HUD Publishes Final Section 3 Rule

HUD published a final rule implementing the Section 3 obligations of public housing agencies (PHAs) and other recipients of HUD housing and community development funding. The final rule was published on September 29 and becomes effective on November 30. While the final rule maintains most of the problematic components of the proposed rule, it does include three positive changes.

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. 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.

Under the current administration, HUD issued a proposed rule on April 4, 2019 that NLIHC and other advocates found to be deeply flawed. Three recommendations in NLIHC’s comment letter, however, are adopted in the final rule. During the previous administration, HUD proposed significant changes to the then interim rule from 1994. Many of those changes reflected input from advocates, including NLIHC, after numerous conference calls with HUD staff. That proposed rule never cleared the Office of Information and Regulatory Affairs (OIRA) at the Office of Management and Budget (OMB). The current administration replaced the previous proposed rule with the one now made final.

Three Positive Changes in the Final Rule

Requiring PHAs and Jurisdictions to Track and Report “Labor Hours” instead of “New Hires”

The 1994 interim rule required PHAs and jurisdictions to have goals of 30% of “new hires” be so-called Section 3 residents. However, as advocates had long observed, some contractors would hire Section 3 residents for a short time so that they would “count” toward the 30% goal but lay them off in short order. Or, a Section 3 resident would only be given 20 hours or less of work per week. Some contractors would shift some of their existing workforce to a Section 3 project so that the contractor could claim that they did not need to hire anyone new for the Section 3 project.

As HUD rightly notes in the preamble to the final rule, a focus on labor hours worked instead of new hires will measure total actual employment by Section 3 workers and the proportion of that total employment performed by Section 3 workers. Using labor hours worked also emphasizes continued employment. As an example, HUD observes that with a new hires standard, hiring five new workers for one or two months would be counted as more valuable than hiring one person for a full year. A full-time job sustained over a long period provides a Section 3 worker with the potential to gain skills that can lead to greater self-sufficiency.

The proposed rule would have required jurisdictions to switch to labor hours worked but asked whether PHAs should use labor hours worked or continue to use the new hires standard. NLIHC urged PHAs also be required to switch to labor hours worked. HUD agreed; the final rule requires PHAs to also make the switch to labor hours worked.

Small PHAs, those with fewer than 250 public housing units, will not be required to report the number of labor hours. Instead they have the option to report qualitative efforts, such as holding job fairs, referring residents to services supporting work readiness, and outreach efforts to generate job applicants. Out of 2,950 PHAs, 2,250 are small PHAs.

Removing the “Qualified Census Tract” Option from Definition of “Section 3 Worker”

The proposed rule would have replaced the interim rule’s term “Section 3 Resident” with a new term, “Section 3 Worker,” who is someone meeting one of the following:

1. The worker’s income is less than the income limit set by HUD for the program triggering Section 3 (for example 80% of AMI for CDBG and HOME); or
2. The worker lives in a “qualified census tract”; or                                                             
3. The worker is employed by a Section 3 business (see below).

NLIHC and other advocates urged HUD to remove option #2 because someone living in a qualified census tract (QCT) will not necessarily be a low-income person. Depending on how the qualified census tract is drawn, a large number of residents could be higher income. HUD agreed; the final rule eliminates the QCT option. However, problems remain with the definition of Section 3 Worker, one of which is discussed below.

Changing the Definition of “Section 3 Business”

The proposed rule would have significantly changed the definition of “Section 3 business” to be a business meeting one of the following:

1. At least 51% of the business is owned by low-income people; or
2. Low-income people work more than 75% of the labor hours worked at the business; or
3. At least 25% of the business is owned by public housing residents or Section 8 residents (either tenant-based or project-based).

Setting a 25% threshold for public housing or Section 8 ownership of a business risks rewarding businesses that are merely front entities, a problem sometimes experienced with minority-owned and women-owned business programs. For example, the other 75% owners could be regular businesspeople who do not have the best interests of residents at heart. The final rule improves the third option by requiring a business to be one that is at least 51% owned and controlled by current public housing residents or Section 8 residents (either tenant-based or project-based).  

Harmful Provisions in the Final Rule

Most of the provisions in the proposed rule remain in the final rule, which also introduces additional harmful features. This Memo article only highlights five harmful provisions. NLIHC will prepare a thorough summary and analysis, elaborating on the points highlighted here and describing the other problematic provisions of the final rule.

• The final rule would eliminate any Section 3-specific complaint process. Instead, complaints may be reported to the relevant program office or to the local HUD field office. The relevant program offices are those that provide the funds that trigger the Section 3 obligation, such as the Office of Public and Indian Housing (PIH), the Office of Community Planning and Development (CPD), and the Office of Recapitalization (for RAD demolition, rehabilitation, or new construction). However, the preamble to the rule is confusing, stating that the Office of Field Policy and Management (FPM) will filter complaints to the appropriate program office, instead of every HUD program office having its own complaint process.
• Monitoring and enforcement of Section 3 is removed from HUD’s Office of Fair Housing and Equal Opportunity (FHEO) and transferred to the relevant program office. This is a problem because Section 3 monitoring and enforcement should be carried out by HUD staff who are independent of the HUD program offices because program staff are too close to the PHAs, jurisdictions, and the development projects funded by their programs.
• The proposed rule’s third option for determining whether someone might be a “Section 3 Worker” was someone employed by a “Section 3 business.” The final rule keeps this option, which is a problem because someone hired by a Section 3 business will not necessarily be a public housing, Section 8, or other low-income person.
• The proposed rule would establish Section 3 “benchmarks” to replace the current rule’s “goals.” The preamble indicated that benchmarks would be used to monitor a PHA’s and a jurisdiction’s accomplishments toward directing job opportunities to Section 3 Workers and a new subcategory of Section 3 Worker called “Targeted Section 3 Workers” (next topic).

The proposed benchmarks would be the same for PHAs and jurisdictions:

1. Section 3 Workers make up 25% of the total number of labor hours worked by all workers.
2. Targeted Section 3 Workers make up 5% of the total number of labor hours worked by all workers.

In other words, 30% of all labor hours worked are by Section 3 Workers (25%) and Targeted Section 3 Workers (5%).

NLIHC and other advocates wrote that the benchmark of 5% for Targeted Section 3 Workers was far too low; at least 15% was recommended. However, the final rule keeps the benchmark at 5%.

• The proposed rule would create the category “Targeted Section 3 Worker,” intended to give PHAs and jurisdictions an incentive to focus on hiring workers given priority in the statute and providing contracts to Section 3 businesses primarily owned or controlled by or that hire a substantial number of workers given priority in the statute. There were two options for considering whether someone could be considered a Targeted Section 3 Worker. The first option was someone employed by a Section 3 business. The final rule keeps this option, which is a problem because as noted above, someone hired by a Section 3 business will not necessarily be a public housing, Section 8, or other type of low-income person. In addition, repeating a “worker employed by a Section 3 business” dilutes the targeting concept HUD proposes for benchmarking.

The Federal Register version of the final Section 3 rule is at: https://bit.ly/33e0Vos

An easier to read version of the final rule is at: https://bit.ly/30mPLf7

More information about the now-defunct Section 3 regulations is on page 7-75 of NLIHC’s 2020 Advocates’ Guide and on NLIHC’s public housing webpage.