In late May, the Office of Management and Budget (OMB) proposed a sweeping rewrite of the rules governing federal grants, under the innocuous title Regulation for Federal Financial Assistance. While the rule claims its overarching goal is to “improve transparency, accountability, and oversight for how Federal taxpayer dollars are used in the context of Federal grantmaking,” it politicizes federal funding and makes it even harder for underserved, smaller communities and community-based organizations to access federal grants.
Which agencies and grant programs are affected? The short answer: all of them.
While formula grants—that is, funds ultimately disbursed by state and local governments—are not affected, the rule covers every discretionary federal grant program, including grants awarded to community-based organizations working on housing, economic development, environmental health, and community infrastructure. Lawyers for Good Government and the Environmental Protection Network indicate that “The proposal’s reach extends across the whole of the federal government, impacting over $1.3 trillion in annual funding from more than 40 federal agencies.”
To date, more than 39,000 people and organizations have submitted comments. Universities and scientists have spoken up loudly, but what about housing and community development groups? We suggest that community-based organizations and small, underserved communities may be among those most harmed by the proposed regulations. If you haven’t spoken up yet, now would be a good time to do so.
What the Rule Would Do
The two most consequential provisions for community-based organizations concern termination authority and political review of awards.
Under the proposal, any active federal grant can be terminated if an agency determines that the award no longer advances “program goals, Federal agency priorities, or the national interest as they exist at the time of the termination.” No finding of noncompliance, fraud, or misuse is required.
In addition, under the proposed rule, every discretionary grant award must undergo pre-issuance review by a designated senior political appointee. Awards must “demonstrably advance the President’s policy priorities” and may not address a list of prohibited subjects, including racial equity programming, gender identity, and activities deemed to “promote anti-American values.” For organizations whose work touches on environmental justice, health equity, or inclusive community development, these conditions create a direct vulnerability.
Additional provisions compound the problem. The rule eliminates fixed-amount awards, a flexible funding mechanism that many smaller organizations depend on because it reduces administrative burden. It extends E-Verify requirements to every employee and contractor working on any federal grant, a costly administrative requirement previously required only of contractors. And it allows pass-through entities to terminate subawards based on vague reputational damage determinations, putting community organizations that receive subgrants at perpetual risk. These provisions also complicate both ends of the grants process: for applicants required to comply with the changes and for agency staff who must implement them.
Those most affected are organizations and municipalities working on environmental cleanup, community health, affordable housing, and neighborhood economic development in low-income, tribal, and rural areas. They would face higher barriers to winning awards and be at constant risk of grant termination.
A fact sheet from Lawyers for Good Government and the Environmental Protection Network lists U.S. Department of Housing and Urban Development continuum of care homelessness grants as among the programs directly affected. The National Council of Nonprofits warns of the substantial risks this rule poses to nonprofits of all sizes and focus areas.
But Doesn’t the Federal Grant System Need Reform?
Of course, the federal grantmaking system has long failed community-based organizations. Reforms that would make grants more accessible to community groups are long overdue.
Applying for a competitive federal grant is unnecessarily complex and takes staff time and expertise that many organizations lack. Registration systems such as SAM.gov are complex and unforgiving; technical errors can disqualify an application. Award processes are calibrated for institutions with large compliance teams and established track records, not community-based organizations that are closest to the problems many federal programs exist to address. Rural communities, tribal nations, and civic organizations in low-income neighborhoods routinely lose out to universities and large municipalities because the system was not designed for them.
During the previous administration, both of us worked two years at the U.S. Environmental Protection Agency (EPA), trying to address this. One of us designed the Community Change Grants program, a $2.2 billion program aimed at reducing pollution and advancing climate resilience and economic opportunity for the nation’s marginalized communities. The other led the Thriving Communities Network, an interagency effort to connect federal resources to underserved communities that have long been excluded from them.
Gains were uneven, but the changes we were involved in have been systematically dismantled since January 2025. The EPA’s Office of Environmental Justice and External Civil Rights was shuttered, hundreds of grant awardees received termination notices, and career civil servants who had built relationships with community intermediaries over years were fired or transferred. Although a federal judge found the termination of the environmental justice grants unlawful, he declined to order reinstatement because the staff responsible for administering the program were already gone. This proposed rule sets us back even further, creating bigger hurdles for community-based organizations and making abrupt grant terminations even easier.
What You Can Do
The public comment period closes on July 13, 2026. Comments must be submitted electronically through Regulations.gov under docket number OMB-2026-0034. Here is a link to submit comments.
The administration is not required to adopt public feedback, but a strong comment record still matters. Under the Administrative Procedure Act, agencies must respond to significant comments, and a robust record creates grounds for legal challenge. Courts reviewing a final rule will examine what concerns were raised during the comment period and how the agency responded. The most useful comments describe specific impacts your community would face. For more information, the Environmental Protection Network has put together a fact sheet about the rule and submitting comments, and the National Council on Nonprofits has created a comment guide.
Of course, the longer-term answer is legislative. OMB’s proposed rule exploits ambiguities in how Congress has structured federal grant law.
The federal grants system was already not working well. The path forward requires both fighting the proposed rule and building power to create a federal grants system that truly serves communities.
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