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This rule revises HUD's regulations for Section 3 of the Housing and Urban Development Act of 1968, as amended by the Housing and Community Development Act of 1992 (Section 3), which ensures 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. HUD’s regulations implementing the requirements of Section 3 have not been updated since 1994 and are not as effective at promoting economic opportunity for low-income persons as HUD believes they could be.  This proposed rule would update HUD’s Section 3 regulations to streamline reporting requirements by aligning the reporting with standard business practice; amending the applicability section; updating reporting and adding new outcome benchmarks; and integrating Section 3 into program enforcement. The purpose of these changes is to reduce regulatory burden, increase compliance with Section 3 requirements, and increase Section 3 opportunities for low-income persons. 

Statement of Need:

Over 24 years ago, HUD’s Section 3 regulations were promulgated through an interim rule published on June 30, 1994, at 59 FR 33880. Since HUD promulgated the current set of Section 3 regulations, significant legislation has been enacted that affects HUD programs that are subject to the requirements of Section 3. HUD has also heard from the public that there is a need for regulatory changes to clarify and simplify the existing requirements. HUD concluded that regulatory changes are needed to streamline Section 3 and more effectively help recipients of HUD funds achieve the purposes of the Section 3 statute.

Summary of the Legal Basis:

12 U.S.C. 1701u; 42 U.S.C. 1450; 42 U.S.C. 3301; 42 U.S.C. 3535(d).

Alternatives:

None.

Anticipated Costs and Benefits:

The purpose of Section 3 is to provide jobs, including apprenticeship opportunities, to public housing residents and other specific low- and very low-income residents of a local area, and contracting opportunities for businesses that substantially employ these persons. However, the Section 3 requirement itself does not create additional jobs or contracts. Instead, Section 3 redirects local jobs and contracts created as a result of the expenditure of HUD funds to Section 3 residents and businesses residing and operating in the area in which the HUD funds are expended. Currently, Section 3 rules require that a certain percent of new hires are Section 3 residents. HUD has determined that this measure has led to churning, where employers create a series of short-term jobs and hire and fire an employee in order to meet their Section 3 numeric goals. The proposed rule will curb these practices by changing the metric to a percentage of hours worked. HUD anticipates that the change will incentivize employers to create long-term employment opportunities as employers shift their focus to reporting hours worked, a factor that aligns with business practices, rather than on providing employment for a specific number of new hires. HUD also anticipates that the rule’s streamlined reporting requirements will contribute to an increase in the number of employment opportunities provided to Section 3 residents and more funds for Section 3 businesses. HUD estimates that proposed rule would result in an estimated reporting and recordkeeping burden reduction of 25,910 hours or $1.2 million a year. These figures are preliminary estimates and may be updated pending OMB review.   

Initial compliance costs are expected to be minimal and one-time as recipients shift their practices to meet the new requirements. For example, some recipients may have difficulty determining whether employees live in a Qualified Census Tract, or whether they live within a certain distance of a worksite. However, HUD plans to create tools to assist recipients in making these determinations. HUD will pay attention to public comment on this issue to ensure that compliance costs are indeed reduced by this rule change.

Benefits to low-income and very low-income persons are difficult to quantify. As described below, the change from measuring new hires to measuring labor hours could not only reduce churn but, depending on the initial benchmarks established, could also result in employers not needing to add new Section 3 workers in the short-term. However, tracking the amount of work performed by Targeted Section 3 workers would help ensure that the priorities of Section 3 are being considered, consistent with the statutory requirement, when recipients hire and distribute hours to low-income workers. As HUD tracks the new data reported by recipients, HUD expects to move the benchmarks to ensure that recipients are driven to increase their Section 3 opportunities, consistent with the Section 3 statutory intent that Federal financial assistance is, to the greatest extent feasible, directed toward low- and very low-income persons, particularly those who are recipients of government assistance for housing. The goal is that those recipients of government assistance for housing will find Section 3 employment and a path to financial security that removes the need for long-term government assistance.

The initial benefit of this rule is the reduction in administrative costs to both HUD and recipients of HUD financing, which results from aligning the Section 3 requirements with what businesses already track. HUD believes this change would improve compliance by recipients.

Risks:

A potential risk in switching from reporting and tracking new hires to labor hours is that the number of Section 3 workers being hired might decrease or remain flat.  However, this would be because employers have a financial incentive to retain current Section 3 workers rather than hire new Section 3 workers under this rule. This would be due, in part, to employers losing the existing incentive to churn workers in order to count new hires. Additionally, if data shows that this rule is not increasing employment opportunities for Section 3 workers over time, HUD can adjust the new Section 3 benchmarks to increase the number of labor hours performed by Section 3 workers that employers would need to meet in order to demonstrate compliance with this requirement.