DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

Statement of Regulatory Priorities

The Regulatory Plan for the Department of Housing and Urban Development (HUD) for Fiscal Year (FY) 2015, together with HUD's Fall Semiannual Agenda of Regulations, highlights the most significant regulatory initiatives that HUD seeks to complete during the upcoming fiscal year. As described by Secretary Castro during his confirmation hearings, HUD is a critical federal agency because it directly impacts American families, from enforcing fair housing rights to revitalizing distressed areas, from assisting veterans and finding permanent housing, to helping communities rebuild after a natural disaster hits, HUD impacts small towns, big cities, rural communities and tribal communities across the country.[1] Through its programs, HUD works to strengthen the housing market and protect consumers; meet the need for quality affordable rental homes; utilize housing as a platform for improving quality of life; and build inclusive and sustainable communities free from discrimination.

As discussed in HUD's 2010-2015, Strategic Plan, a central feature of HUD's mission is nurturing opportunities for job growth and business expansion in American communities, particularly those that are economically distressed. HUD's experience is that job growth and business expansion are essential to creating viable communities that provide residents opportunities that enhance their quality of life. Economic development, however, must be tailored to the assets and needs of the community in a way that maintains and enhances affordability and local character. HUD utilizes several tools to achieve this goal, including the providing tax incentives and Federal financial assistance that assist communities to carry out a wide range of community development activities directed toward neighborhood revitalization, economic development, and improved community facilities and services. Another tool that HUD has to support job growth and economic activity is Section 3 of the Housing and Urban Development Act of 1968, as amended, which ensures that employment and other economic opportunities generated by Federal financial assistance for housing and community development programs are, to the greatest extent feasible, directed toward low- and very low-income persons, particularly those who are recipients of government assistance for housing.

Consistent with its 2010-2015 Strategic Plan, HUD's Regulatory Plan for FY2015 focuses on strengthening, through regulation, Section 3 to update and better align it with the statutory changes to HUD's housing and community development programs since HUD issued the regulation in 1994. This effort will also provide recipients of HUD financial assistance more discretion when carrying out their Section 3 responsibilities while simultaneously increasing their accountability to HUD and the communities that they serve.

Priority: Enhancing Economic Development and Job Creation through Section 3

The purpose of Section 3 is to ensure that the employment and other economic opportunities generated by Federal financial assistance, to the greatest extent feasible, be directed to low-and very low-income persons, particularly those who are recipients of government assistance for housing. In this regard, the statute recognizes that the employment and other economic opportunities generated by projects and activities that receive Federal housing and community development assistance offer an effective means of empowering low- and very low-income persons and to business concerns that provide economic opportunities to these persons. Notwithstanding, HUD's Section 3 regulations have not been updated since 1994. In the 20 years that have passed since HUD promulgated its Section 3 regulations, significant legislation has been enacted that affects HUD programs that are subject Section 3. These legislative changes are not adequately addressed by HUD's current Section 3 regulations.

In addition, recipients of Section 3 covered HUD financial assistance, community advocates, representatives from national housing organizations, Section 3 residents and businesses, and other interested parties have expressed, in HUD's organized listening sessions, that the existing regulations are not sufficiently explicit about specific actions that could be undertaken to achieve compliance; that the existing regulations do not clearly describe the extent to which recipients may require subrecipients, contractors, and subcontractors to comply with Section 3; and actions that recipients may take to impose meaningful sanctions for noncompliance by their subrecipients, contractors, and subcontractors. Finally, HUD's Office of Inspector General (OIG) conducted an audit in 2013 to assess HUD's oversight of Section 3 in response to concerns about economic opportunities that were provided (or should have been provided) as a result of the expenditure of financial assistance under the American Reinvestment and Recovery Act (Recovery Act) (Public Law 111-5, approved February 17, 2009).

As a result, HUD proposes to update and clarify its Section 3 regulations to better fulfill the purpose of Section 3 and maximize the employment and contracting opportunities available to the low and very low-income residents of communities enjoying the benefit of Federal financial assistance in support of economic development and to business concerns that provide economic opportunities to these persons.

Regulatory Action: Creating Economic Opportunities for Low- and Very Low-Income Persons and Eligible Businesses through Strengthened "Section 3" Requirements

Section 3 of the Housing and Urban Development Act of 1968, as amended by the Housing and Community Development Act of 1992, contributes to the establishment of stronger, more sustainable communities by ensuring that employment and other economic opportunities generated by Federal financial assistance for housing and community development programs are, to the greatest extent feasible, directed toward low- and very low-income persons, particularly those who are recipients of government assistance for housing and to business concerns that provide economic opportunities to these persons. HUD is statutorily charged with the authority and responsibility to implement and enforce Section 3. HUD's regulations implementing the requirements of Section 3 have not been updated since 1994. This proposed rule would update HUD's Section 3 regulations to address new programs established since 1994 that are subject to the Section 3 requirements, and revise the regulations to both better promote compliance with the requirements of Section 3 by recipients of Section 3 covered financial assistance, while also recognizing barriers to compliance that may exist, and overall strengthening HUD's oversight of Section 3.

Aggregate Costs and Benefits

Executive Order 12866, as amended, requires the agency to provide its best estimate of the combined aggregate costs and benefits of all regulations included in the agency's Regulatory Plan that will be made effective in calendar year 2015. HUD expects that the neither the total economic costs nor the total efficiency gains will exceed $100 million.

Priority Regulations in HUD's FY 2015 Regulatory Plan

HUD - Office of the Secretary

PROPOSED RULE STAGE

Creating Economic Opportunities for Low- and Very Low-Income Persons and Eligible Businesses through Strengthened "Section 3" Requirements

Priority: Significant

Legal Authority: 12 USC 1701u; 42 USC 1450; 42 USC 3301; 42 USC 3535(d)

CFR Citation: 24 CFR 135

Legal Deadline: None

Abstract: This proposed rule would revise HUD's regulations found at 24 CFR part 135, which ensure that employment, training, and contracting opportunities generated by certain HUD financial assistance shall, to the greatest extent feasible, and consistent with existing Federal, State, and local laws and regulations, be directed to low- and very low-income persons, particularly those who are recipients of Government assistance for housing and to business concerns that provide economic opportunities to these persons. Part 135 was last revised to incorporate the statutory amendments of the Housing and Community Development Act of 1992. This proposed rule would update part 135 to: (1) Reflect certain changes in the design and implementation of HUD programs that are subject to the section 3 regulations; (2) clarify the obligations of covered recipient agencies; and (3) simplify the Department's section 3 complaint processing procedures.

Statement of Need

Section 3 requirements have been governed by an interim regulation since 1994 and the Department is obligated to promulgate final regulations. Equally important, HUD programs subject to Section 3 have undergone significant legislative change. This includes, reforms made to HUD's Indian housing programs by the Native American Housing Assistance and Self-Determination Act of 1996 (NAHASDA) (Public Law 104-330, approved October 26, 1996); public housing reforms made by the Quality Housing and Work Responsibility Act of 1998 (QHWRA) (Public Law 105-276, approved by October 21, 1998); reforms made to HUD's supportive housing programs by the Section 202 Supportive Housing for the Elderly Act of 2010 (Public Law 111-372, approved January 4, 2011), and the Frank Melville Supportive Housing Investment Act of 2010 (Public Law 111-347, approved January 4, 2011); and more recently reforms made to HUD's public housing by the Rental Assistance Demonstration program authorized by the act appropriating 2012 funding for HUD, the Consolidated and Further Continuing Appropriations Act, 2012 (Public Law 112-55, approved November 18, 2011). HUD proposes to clarify and strengthen its Section 3 regulations to incorporate new programs established since 1994 that are subject to Section 3 requirements, revise the existing regulation to enhance compliance by recipients of covered HUD assistance, and mitigate barriers to achieving compliance.

In August 2010, HUD hosted a Section 3 Listening Forum[2] that brought together recipients of Section 3 covered HUD financial assistance, community advocates, representatives from national housing organizations, Section 3 residents and businesses, and other interested parties to highlight best practices and to discuss barriers to implementation across the country. The forum offered recipients of Section 3 covered financial assistance the opportunity to identify challenges they were facing in complying with Section 3. Participants stated that the existing regulations are not sufficiently explicit about specific actions that could be undertaken to achieve compliance; that the existing regulations do not clearly describe the extent to which recipients may require subrecipients, contractors, and subcontractors to comply with Section 3; and actions that recipients may take to impose meaningful sanctions for noncompliance by their subrecipients, contractors, and subcontractors.

In addition, HUD's Office of Inspector General (OIG) conducted an audit in 2013 to assess HUD's oversight of Section 3 in response to concerns about economic opportunities that were provided (or should have been provided) as a result of the expenditure of financial assistance under the American Reinvestment and Recovery Act (Recovery Act) (Public Law 111-5, approved February 17, 2009). HUD's OIG concluded that HUD did not enforce the reporting requirements of Section 3 for recipients of FY 2009 Recovery Act Public Housing Capital funds from HUD.[3] HUD's OIG made several recommendations to address its findings including developing procedures to take administrative measures against recipients that fail to comply with Section 3 requirements and publishing a Section 3 final rule.

Alternatives:

Efforts have been made to improve HUD's Section 3 efforts independent of regulatory change, by increased reporting compliance, use of Notices of Financial Assistance (NOFA) competitions for Section 3 coordinators, and a business registry. These initiatives have been helpful, but as HUD's Office of Inspector General[4] noted, regulatory change is important and necessary to clarify areas of confusion without subjecting recipients who operated in good faith to legal problems.

Anticipated Costs and Benefits

The proposed rule will enhance employment opportunities for Section 3 residents and contracting opportunities for Section 3 businesses. In doing so, the proposed rule imposes additional recordkeeping, verification, procurement, monitoring, and complaint processing requirements on covered recipients. Additional administrative work will be one of the outcomes of an invigorated effort to provide economic opportunities to the greatest extent feasible. HUD has estimated that total reporting and record keeping burden would be $6.5 million the first year the rule goes into effect and $2.2 million annually in succeeding years.

Section 3 does not create additional jobs. Instead, a more rigorous targeting of economic opportunity will direct (transfer) positions and contracts to those eligible under Section 3. A reasonable estimate of the impact would be protection for an additional 1,400 Section 3 jobs annually from increased oversight and clarification of program standards. Finally, as tenant incomes rise, the federal rental subsidy for those tenants would decline. Such an effect would constitute a transfer from tenants to the U.S. government and could be as large as $19 million annually.

This rule will not have any impact on the level of funding for the impacted programs. Funding is determined independently by congressional appropriations. It will, however, affect the allocation of resources.

Risks: This rule poses no risk to public health, safety, or the environment.

TIMETABLE:

Action Date FR CITE

NPRM 12/00/2014

Regulatory Flexibility Analysis Required: No

Small Entities Affected: No

Government Levels Affected: None

# Federalism Affected: No

# Energy Affected: No

International Impacts: No

Agency Contact:

Sara K. Pratt, Deputy Assistant Secretary for Enforcement and Programs, Department of Housing and Urban Development,

451 7th Street SW., Washington, DC 20410

PHONE: 202 402-6978

RIN: 2529-AA91

[1] Senate Banking, Housing and Urban Affairs Committee Confirmation Hearing on the Nomination of Julian Castro to be Housing and Urban Development Secretary and Laura S. Wertheimer to be the Federal Housing Finance Agency Inspector General, 113^th Cong. (June 17, 2014) (Statement of Julián Castro).

[2]https://nhlp.org/files/09%20Section%203%20Barriers%20and%20best%20practices%208%2024%2010%20Final%20with%20attachment.pdf

[3] See: http://www.hudoig.gov/reports-publications/audit-reports/hud-did-not-enforce-reporting-requirements-of-section-3-of.

[4] http://www.hudoig.gov/reports-publications/audit-reports/hud-did-not-enforce-reporting-requirements-of-section-3-of