HUD’s Office of Community Planning and Development (CPD) issued Notice CPD-21-09 regarding the new Section 3 regulations, providing guidance for local and state governments (“grantees”) that receive various CPD-administered programs (see Memo, 10/5/20) about providing jobs and other economic opportunities to low-income people, particularly those receiving housing assistance, and to businesses controlled by low-income people or employing them.
The programs addressed in the notice are the Community Development Block Grant (CDBG), CDBG CARES Act (CDBG-CV), CDBG Disaster Recovery (CDBG-DR), CDBG Mitigation (CDBG-MIT), and Neighborhood Stabilization Program (NSP) programs, as well as Recovery Housing Program (RHP) grantees and Section 108 Loan Guarantee Program (Section 108) borrowers. Section 3 requirements apply to housing rehabilitation, housing construction, and other public construction projects (e.g., public improvements and public facilities) assisted by any one of the above programs. Other programs administered by CPD, such as the HOME Investment Partnerships program and the national Housing Trust Fund, must also comply with Section 3; however, these programs are not subject to Notice CPD-21-09.
The purpose of Section 3 of the Housing and Urban Development Act of 1968 is to ensure that when HUD funds are used to assist housing and community development projects “to the greatest extent feasible,” preference for some of the jobs and other economic opportunities created go to low-income people, “particularly those who are recipients of government assistance for housing.” Another Section 3 obligation is to support businesses owned or controlled by low-income people or businesses that hire them. Public housing agencies (PHAs) and jurisdictions using Community Development Block Grant (CDBG), HOME Investment Partnerships program, and other HUD funds must comply with Section 3 and ensure that contractors and subcontractors comply.
Notice CPD-21-09 is a useful summary of the new Section 3 rule published in the Federal Register on September 29, 2020. It replaced the interim Section 3 rule that had been in place since 1994. The new rule made three positive changes, yet has four harmful provisions (see Memo, 10/5/20).
One of the harmful new provisions established a threshold of $200,000 of HUD assistance per project before Section 3 would apply to housing rehabilitation, housing construction, and other public construction activities (e.g., roads, sewerage, water facilities, community centers, parks, and homeless facilities). The rule defines a “project” as the site or sites together with any building(s) and improvements located on the site(s) that are under common ownership, management, and financing. NLIHC’s comment letter in response to the proposed Section 3 rule opposed this high threshold.
The problem can apply to CDBG-assisted (as well as HOME-assisted) housing rehabilitation and CDBG-assisted infrastructure projects. Most CDBG- or HOME-assisted rehabilitation projects address single-family homeowner properties, which are not likely to ever reach the $200,000 per home threshold. For instance, contractors awarded significant amounts of Section 3 covered funds in a single year to spend on several small, discreet activities (such as homeowner housing rehabilitation) would not have to hire Section 3 workers or subcontract with Section 3 businesses because each component activity costs less than $200,000. For example, if a contractor receives $1 million in CDBG funds to rehab seven single-family homes and the contractor spends $130,000 per home, that contractor would not have to comply with Section 3 because each home is considered a single “project;” not one of the seven rehabs had a contract for more than $200,000.
Notice CPD-21-09 uses as examples CDBG-assisted multifamily rehabilitation to demonstrate the applicability of the $200,000 per project threshold (see pages 4, 5, and 13). However, historically on a national basis, only 2% of CDBG has been used for multifamily housing projects, while approximately 11% of CDBG has been spent on homeowner rehabilitation. The threshold problem could also apply to non-housing CDBG activities such as road improvements, sidewalk installment, and water and sewerage infrastructure if such projects are awarded in discreet segments, each using less than $200,000 in CDBG.
Notice CPD-21-09 is at: https://bit.ly/2WHhvvW
HUD has two Section 3 websites. The more useful one is at HUD Exchange https://bit.ly/3Bt0RiX, while another is on the main HUD website at: https://www.hud.gov/section3
NLIHC has developed two summaries of the new Section 3 rule: 1) a “Detailed Summary and Analysis of the Final Section 3 Regulations” at: https://bit.ly/3dXxcnD, and 2) a “Brief Summary and Analysis of the Final Section 3 Regulations” at: https://bit.ly/2HoSmic
Both of these resources and more are available on NLIHC’s public housing webpage at: https://bit.ly/2WQtcB5
More information about the new Section 3 regulations is on page 7-45 of NLIH