View Rule

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 [1] 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. [2] 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.

Summary of the Legal Basis:

Section 3 was enacted as a part of the Housing and Urban Development Act of 1968 (Public Law 90-448, approved August 1, 1968) to bring economic opportunities, generated by the expenditure of certain HUD financial assistance, to the greatest extent feasible, to low- and very low-income persons residing in communities where the financial assistance is expended. Section 3 recognizes that HUD funds are often one of the largest sources of funds expended in low-income communities and, where such funds are spent on activities such as construction and rehabilitation of housing and other public facilities, the expenditure results in new jobs and other opportunities. By directing new economic opportunities to residents and businesses in the community in which the funds are expended, the expenditure can have the double benefit of creating new or rehabilitated housing or other facilities in such communities while also creating jobs for the residents of these communities. Section 3 was amended by the Housing and Community Development Act of 1992 (Public Law 102-550, approved October 28, 1992), which required the Secretary of HUD to promulgate regulations to implement Section 3, codified at 12 U.S.C. 1701u. HUD’s Section 3 regulations were promulgated through an interim rule published on June 30, 1994, at 59 FR 33880, and are codified in 24 CFR part 135. 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.

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 [1] noted, regulatory change is important and necessary to clarify areas of confusion without subjecting recipients who operated in good faith to legal problems.

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

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 protections 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.