs that involve indirect funding must, 
of course, comply with Federal law (including current legal precedent), 
and nothing in the proposed regulation provides otherwise. As explained 
in the preamble of the proposed rule as well as the preamble of the 
final rule, the term ``direct HUD funds'' refers to direct funding 
within the meaning of the Establishment Clause of the First Amendment. 
In other words, HUD's use of the phrase ``direct funding'' in this rule 
incorporates current First Amendment jurisprudence into its definition. 
For example, direct HUD funding may mean that the government or an 
intermediate organization with similar duties as a governmental entity 
under a particular HUD program selects an organization and purchases 
the needed services straight from the organization (e.g., via a 
contract or cooperative agreement). In contrast, indirect funding 
scenarios may place the choice of service provider in the hands of a 
beneficiary, and then pay for the cost of that service through a 
voucher, certificate, or other similar means of payment
    HUD believes that, under current precedent, faith-based 
organizations that receive HUD funds as the result of the genuine and 
independent choice of a beneficiary (for example, where the entity 
administering HUD funds established a voucher, coupon, certificate, or 
similar funding mechanism) are permitted to offer assistance that 
integrates religion and social services and requires participation in 
all aspects of their programs. The religious freedom of beneficiaries 
in an indirect funding program is protected by the guarantee of genuine 
and independent private choice. A beneficiary has the right to select 
any eligible provider, and no beneficiary may be required to receive 
services from a provider to which the beneficiary has a religious 
objection. In other words, vouchers for services funded by the 
government must be available to eligible beneficiaries regardless of 
their religious belief, and

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those who object to a religious provider may select an eligible 
alternative provider.
    Finally, HUD notes that this final rule does not modify any 
statutory nondiscrimination requirements for HUD programs covered by 
the rule. To the extent that such requirements restrict the activities 
of indirectly funded organizations, those restrictions remain in 
effect. Accordingly, the statute that applies to each program should be 
reviewed for the scope of its applicability.
    Comment: Rule should provide for stricter monitoring and 
enforcement. Several commenters wrote that the rule fails to provide 
for any oversight mechanisms or ``firewalls'' to prevent the religious 
use of government funds. The commenters wrote that the rule should 
require faith-based organizations to regularly account for the 
expenditures of funds and to undergo regular audits.
    HUD Response. HUD has not revised the rule in response to these 
comments. HUD has a responsibility to monitor all program participants 
to ensure that HUD funds are used in accordance with HUD program and 
any governmentwide requirements. Inappropriate use of HUD funds or 
failure to comply with HUD requirements is not a possibility that 
arises only when program participants are faith-based organizations. 
Failure of any organization receiving Federal funds to ensure that the 
Federal portion of their funding is not used for prohibited purposes 
will subject the organization to the imposition of sanctions or 
penalties. All HUD program participants must carefully manage their 
various sources of Federal funds and abide by Office of Management and 
Budget (OMB) cost accounting circulars, where applicable, or other cost 
accounting methods that may be specified in individual program 
regulations. These existing procedures, therefore, more than suffice to 
address the concerns raised by the commenters.
    Comment: The regulatory restrictions should not apply to non-
financial assistance. One commenter expressed concern about the HUD 
programs covered by the rule, which included the ``full range of HUD 
programs and activities, including programs that make funds available 
through contracts, grants, cooperative agreements, or other instruments 
for eligible goods, services, and activities, and programs that do not 
make funds available, but involve other forms of benefit or resources'' 
(69 FR 10127, first column). The commenter expressed concern that 
application of all applicable regulatory requirements would place non-
financial assistance under quite restrictive requirements.
    HUD Response. HUD believes that the commenter has misunderstood the 
rule in part. Certain portions of the rule apply to all who 
``participate in HUD's programs and activities,'' while others apply 
more narrowly to organizations that receive direct HUD funds. For 
example, religious organizations are eligible, on the same basis as any 
other organization, to participate in HUD's programs and activities. 
Therefore, in administering HUD-supported financial and non-financial 
assistance, neither the Federal government nor a State government, 
local government, or other entity administering a HUD program or 
activity can discriminate against an organization on the basis of the 
organization's religious character or affiliation. In contrast, the 
restriction on inherently religious activities is limited to programs 
that receive direct HUD funds. Certain forms of non-financial 
assistance, such as HUD-supported mortgage insurance, do not fall 
within the definition of direct HUD funds. HUD, therefore, does not 
believe that further clarification in the regulatory text is needed.

B. Comments Regarding Employment and Non-Discrimination Provisions

    Comment: Comments regarding the Title VII exemption. One commenter 
expressed support for the regulatory provision regarding the employment 
nondiscrimination exemption provided in Title VII of the Civil Rights 
Act of 1964. However, the commenter requested that HUD provide more 
specific guidance on how faith-based organizations may preserve their 
employment exemption, notwithstanding program-specific requirements. 
Other commenters questioned whether a faith-based organization retains 
its Title VII exemption after receipt of Federal funds. The commenters 
wrote that the exemption from Title VII was never intended to provide 
the basis for government-funded discrimination, and expressed concern 
that the rule will result in illegal employment discrimination.
    HUD Response. As noted above in this preamble, this final rule 
clarifies that a faith-based organization's exemption from the Federal 
prohibition on employment discrimination on the basis of religion, set 
forth in section 702(a) of Title VII of the Civil Rights Act of 1964, 
is not forfeited when the organization participates in a HUD program. 
HUD believes that faith-based organizations should retain their 
fundamental civil rights, including their ability to take faith into 
account when they make employment decisions without running afoul of 
Title VII. Title VII recognizes that for a faith-based organization to 
define or carry out its mission, it must be able to choose its 
employees based on its vision and beliefs. Some HUD programs, however, 
contain independent statutory provisions that impose certain 
nondiscrimination requirements on all grantees. Accordingly, grantees 
should consult with the appropriate Department program office to 
determine the scope of any applicable requirements.
    Comment: Rule should provide for applicability of State and local 
nondiscrimination requirements. Several commenters wrote that the 
proposed rule did not make clear that State and local civil rights laws 
continue to apply to organizations providing federally funded programs 
and activities. The commenters urged that the final rule should 
explicitly preserve the application of state and local 
nondiscrimination laws, particularly those concerning employment 
discrimination. However, a commenter writing in support of the Title 
VII exemption expressed a contrary view. This commenter requested that 
the final rule explicitly preempt any conflicting State or local 
restrictions on religious staffing when HUD funds are commingled with 
State or local funds.
    HUD Response. The requirements that govern funding under the HUD 
programs at issue in these regulations do not directly address 
preemption of State or local laws. Federal funds, however, carry 
Federal requirements. No organization is required to apply for funding 
under these programs, but organizations that apply and are selected for 
funding must comply with the requirements applicable to the program 
funds. As noted earlier, if a State or local government voluntarily 
contributes its own funds to supplement federally funded activities, 
the State or local government has the option to segregate the Federal 
funds or commingle them. If the funds are commingled, this regulation 
applies to all the commingled funds.
    Comment: The nondiscrimination provisions should be strengthened by 
explicitly prohibiting discrimination based on sexual orientation and 
gender identity. One commenter made this suggestion.
    HUD Response. As noted earlier, this final rule does not modify any 
statutory nondiscrimination requirements for the HUD programs covered 
by the rule. The purpose of this rule is to ensure the

[[Page 41716]]

equal treatment of faith-based organizations participating in HUD 
programs. The purpose of this rule is not to establish 
nondiscrimination requirements or to alter existing nondiscrimination 
requirements. Current requirements of applicable statutes continue to 
apply to the HUD programs covered by this final rule, but HUD declines 
to impose additional requirements by regulation.

C. Comments Regarding Inherently Religious Activities

    Comment: The restrictions on inherently religious activities 
require clarification. One commenter requested a more expansive 
definition of ``inherently religious activities.'' The commenter wrote 
that while the rule defines ``inherently religious activities'' to 
include ``worship, religious instruction, or proselytization,'' such 
guidance is insufficient to ensure that grantees do not run afoul of 
the constitutional restrictions.
    HUD Response. The final rule continues to specify that inherently 
religious activities include ``worship, religious instruction, or 
proselytization.'' It would be difficult to establish an acceptable 
list of all inherently religious activities. Inevitably, the regulatory 
definition would fail to include some inherently religious activities 
or include certain activities that are not inherently religious. Rather 
than attempt to establish an exhaustive regulatory definition, this 
final rule retains the language of the proposed rule, which provides 
examples of the general types of activities that are prohibited by the 
regulations. This approach is consistent with Supreme Court precedent, 
which likewise has not comprehensively defined inherently religious 
activities. For example, prayer and worship are inherently religious, 
but social services do not become inherently religious merely because 
they are conducted by individuals who are religiously motivated to 
undertake them or view the activities as a form of ministry. If HUD 
determines that additional guidance is needed regarding specific 
activities that are ``inherently religious,'' HUD will provide this 
guidance.
    Comment: Clarify the term ``separation in time or location.'' One 
commenter requested that HUD clarify the separation ``in time or 
location'' restriction. The commenter wrote that the vagueness of the 
current language would lead to confusion among service providers. The 
commenter suggested that specifying that religious activities must be 
separated by both time and location could provide greater clarity.
    HUD Response. HUD declines to adopt the suggestion made by the 
commenter. HUD does not agree that the separation of time or location 
requirement is ambiguous or necessitates the need for additional 
regulation for proper adherence. HUD believes that existing regulations 
and this rule are clear that faith-based organizations using direct 
Federal funds for certain activities must separate their inherently 
religious activities from the federally funded activities. HUD believes 
that a common sense approach to this regulation supported by HUD 
guidance, not a detailed regulatory approach, is the better one. HUD 
believes that requiring that inherently religious activities be 
separated from HUD-funded activities by both time and location is 
legally unnecessary. Further, such a requirement would impose an 
unnecessarily harsh burden on small faith-based organizations, which 
may have access to only one suitable location for the provision of HUD-
funded services.
    Comment: The requirement regarding ``separation in time or 
location'' fails to meet constitutional standards. One commenter wrote 
that the ``time or location'' restriction applies solely to inherently 
religious activities. According to the commenter, this seems to suggest 
that religious activity that is not inherently religious is permissible 
during the provision of HUD-funded programs or services. The commenter 
wrote that this is misleading and fails to meet the current 
constitutional standard, which requires that no government funds be 
diverted to religious indoctrination.
    HUD Response. HUD has not revised the rule in response to this 
comment. The final rule, consistent with Supreme Court decisions 
interpreting the First Amendment to the Constitution, is clear that 
faith-based organizations using direct Federal funds must separate 
their inherently religious activities from the federally funded 
activities. However, prohibiting any and all references to religion or 
religious belief is legally unnecessary. As to the commenter's 
suggestion that the regulation should more clearly prohibit the use of 
government funds for religious indoctrination, HUD believes that the 
language of the proposed rule, which HUD has decided to retain, 
adequately addresses this concern. The rule provides examples of the 
general types of activities that are prohibited by the regulations: 
worship, religious instruction, and proselytizing. As to the 
commenter's suggestion that all ``religious activity'' must be separate 
from HUD-funded services, HUD notes that some religious organizations 
view the very provision of social services as a ``religious'' activity. 
HUD-funded services, however, do not become impermissibly religious 
merely because they are conducted by individuals who are religiously 
motivated to undertake them or view them as a form of ``ministry.'' HUD 
believes that its approach is consistent with Supreme Court precedent.

D. Comments Regarding Other Rule Provisions

    Comment: The rule should prohibit the display of religious art or 
iconography. Two commenters made this suggestion. The commenters wrote 
that the rule fails to recognize that proselytization, religious 
instruction, and worship can occur through art, icons, and images. 
Further, the commenters were concerned that the symbols might create a 
pervasively sectarian atmosphere in which members of a different 
religion may not feel comfortable or welcome.
    HUD Response. HUD declines to impose this restriction on HUD 
program participants that are faith-based organizations. A number of 
Federal statutes affirm the principle embodied in this rule (see e.g., 
42 U.S.C. 290kk-1(d)(2)(B)). For no other program participants do HUD 
regulations prescribe the type of artwork, statues, or icons that may 
be placed within or without the structures in which HUD-funded services 
are provided. A prohibition on the use of religious icons would make it 
more difficult for many faith-based organizations to participate in the 
program than other organizations, and would thus be an inappropriate 
and excessive restriction.
    Comment: The proposed rule allows the misuse of HUD funds to build 
structures used for religious purposes. Several commenters objected to 
the use of HUD funds in the acquisition, construction, or 
rehabilitation of religious structures. The commenters wrote that the 
provisions are contrary to Supreme Court decisions that prohibit 
spending government funds on structures that are not exclusively 
secular in their use. The commenters wrote that the ``attribution'' 
requirements are vague and that HUD will need to establish effective 
safeguards to avoid the perceived constitutional pitfalls.
    HUD Response. HUD has not revised the rule in response to these 
comments. HUD believes that the prorated funding of improvements to a 
structure that has a mixed use--both religious and nonreligious--is not 
itself a violation of the Constitution. In a neutral program in

[[Page 41717]]

which the government directly funds the capital improvements of 
institutions that administer Federal social welfare programs, the 
government need only put in place safeguards to ensure that public 
money is not used to finance inherently religious activities. 
Therefore, the final rule's prohibition on the funding of capital 
improvements for sanctuaries, chapels, or any other rooms that a 
religious congregation uses as its principal place of worship simply 
provides extra assurance that HUD-funded capital improvements will not 
be used to support inherently religious activities, and HUD's rule is 
well within the bounds of the Constitution.

V. Findings and Certifications

Regulatory Planning and Review

    The Office of Management and Budget (OMB) reviewed this rule under 
Executive Order 12866 (entitled ``Regulatory Planning and Review''). 
OMB determined that this rule is a ``significant regulatory action'' as 
defined in section 3(f) of the Order (although not an economically 
significant action, as provided under section 3(f)(1) of the Order). 
Any changes made to the rule subsequent to its submission to OMB are 
identified in the docket file, which is available for public inspection 
in the Regulations Division, Room 10276, Office of General Counsel, 
Department of Housing and Urban Development, 451 Seventh Street, SW., 
Washington, DC 20410-0500.

Regulatory Flexibility Act

    The Secretary, in accordance with the Regulatory Flexibility Act (5 
U.S.C. 605(b)) has reviewed and approved this final rule and in so 
doing certifies that this rule will not have a significant economic 
impact on a substantial number of small entities. The final rule will 
not impose any new costs, or modify existing costs, applicable to HUD 
grantees. Rather, the purpose of the final rule is to ensure the equal 
participation of faith-based organizations (irrespective of size) in 
HUD's programs.

Environmental Impact

    This final rule sets forth nondiscrimination standards. 
Accordingly, under 24 CFR 50.19(c)(3), this final rule is categorically 
excluded from environmental review under the National Environmental 
Policy Act of 1969 (42 U.S.C. 4332).

Unfunded Mandates Reform Act

    Title II of the Unfunded Mandates Reform Act of 1995 (UMRA) (2 
U.S.C. 1531-1538) establishes requirements for Federal agencies to 
assess the effects of their regulatory actions on State, local, and 
tribal governments and the private sector. This final rule does not 
impose any Federal mandate on State, local, or tribal government or the 
private sector within the meaning of UMRA.

Executive Order 13132, Federalism

    Executive Order 13132 (entitled ``Federalism'') prohibits, to the 
extent practicable and permitted by law, an agency from promulgating a 
regulation that has Federalism implications and either imposes 
substantial direct compliance costs on State and local governments and 
is not required by statute or preempts state law, unless the relevant 
requirements of section 6 of the Executive Order are met. Consistent 
with the consultation requirements of the Executive Order, HUD 
specifically solicited comment from State and local government 
officials on the March 3, 2004, proposed rule, but received no such 
comments. This final rule does not impose substantial direct costs on 
State or local governments and therefore does not have Federalism 
implications under this Executive Order.

Catalog of Federal Domestic Assistance Numbers

    The regulatory amendments contained in this final rule apply to all 
HUD assistance programs for which faith-based organizations are 
eligible to participate. The Catalog of Federal Domestic Assistance 
number for a particular HUD program may be found on the CFDA Web site 
at: http://www.cfda.gov.

List of Subjects

24 CFR Part 5

    Administrative practice and procedure, Aged, Claims, Drug abuse, 
Drug traffic control, Grant programs--housing and community 
development, Grant programs--Indians, Individuals with disabilities, 
Loan programs--housing and community development, Low and moderate 
income housing, Mortgage insurance, Pets, Public housing, Rent 
subsidies, Reporting and recordkeeping requirements.

24 CFR Part 570

    Administrative practice and procedure, American Samoa, Community 
development block grants, Grant programs--education, Grant programs--
housing and community development, Guam, Indians, Loan programs--
housing and community development, Low and moderate income housing, 
Northern Mariana Islands, Pacific Islands Trust Territory, Puerto Rico, 
Reporting and recordkeeping requirements, Student aid, Virgin Islands.

0
Accordingly, for the reasons described in the preamble, HUD amends 24 
CFR parts 5 and 570 as follows:

PART 5--GENERAL HUD PROGRAM REQUIREMENTS; WAIVERS

0
1. The authority citation for 24 CFR part 5 continues to read as 
follows:

    Authority: 42 U.S.C. 3535(d), unless otherwise noted.

0
2. Add Sec.  5.109 to read as follows:


Sec.  5.109  Equal Participation of Religious Organizations in HUD 
Programs and Activities.

    (a) Purpose. Consistent with Executive Order 13279 (issued on 
December 12, 2002, 67 FR 77141, 3 CFR, 2002 Comp., p. 258), entitled 
``Equal Protection of the Laws for Faith-Based and Community 
Organizations,'' this section describes HUD's policy for the equal 
participation of religious organizations in HUD's programs and 
activities. The equal participation policies and requirements contained 
in this section are generally applicable to religious organizations in 
all HUD programs and activities. More specific policies and 
requirements regarding the participation of religious organizations in 
individual HUD programs may be provided in the regulations for those 
programs.
    (b) Equal participation of religious organizations in HUD programs 
and activities. Religious organizations are eligible, on the same basis 
as any other organization, to participate in HUD's programs and 
activities. Neither the Federal government, nor a State or local 
government, nor any other entity that administers any HUD program or 
activity shall discriminate against an organization on the basis of the 
organization's religious character or affiliation.
    (c) Inherently religious activities. Organizations that receive 
direct HUD funds under a HUD program or activity may not engage in 
inherently religious activities, such as worship, religious 
instruction, or proselytization, as part of the programs or services 
funded under a HUD program or activity. If an organization conducts 
such inherently religious activities, the inherently religious 
activities must be offered separately, in time or location, from the 
programs, activities, or services supported by direct HUD funds and 
participation must be voluntary for the beneficiaries of the programs, 
activities or services provided under the HUD program.

[[Page 41718]]

    (d) Independence of religious organizations. A religious 
organization that participates in a HUD program or activity will retain 
its independence from Federal, State, and local governments, and may 
continue to carry out its mission, including the definition, practice, 
and expression of its religious beliefs, provided that it does not 
engage in any inherently religious activities, such as worship, 
religious instruction, or proselytization as part of the programs or 
services supported by direct HUD funds. Among other things, religious 
organizations may use space in their facilities to provide services 
under a HUD program without removing religious art, icons, scriptures, 
or other religious symbols. In addition, a religious organization 
participating in a HUD program retains its authority over its internal 
governance, and it may retain religious terms in its organization's 
name, select its board members on a religious basis, and include 
religious references in its organization's mission statements and other 
governing documents.
    (e) Exemption from Title VII employment discrimination 
requirements. A religious organization's exemption from the Federal 
prohibition on employment discrimination on the basis of religion, set 
forth in section 702(a) of the Civil Rights Act of 1964 (42 U.S.C. 
2000e-1), is not forfeited when the organization participates in a HUD 
program. Some HUD programs, however, contain independent statutory 
provisions that impose certain nondiscrimination requirements on all 
grantees. Accordingly, grantees should consult with the appropriate HUD 
program office to determine the scope of applicable requirements.
    (f) Nondiscrimination requirements. An organization that receives 
direct HUD funds shall not, in providing program assistance, 
discriminate against a program beneficiary or prospective program 
beneficiary on the basis of religion or religious belief.
    (g) Acquisition, construction, and rehabilitation of structures. 
HUD funds may not be used for the acquisition, construction, or 
rehabilitation of structures to the extent that those structures are 
used for inherently religious activities. HUD funds may be used for the 
acquisition, construction, or rehabilitation of structures only to the 
extent that those structures are used for conducting eligible 
activities under a HUD program or activity. Where a structure is used 
for both eligible and inherently religious activities, HUD funds may 
not exceed the cost of those portions of the acquisition, construction, 
or rehabilitation that are attributable to eligible activities in 
accordance with the cost accounting requirements applicable to the HUD 
program or activity. Sanctuaries, chapels, and other rooms that a HUD-
funded religious congregation uses as its principal place of worship, 
however, are ineligible for HUD-funded improvements. Disposition of 
real property after use for the authorized purpose, or any change in 
use of the property from the authorized purpose, is subject to 
governmentwide regulations governing real property disposition (see, 
e.g., 24 CFR parts 84 and 85).
    (h) Commingling of Federal and State and local funds. If a state or 
local government voluntarily contributes its own funds to supplement 
Federally funded activities, the State or local government has the 
option to segregate the Federal funds or commingle them. However, if 
the funds are commingled, the requirements of this section apply to all 
of the commingled funds. Further, if a State or local government is 
required to contribute matching funds to supplement a Federally funded 
activity, the matching funds are considered commingled with the Federal 
assistance and therefore subject to the requirements of this section. 
Some HUD programs' requirements govern any project or activity assisted 
under those programs. Accordingly, grantees should consult with the 
appropriate HUD program office to determine the scope of applicable 
requirements.

PART 570--COMMUNITY DEVELOPMENT BLOCK GRANTS

0
3. The authority citation for 24 CFR part 570 continues to read as 
follows:

    Authority: 42 U.S.C. 3535(d) and 5301-5320.


0
4. Add Sec.  570.480(e) to read as follows:


Sec.  570.480  General.

* * * * *
    (e) Religious organizations are eligible to participate under the 
State CDBG Program as provided in Sec.  570.200(j).

    Dated: July 6, 2004.
Alphonso Jackson,
Secretary.
[FR Doc. 04-15677 Filed 7-8-04; 8:45 am]
BILLING CODE 4210-32-P