HUD Issues Notice to Update Section 3 Regulations

by Ballard Spahr LLP

The U.S. Department of Housing and Urban Development (HUD) recently published a notice that updates the interim regulation at 24 CFR Part 135, which provides for compliance with Section 3 of the Housing and Urban Development Act of 1968 (Section 3). Since 1994, the interim regulation has remained unchanged.

Section 3 recognizes that HUD public housing and housing and community development funds are typically two of the largest sources of federal funding expended in communities through the form of grants, loans, entitlement allocations, and other forms of financial assistance. The purpose of Section 3 is to ensure that when employment or contracting opportunities are generated because a covered project or activity necessitates the employment of additional people or the awarding of contracts for work, preference must be given to low- and very low-income people (Section 3 residents) or business concerns (Section 3 businesses) residing in the community where the project is located.

HUD's notice seeks to incorporate new HUD programs established since 1994, promote compliance with Section 3, and codify “best practices” implemented by recipients of HUD funds. The notice proposes the following changes to the Section 3 interim regulation:

Standards for Demonstrating Compliance: The notice seeks to clarify the statutory standard for achieving compliance with Section 3. The existing regulation provides two standards: “best efforts” and “to the greatest extent feasible.” The notice removes the distinction in the existing regulation by using only the “to the greatest extent feasible” standard.

Definition of "New Hire:" The existing regulation sets a goal for Section 3 residents to comprise 30 percent of all new hires, without regard to the length of employment. The notice redefines a "new hire" as a Section 3 resident who works a minimum of 50 percent of the average staff hours worked for the job category that they were hired for throughout the duration of time that the category of work is performed on the covered project. For instance, if a Section 3 resident is hired as a painter, and painters typically work 40 hours each week, the Section 3 resident must work a minimum of 20 hours each week to be counted toward the recipient’s minimum numerical goal for employment.

Definition of "Section 3 Business:" The existing regulation requires a Section 3 business to meet one of the following three definitions: (1) 51 percent owned by Section 3 residents; (2) at least 30 percent of permanent, full-time employees are Section 3 residents; (3) provides evidence of a commitment to subcontract 25 percent or more of the dollar amount of all subcontracts to businesses that meet definitions (1) or (2). The notice removes category (3) of the definition of a Section 3 business and adds two new categories as follows: (1) business that meets the definition of a resident-owned business as set forth in 24 CFR 963.5, and (2) business that demonstrates that at least 20 percent of its permanent full-time employees are Section 3 residents and the business either: (a) sponsored a minimum of 10 percent of its current Section 3 employees to attend a Department of Labor (DOL) or DOL recognized, State-Apprenticeship Agency- approved, registered apprenticeship or a pre-apprenticeship training program that meets the  requirements outlined in DOL/Employment and Training Administration Training and Employment Notice 13-2, or (b) 10 percent of its employees are participants or graduates of a DOL Youthbuild program.

Section 3 Local Area: The definitions of Section 3 resident and Section 3 business in the existing regulation do not specify that such residents and businesses must be located in the proximity of HUD-funded projects or activities. The notice clarifies that Section 3 residents and businesses must be located in the "Section 3 local area," defined as: the primary statistical area where the Section 3 covered project or activity takes place; or the nonmetropolitan county where the Section 3 covered project or activity takes place.

Numeral Goal for Contracts: The existing regulation requires recipients of HUD funds to award a minimum of 3 percent of the total dollar amount of non-construction contracts to Section 3 businesses. The notices changes this numeral threshold to require recipients of HUD funds to award a minimum of 10 percent of the total dollar amount of all covered contracts, not just nonconstruction contracts, to Section 3 businesses.

Verification Procedures: The existing regulation does not require recipients of HUD funds to verify that Section 3 residents or businesses meet the applicable definitions. Section 3 residents and businesses must, however, comply with verification procedures required by the recipient of HUD funds. The notice continues to allow recipients to use their discretion for developing verification procedures. Additionally, it provides that recipients may accept self-certifications from residents or businesses or presume that residents or businesses located in disadvantaged census tracts are eligible to be considered Section 3 residents or businesses.

Monitoring Payroll Data: The notice recognizes that recipients of HUD funds combine Section 3 obligations with Davis-Bacon payroll requirements. The notice requires recipients of HUD funds administering Davis-Bacon-covered projects, to monitor contractor payroll data for changes in workforce (i.e., terminations, retirements, transfers, and other new job vacancies) to identify instances where Section 3 obligations may be triggered.

Amendment of Agreements with Labor Unions: The notice requires recipients of HUD funds to amend all existing agreements with labor unions to ensure the inclusion of Section 3 obligations and to prevent labor unions from obstructing the recipients’ ability to achieve compliance with Section 3.

Funding Threshold for Recipients of Section 3 Housing and Community Development Funds: The notice establishes a new threshold for recipients of covered housing and community development assistance based on the expenditure of funds rather than the receipt of funds. Section 3 requirements apply to recipients of housing and community development financial assistance that plan to obligate or commit $400,000 or more in Section 3 covered financial assistance on projects involving housing rehabilitation, housing construction, demolition, or other public construction during an annual reporting period.

HUD also launched a National Section 3 business registry. This registry is a searchable online database for public housing authorities, state and local governments, and contractors to find firms that are self-certified as Section 3 businesses.  

Interested persons are invited to submit comments on the notice no later than 60 days following the date of publication in the Federal Register. The notice identifies certain key areas for which HUD is most interested in receiving comments. Comments may be submitted by mail to the Regulations Division, Office of General Counsel, Department of Housing and Urban Development, 451 7th Street SW, Room 10276, Washington, DC 20410-0500, or by electronic submission at  

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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