Enhancing and Streamlining the Implementation of Section 3 Requirements for Creating Economic Opportunities for Low- and Very Low-Income Persons and Eligible Businesses, 61524-61568 [2020-19185]

Download as PDF 61524 Federal Register / Vol. 85, No. 189 / Tuesday, September 29, 2020 / Rules and Regulations 24 CFR Parts 5, 14, 75, 91, 92, 93, 135, 266, 570, 574, 576, 578, 905, 964, 983, and 1000 [Docket No. FR–6085–F–03] RIN 2501–AD87 Enhancing and Streamlining the Implementation of Section 3 Requirements for Creating Economic Opportunities for Low- and Very LowIncome Persons and Eligible Businesses Office of the Secretary, HUD. Final rule. AGENCY: ACTION: Section 3 of the Housing and Urban Development Act of 1968, as amended by the Housing and Community Development Act of 1992 (Section 3), contributes to the establishment of stronger, more sustainable communities by ensuring that employment and other economic opportunities generated by Federal financial assistance for housing and community development programs are, to the greatest extent feasible, directed toward low- and very low-income persons, particularly those who receive government assistance for housing. In accordance with statutory authority, HUD is charged with the responsibility to implement and enforce Section 3. HUD’s regulations implementing the requirements of Section 3 have not been updated since 1994 and are not as effective as HUD believes they could be. This final rule updates HUD’s Section 3 regulations to create more effective incentives for employers to retain and invest in their low- and very lowincome workers, streamline reporting requirements by aligning them with typical business practices, provide for program-specific oversight, and clarify the obligations of entities that are covered by Section 3. These changes will increase Section 3’s impact for lowand very low-income persons, increase compliance with Section 3 requirements, and reduce regulatory burden. DATES: Effective Date: November 30, 2020. Compliance Dates: Public housing financial assistance recipients must implement their Section 3 activities pursuant to these regulations and comply with the reporting requirements starting with the recipient’s first full fiscal year after July 1, 2021. These regulations are applicable to Section 3 projects for which assistance or funds are committed on or after July 1, 2021. jbell on DSKJLSW7X2PROD with RULES4 SUMMARY: VerDate Sep<11>2014 20:48 Sep 28, 2020 Jkt 250001 For questions, please contact the following people (the phone numbers are not tollfree): For Public Housing Financial Assistance: Merrie Nichols-Dixon, Director, Office of Policy Program and Legislation, Office of Public and Indian Housing, Department of Housing and Urban Development, 451 7th Street SW, Room 3178, Washington, DC 20410; telephone 202–402–4673 (not a toll-free number). For Community Development Block Grant (CDBG)/CDBG Disaster Recovery/ Section 108 Loan Guarantee Program: Jessie Handforth Kome, Director, Office of Block Grant Assistance, Office of Community Planning and Development, Department of Housing and Urban Development, 451 7th Street SW, Room 7282, Washington, DC 20410; telephone 202–708–3587 (voice/TDD) (not a tollfree numbers). For HOME or Housing Trust Fund Section 3 projects: Virginia Sardone, Director, Office of Affordable Housing Programs, Office of Community Planning and Development, Department of Housing and Urban Development, 451 7th Street SW, Room 10168, Washington, DC 20410; telephone 202– 402–4606 (not a toll-free number). For Office of Housing programs: Thomas R. Davis, Director, Office of Recapitalization, Office of Housing, Department of Housing and Urban Development, 451 7th Street SW, Room 6230, Washington, DC 20410; telephone 202–402–7549 (voice/TDD) (these are not toll-free numbers). Persons with hearing or speech impairments may access this number through TTY by calling the Federal Relay Service, at toll-free, 800–877– 8339. General email inquiries regarding Section 3 may be sent to: section3@ hud.gov. in economic opportunities. By directing HUD-funded economic opportunities to residents and businesses in the community where the funds are expended, the expenditure can have the dual benefit of creating new or rehabilitated housing and other facilities while providing opportunities for employment and training for the residents of these communities. The Section 3 statute establishes priorities for employment and contracting for public housing programs and for other programs that provide housing and community development assistance. For example, the prioritization as it relates to public housing assistance places an emphasis on public housing residents, in contrast to the prioritization as it relates to housing and community development assistance, which places more emphasis on residents of the neighborhood or service area in which the investment is being made. In the 25 years since HUD promulgated the current Section 3 regulations, significant legislation has been enacted that affects Section 3.1 In addition, HUD has also heard from the public that there is a need for regulatory changes to clarify and simplify the existing requirements. HUD’s experience in administering Section 3 over time has also provided insight as to how HUD could improve its Section 3 regulations. HUD, thus, concluded that regulatory changes were necessary to streamline Section 3 and more effectively benefit low- and very lowincome persons through HUD financial assistance to achieve the Section 3 statute’s purposes. SUPPLEMENTARY INFORMATION: Promote Sustained Employment and Career Development The proposed rule included multiple elements designed to increase Section 3’s impact in directing employment opportunities and sustaining employment for the people served by FOR FURTHER INFORMATION CONTACT: DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT I. Background Section 3 of the Housing and Urban Development Act of 1968 (Pub. L. 90– 448, approved August 1, 1968) (Section 3) was enacted to bring economic opportunities generated by certain HUD financial assistance expenditures, 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 Federal funds expended in low- and very 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 PO 00000 Frm 00002 Fmt 4701 Sfmt 4700 II. The Proposed Rule HUD issued a proposed rule on April 4, 2019 (84 FR 13177) to update the existing regulations and streamline the Section 3 program. 1 This legislation includes, but is not limited to, the following: Reforms made to HUD’s Indian housing programs by the Native American Housing Assistance and Self-Determination Act of 1996 (NAHASDA) (Pub. L. 104–330, approved October 26, 1996); public housing reforms made by the Quality Housing and Work Responsibility Act of 1998 (QHWRA) (Pub. L. 105–276, approved October 21, 1998); reforms made to HUD’s supportive housing programs by the Section 202 Supportive Housing for the Elderly Act of 2010 (Pub. L. 111– 372, approved January 4, 2011); and the Frank Melville Supportive Housing Investment Act of 2010 (Pub. L. 111–347, approved January 4, 2011). E:\FR\FM\29SER4.SGM 29SER4 Federal Register / Vol. 85, No. 189 / Tuesday, September 29, 2020 / Rules and Regulations jbell on DSKJLSW7X2PROD with RULES4 HUD financial assistance programs. The rule proposed tracking and reporting labor hours instead of new hires. While the previous new hire framework was valuable for measuring entry into employment, the new hire framework did not capture the extent to which new hiring opportunities are created relative to the total work performed, nor whether those opportunities are sustained over time. The proposed rule’s focus on labor hours sought to measure total actual employment and the proportion of the total employment performed by low- and very low-income workers. In addition, the change to labor hours emphasized continued employment. For example, the prior exclusive focus on counting new hires regarded five new hires for one-month opportunities as a more valued outcome than one 12-month opportunity, and it did not distinguish between full- and part-time employment. A full-time job sustained over a long period allows a low- or very low-income worker to gain skills and is a strong indicator of progress towards self-sufficiency. The new focus on labor hours would ensure that longer-term, full-time opportunities are appropriately recognized. HUD’s proposed rule also sought comment on maintaining the new hire framework for only Public Housing Agencies (PHAs). HUD held a number of listening sessions and heard from some PHAs that they would prefer to keep reporting new hires rather than switch to reporting labor hours. Therefore, while HUD believes tracking labor hours is the best option and would simplify reporting, HUD did seek comment on the alternative option of maintaining the new hires framework for PHAs. Align Section 3 Reporting With Standard Business Practices HUD also proposed tracking labor hours rather than new hires because it would be more consistent with business practices. Most construction contractors working on HUD assisted projects already track labor hours in their payroll systems because they pay their employees based on an hourly wage. In some cases, they are also subject to prevailing wage requirements.2 HUD believes a consistent labor-hour tracking mechanism makes compliance with Section 3 easier not only for recipients of HUD assistance, but also for contractors and subcontractors. The proposed rule provided that for employers who do not track labor hours in detail through a time-and-attendance 2 See 42 U.S.C. 1437j(a), 24 CFR 905.308(b)(3)(ii), 24 CFR 965.101, 25 U.S.C. 4225(b)(1)(A), and 24 CFR 1006.345(b). VerDate Sep<11>2014 20:48 Sep 28, 2020 Jkt 250001 system, such employers could provide a good faith assessment of the labor hours for a full- or part-time employee. However, if a time-and-attendance system is later implemented, the accurate labor hour accounting would be required. Applicability and Thresholds The Section 3 statute applies to both: (1) HUD’s Public Housing Program, and (2) Other HUD programs that provide housing and community development assistance. For ease in administration for recipients using one or both of these HUD funding streams, the proposed rule provided definitions for these types of funding and specified Section 3 requirements for each type. The proposed rule included the following definitions for the scope of such financial assistance: (1) Public housing financial assistance covers: (a) Development assistance provided pursuant to Section 5 of the United States Housing Act of 1937 (the 1937 Act), (b) operations and management assistance provided pursuant to Section 9(e) of the 1937 Act (Operating Fund), and (c) development, modernization, and management assistance provided pursuant to Section 9(d) of the 1937 Act (Capital Fund); and (2) Section 3 projects cover HUD program assistance used for housing rehabilitation, housing construction and other public construction projects that generally exceed a $200,000 project threshold or any Section 3 project funding from HUD’s Lead Hazard Control and Healthy Homes programs. The proposed definitions defined the scope of programs subject to Section 3 requirements but did not expand such coverage beyond the compliance requirements of HUD’s prior regulations. HUD proposed the $200,000 threshold for housing rehabilitation, housing construction and other public construction projects because work below that amount would likely not trigger long-term employment opportunities for which the recipient could show measurable labor hours. The proposed rule also clarified that contracts, subcontracts, grants, or subgrants subject to Section 7(b) of the Indian Self-Determination and Education Assistance Act (25 U.S.C. 5307(b)) or subject to tribal preference requirements as authorized under Section 101(k) of the Native American Housing Assistance and SelfDetermination Act (25 U.S.C. 4111(k)) must provide preferences in employment, training, and business PO 00000 Frm 00003 Fmt 4701 Sfmt 4700 61525 opportunities to Indians and Indian organizations. Reporting and Targeted Section 3 Workers The proposed rule aimed to align Section 3 reporting requirements more closely to the statutory priorities; HUD’s previous regulation tracked only public housing residents or low- or very lowincome persons who lived in the metropolitan area or nonmetropolitan county of the project, rather than whether the statutory priorities were met. The rule proposed a new definition of ‘‘Section 3 worker’’ as any worker or who meets at least one of the following criteria: Low- or very low-income, as established by HUD’s income limits; living in a Qualified Census Tract (QCT); or employed by a Section 3 business concern.3 The proposed rule also included a new ‘‘Targeted Section 3 worker’’ definition so that HUD could track, and recipients could target, the hiring of Section 3 workers in selected categories. The Section 3 statute requires certain financial assistance recipients to prioritize their efforts to direct employment and economic opportunities to specific groups of lowand very low-income individuals. The ‘‘Targeted Section 3 worker’’ reflects both statutory and policy priorities that HUD wishes to specifically track. For public housing financial assistance, the proposed definition of a Targeted Section 3 worker was a Section 3 worker who is also: (1) A worker employed by a Section 3 business concern; or (2) A worker who is currently or who was when hired by the worker’s current employer, a resident in a public housing project or Section 8-assisted housing; or (3) A resident of other projects managed by the PHA that is expending assistance; or (4) A current YouthBuild participant. For other HUD assistance programs, the proposed priorities were: (1) Residents within the service area or the neighborhood of the project, and (2) YouthBuild participants. 3 Section 3 business concern means: (1) A business concern that meets one of the following criteria: (i) It is at least 51 percent owned by lowor very low-income persons; (ii) Over 75 percent of the labor hours performed for the business are performed by low- or very low-income persons; or (iii) It is a business at least 25 percent owned by current public housing residents or residents who currently live in Section 8-assisted housing. (2) The status of a Section 3 business concern shall not be negatively affected by a prior arrest or conviction of its owner(s) or employees. (3) Nothing in this part shall be construed to require the contracting or subcontracting of a Section 3 business concern. Section 3 business concerns are not exempt from meeting the specifications of the contract. E:\FR\FM\29SER4.SGM 29SER4 Federal Register / Vol. 85, No. 189 / Tuesday, September 29, 2020 / Rules and Regulations There is also a statutory contracting priority for businesses that provide economic opportunities for low- and very low-income workers. Therefore, HUD proposed including labor hours worked by the Section 3 business concern employees for both Section 3 workers and Targeted Section 3 workers. HUD also proposed a new Section 3 business concern definition that reflected the change to labor hours and increased the threshold of work performed by a business by low- and very low-income workers given the proposed rule’s inclusion of all Section 3 business concerns’ labor hours in the definition of both Section 3 workers and Targeted Section 3 workers. The proposed rule created the following construct for measuring workers: Benchmarks qualitative reports on their efforts, as they are required to do under HUD’s previous rule when they do not meet the safe harbor, and HUD may conduct monitoring to review the recipient’s compliance, again consistent with practices used to monitor program participants’ compliance with other program requirements. The proposed rule also provided a burden relieving measure for PHAs with fewer than 250 units. For these PHAs, they would only be required to report on Section 3 qualitative efforts and would not need to track labor hours for Section 3 workers and Targeted Section 3 workers. guidance through a single reporting office. The proposed rule provided that a new Section 3 benchmark measurement would serve as a safe harbor for those recipients that meet the new benchmark. The primary objective of the proposed rule was to reflect and monitor grantees’ abilities to direct job opportunities that are generated by HUD financial assistance to Section 3 workers and Targeted Section 3 workers. The proposal included using benchmarks based on ratios of Section 3 workers and Targeted Section 3 workers in comparison to all workers. HUD proposed that the benchmarks would be set by Federal Register Notice and amended periodically to provide for updating of the benchmarks to align with the reporting data HUD received. As HUD gathers more data under the new rule, HUD could increase or decrease benchmark figures over time, or tailor different benchmarks for different geographies and different funding types. If a recipient certifies compliance with the statutory priorities and meets the outcome benchmarks, HUD will presume the recipient is complying with Section 3 requirements, absent evidence to the contrary. Recipients are still required to report their outcomes, and HUD will monitor them accordingly through the data reporting methods used to oversee all other program requirements in each applicable program area. Otherwise, recipients would be required to submit VerDate Sep<11>2014 20:48 Sep 28, 2020 Jkt 250001 Multiple Funding Sources The proposed rule created a new section for housing rehabilitation, housing construction, or other public construction projects assisted with funds from more than one HUD program. Specifically, the proposed rule provided that when a Section 3 project is funded by public housing financial assistance, the public housing financial assistance must be tracked and reported consistent with the public housing financial assistance requirements in subpart B, while the community development financial assistance may follow the requirements in subpart B or subpart C. The proposed rule directed that when a Section 3 project receives housing and community development assistance from two different HUD programs, HUD would designate PO 00000 Frm 00004 Fmt 4701 Sfmt 4700 Integrate Section 3 Into Program Enforcement Since HUD program office staff are regularly in touch with HUD’s funding recipients on other compliance requirements, HUD proposed that program offices incorporate Section 3 compliance and oversight into regular program oversight and make Section 3 an integral part of the program’s oversight work. The proposed rule also streamlined the complaint and compliance process to make Section 3 compliance consistent with existing practices for other requirements. The proposed rule shifted the delegation of authority for Section 3 enforcement and compliance responsibilities from the Assistant Secretary for Fair Housing and Equal Opportunity to reside with each of the applicable HUD program offices. III. Changes Made at the Final Rule Stage After review and consideration of the public comments and upon HUD’s further consideration of Section 3 and the issues raised in the proposed rule, HUD has adopted the proposed rule as final with a few changes in this final rule. HUD also made minor edits to clarify the rule’s language. The following highlights the substantive changes made by HUD in this final rule from the proposed rule. Removing Alternative 2 for New Hires E:\FR\FM\29SER4.SGM 29SER4 ER29SE20.076</GPH> jbell on DSKJLSW7X2PROD with RULES4 61526 Federal Register / Vol. 85, No. 189 / Tuesday, September 29, 2020 / Rules and Regulations After considering the data, Section 3’s statutory goals, and the public comments, HUD is not retaining the tracking of new hires for PHAs, but instead requiring tracking of labor hours for all Section 3 outcomes. HUD agrees with commenters that it is in the best interest of the communities served by HUD to implement a more impactful Section 3 standard across all HUDfunded programs. Using different metrics for different programs would unnecessarily further complicate Section 3 reporting. Tracking labor hours is meant to ensure that Section 3 workers have sustained employment and career opportunities. HUD believes that the use of new hires provides an incomplete measure of the employment and local contracting opportunities available to low- and very low-income persons envisioned by the Section 3 statute. HUD expects the labor hour data to present a more accurate assessment of Section 3’s impact. The focus on labor hours will measure total actual employment and the proportion of the total employment performed by lowand very low-income workers, which will mitigate contractors’ ability to manipulate their Section 3 outcomes. jbell on DSKJLSW7X2PROD with RULES4 Section 3 Project Threshold HUD received many public comments on proposed changes to the Section 3 Project threshold. HUD still considers the $200,000 threshold for Section 3 projects appropriate given the percentage of projects that will continue to be covered and are likely to result in opportunities for employment of lowand very low-income workers when expended on construction-related activities. However, in response to public comments, HUD is providing that in this final rule, the Secretary may adjust the threshold, through a Federal Register Notice subject to public comment, in order to ensure Section 3 compliance. HUD’s proposed rule already provided for the Secretary to update the threshold not less than once every five years based on a national construction cost inflation factor; the final rule now provides that the Secretary updates the benchmarks not less frequently than once every three years. HUD believes adding this flexibility is responsive to the comments received by the public. HUD will continue to work with program participants to adjust the thresholds accordingly, if necessary, based on the updated data provided under this final rule. VerDate Sep<11>2014 20:48 Sep 28, 2020 Jkt 250001 Setting a Project Threshold for Lead Hazard Control Grants HUD also received comments regarding the exclusion of projects under HUD’s Lead Hazard Control and Healthy Homes program from the $200,000 project threshold. Lead hazard control projects are generally smaller, so many commenters suggested a lower threshold for such projects. On the other hand, other commenters noted that not including a threshold for lead hazard control grants altogether may incidentally include small grants that should not be subject to Section 3. For example, some Lead and Healthy Homes Technical Studies grants study the health effects of installed housing components in projects typically smaller than $100,000. As expected, they did not result in opportunities for employment of Section 3 workers under the previous regulations. At the final rule stage, HUD is therefore adopting a $100,000 project threshold for all projects that receive funding from HUD’s Lead Hazard Control and Healthy Homes programs. HUD adopted this number to match the contract threshold in the previous regulations (see previous 24 CFR 135.3(a)(3)). Removing the Qualified Census Tract Definition After considering Section 3’s statutory goals and the public comments, HUD is removing the QCT definition from this final rule. The addition of this criteria was to encourage hiring in the QCT and to make targeted hiring easier, but HUD recognizes that the inclusion of workers in these areas could inadvertently include individuals who are not low- or very low-income. Rather than the broad QCT definition, HUD is limiting the Section 3 worker definition to be more consistent with the statute, which requires prioritization of low- and very low-income workers and YouthBuild participants. This should also alleviate any potential burden on participants associated with the QCT designation. Changing the Section 3 Business Concern Definition In adopting the proposed definition of Section 3 business concern in this final rule, HUD is maintaining the over 75 percent of the labor hours performed for the business on construction are performed by low- or very low-income persons standard, but adding in that such performance must be over the last three-month period to help businesses determine whether or not they meet the criteria. HUD is also maintaining a separate criterion for businesses owned and controlled by current public PO 00000 Frm 00005 Fmt 4701 Sfmt 4700 61527 housing residents or residents who currently live in Section 8-assisted housing, but increasing the required percentage of owned and controlled to 51%. This change is in response to public comments and to maintain consistency with HUD’s public housing regulations on contracting with resident-owned businesses at 24 CFR part 963. HUD also added a change to the documentation timing in paragraph (1) of the Section 3 business concern definition to allow a six-month grace period. HUD understands that businesses need time when bidding on contracts and prior to the contract’s execution to assemble materials and to assess labor hours. This change is responsive to commenters who expressed concerns about Section 3 status retention, since labor hours can be dependent on the number of contracts on which a business bids and receives. Changing the Professional Services Definition In this final rule, HUD is amending the professional services definition to clarify that only non-construction services that require an advanced degree or professional licensing, rather than all non-construction services, are excluded from Section 3. HUD wants to ensure this final rule’s emphasis encapsulates the statutory requirement to prioritize low- and very low-income workers, and provides this category of exempted workers from reporting given the challenge to hire low- and very lowincome workers in jobs that require such degrees and licensing. Counting Labor Hours for 5 Years HUD’s proposed rule provided that labor hours for Section 3 workers and Targeted Section 3 workers could be counted as long as the worker met the definition of a Section 3 worker or Targeted Section 3 worker at the time of hire. Based on public comments and further consideration, HUD agrees that a worker whose income has risen should only be counted for Section 3 purposes for a limited time period. HUD wants to ensure employers are invested in keeping Section 3 workers employed, and that there is enough opportunity to build skills and experience so that Section 3 workers may develop selfsufficiency and compete for other jobs in the future. Therefore, HUD provides that for purposes of reporting the labor hours for Section 3 workers and Targeted Section 3 workers, an employer may choose whether the workers are defined as Section 3 workers for a five-year period at the time of the workers’ hire, or when the E:\FR\FM\29SER4.SGM 29SER4 61528 Federal Register / Vol. 85, No. 189 / Tuesday, September 29, 2020 / Rules and Regulations workers are first certified as meeting the Section 3 worker definition. Delayed Effective Date The rule provides for a delayed transition to labor hours and the associated recordkeeping requirements. HUD recognizes that employers and grantees will need time to transition their systems and reporting practices as a result of this final rule. HUD is mindful of the need to update policies and procedures for planning purposes, and the importance of implementing the rule such that employers will be able to comply. Therefore, HUD has provided for a transition period through at least July 1, 2021. During this transition period, HUD expects that employers and grantees will begin following this final rule’s requirements for new grants, commitments, and contracts. The exact date on which any particular recipient of HUD funding will be able to implement the conversion to the new requirements will vary during this transition period, but the transition must be complete by July 1, 2021. The reporting requirements and labor hours tracking will not begin until the dates for each entity specified in the ‘‘Compliance Date’’ section above. jbell on DSKJLSW7X2PROD with RULES4 IV. Discussion of Public Comments and HUD’s Responses The public comment period on the proposed rule closed on June 3, 2019, and HUD received 163 public comments. The comments came from state and city government agencies and housing administrations, housing authorities, non-profits, independent consultants, private citizens, housing authority directors, small businesses, the construction industry, and housing authority associations. The following presents the significant issues and questions related to the proposed rule raised by the commenters, and HUD’s responses to these issues and questions. HUD would like to thank all the commenters for their thoughtful responses. ‘‘Best Efforts’’ and ‘‘Greatest Extent Feasible’’ In the proposed rule, HUD included a specific question for public comment regarding these statutory terms. Some commenters suggested the terms are interchangeable. One commenter suggested that HUD use the term ‘‘reasonable best efforts’’ for CDBG and HOME recipients and remove the term ‘‘greatest extent feasible’’ from the Section 3 regulations or use only ‘‘best efforts.’’ Other commenters argued that these words are key to the intent of the statute, which is to provide recipients VerDate Sep<11>2014 20:48 Sep 28, 2020 Jkt 250001 leeway when constraints outside their control impede implementation, and recommended that HUD provide guidance materials on how to show best efforts when organizations do not meet their Section 3 goals, such as data collection forms which would indicate best efforts or non-exclusive lists of examples of ‘‘best efforts’’ and ‘‘greatest extent feasible.’’ In contrast, some commenters suggested that these terms are not interchangeable. One commenter said that ‘‘best efforts’’ should be measured by tracking outreach and outcomes of outreach and ‘‘greatest extent feasible’’ is the result of ‘‘best efforts.’’ Another commenter argued that ‘‘best efforts’’ can be more clearly defined than ‘‘greatest extent feasible,’’ as specific actions can demonstrate efforts, while feasibility is a more passive analysis of what is possible. One commenter argued that the ‘‘greatest extent feasible’’ is a much more rigid and prescriptive standard than the ‘‘best efforts’’ standard and noted that courts have found that the ‘‘best efforts’’ requirement ‘‘specifically avoids creating a mandatory obligation on the part of the agencies the statute affects.’’ This ‘‘best efforts’’ standard likewise ‘‘does not call for perfect compliance.’’ This commenter encouraged HUD to allow PHAs to retain greater discretion over the development of their own Section 3 programs. A commenter suggested that Subpart B participants should continue to use ‘‘best efforts’’ while Subpart C participants should use ‘‘greatest extent feasible,’’ and agencies receiving funding that triggers compliance under Subparts B and C should use the ‘‘best efforts’’ standard. One commenter suggested using the term ‘‘best efforts’’ to comply with employment, contracting and training opportunities. Commenters also urged HUD to enforce the terms ‘‘best efforts’’ and ‘‘greatest extent possible,’’ suggesting that whatever the standard, if an activity by a recipient, contractor or subcontractor does not adequately serve to hire, train, and retain a Section 3 worker, then it should not meet the standard. These commenters provided an example of a PHA’s best effort. Commenters noted that while the recipient or contractor appears to meet the Section 3 goal, or at least made ‘‘best efforts’’ to reach the goal, in practicality such effort is not workable. One commenter wrote that the terms without any definition are too broad and should be defined to assist in compliance with Section 3. Another commenter proposed that HUD should define the terms by how they will be PO 00000 Frm 00006 Fmt 4701 Sfmt 4700 measured; for instance, that ‘‘best efforts’’ could be determined by a specific set of metrics around recruitment efforts and the percentage of Section 3 workers in the area. One commenter suggested a way to draft the rule using dollars spent to track compliance such that these terms would not be necessary. Other commenters requested that HUD not define these terms or should not restrictively define these terms because HUD should trust the judgment and common sense of its professional field staff to determine compliance, because documenting compliance according to specific definitions could create additional administrative burden, because there are constraints outside the grantee’s control, and because guidelines may stifle innovation. HUD Response: HUD appreciates commenters’ responses to the specific question regarding ‘‘best efforts’’ and ‘‘greatest extent feasible’’ in the proposed rule. ‘‘Best efforts’’ and ‘‘greatest extent feasible’’ are statutory terms, used in the statute in different contexts. As such, HUD will continue to use both terms to track compliance. HUD agrees with commenters that there are many ways to interpret the language. Traditionally, HUD has used the terms interchangeably, as referenced in the statute, and will continue to be consistent with the statutory language. See 12 U.S.C. 1701u(b)–(d). HUD also agrees with commenters who noted these terms are integral to the statutory intent and provide flexibility, rather than administrative burden, to grantees or recipients. HUD notes that some perceive ‘‘best efforts’’ to be the more rigorous standard, while others perceive ‘‘greatest extent feasible’’ to be the more rigorous standard. HUD has determined not to define the difference between these two terms, but rather to increase the emphasis on outcomes as a result of these efforts. A recipient’s reported results will be compared to the outcome metrics defined in the benchmark Notice. HUD program staff will evaluate the level of effort expended by those recipients that fail to meet the benchmark safe harbor, and thus will ensure that the statutory terms are being properly enforced. HUD included a list of examples in the regulation at §§ 75.15 and 75.25, including engagement in outreach efforts to generate job applicants who are Targeted Section 3 workers, providing training or apprenticeship opportunities, and providing technical assistance to help Section 3 workers compete for jobs (e.g., resume assistance, coaching). E:\FR\FM\29SER4.SGM 29SER4 Federal Register / Vol. 85, No. 189 / Tuesday, September 29, 2020 / Rules and Regulations Move to Labor Hours jbell on DSKJLSW7X2PROD with RULES4 Support for Using ‘‘Labor Hours’’ Many commenters supported the shift to labor hours and, notwithstanding the alternatives presented in the proposed rule for PHAs, encouraged HUD to do the same for public housing construction, modernization, and similar work. These commenters stated that the ‘‘new hire’’ loophole should be eliminated for both housing and community development and public housing projects. Commenters stated that, in practice, contractors have only brought on new hires for short periods of time; the shift to labor hours will promote longer term employment. Commenters also stated that the shift to labor hours would solve the problem of contractors using dishonest practices to meet benchmarks, such as hiring Section 3 residents to fill the 30% benchmark only to lay them off shortly thereafter, or employing Section 3 hires for less than 20 hours a week. Commenters stated that allowing PHAs and their contractors to use ‘‘new hires’’ could provide a loophole to PHAs, allowing them to hire Section 3 workers for a limited or short time frame in order to comply with the regulation. Shortterm employment does not allow residents to obtain technical skills, knowledge, or adequate savings. PHAs should be required to use labor hours worked because they can evade Section 3 compliance through manipulative hiring practices. Commenters stated that the ‘‘labor hours’’ standard is far more effective, less susceptible to manipulation and administratively easier to verify. Commenters stated that the new hire standard is vulnerable to manipulation, because any contractor or subcontractor that performs work on more than one project at a time can easily avoid Section 3 hiring responsibilities by placing their new hires on non-Section 3 covered projects. Commenters asserted the new hire standard may be the single greatest barrier to achieving the employment potential of Section 3. HUD Response: HUD agrees that counting new hires can be problematic and that collecting labor hours can be a more effective measure. As stated in the proposed rule, HUD believes that counting labor hours is consistent with the statute and mitigates contractors’ ability to manipulate their Section 3 outcomes. HUD has adopted the suggestion by the commenters and in the final rule applies the labor hour requirements to both housing and community development and public housing projects. VerDate Sep<11>2014 20:48 Sep 28, 2020 Jkt 250001 Support for Using New Hires Many commenters supported retaining the new hires metrics. Commenters stated that tracking by labor hours is burdensome, will increase administrative costs, and will not streamline the Section 3 reporting requirements. One commenter refuted HUD’s hypothesis articulated in the proposed rule and stated that a labor hours metric is unlikely to capture the data on sustained employment opportunities that HUD is seeking. Another commenter stated that the proposed labor hours metric would decrease the number of firms willing to bid on contracts, increase the cost of public contracting for both the PHA and contractors, and provide no appreciable increase in Section 3 workers. Commenters stated that HUD should continue to track compliance by new hires for both Subparts B and C. One commenter stated that labor hours should only apply to projects that already require the collection of certified payrolls as part of Davis Bacon compliance. Another commenter recommended HUD look to existing programs such as the Department of Transportation’s Disadvantaged Business Enterprises for guidance to make substantive changes to Section 3. Commenters stated that the changes will generate additional administrative burdens. Commenters especially emphasized the potential impact on the Housing Trust Fund (HTF) program and state CDBG and HOME program implementation because states, particularly small and rural community sub-grantees, have limited capacity. Commenters recommended HUD give State CDBG programs a similar alternative to the one offered to PHAs in § 75.15(d). Another commenter proposed HUD allow State CDBG programs to use a good faith assessment of hours, stating that § 75.25(a)(4) will help but will not eliminate the difficulty for State CDBG programs. Another commenter specifically referenced HOME funding and the HTF regulations, noting that stated HTF regulations do not trigger Davis-Bacon and it is rare for a HOME-funded project to trigger Davis-Bacon and prevailing wage requirements. Commenters stated that HUD’s assumption that labor hours are already tracked by most contractors and subcontractors to comply with the prevailing wage requirement is false. Commenters specifically noted that not all CDBG programs are subject to such requirements. One commenter wrote that even a small maintenance contract could result in 6 extra work hours for PO 00000 Frm 00007 Fmt 4701 Sfmt 4700 61529 staff charged with ensuring correct payroll entries and compliance, stating that a current contract that does not track labor hours would have an increase of approximately $606,000 of federal funding required to administer the contracts, an additional 5% of costs. Another commenter stated that the proposed shift to labor hours will create an estimated 110 hours of additional administrative effort for the commenter per construction project, and will not impact the duration of Section 3 worker employment or allow HUD to better determine if long-term employment opportunities are generated. One commenter stated that tracking labor hours would require city contractors and subcontractors to track project labor hours using LCPtracker as the city does, necessitating increased administrative staff and resulting in higher contract amounts. One commenter stated that payrolls required for Davis-Bacon compliance are often submitted in hard copy, so compliance with the shift to labor hours would require manual data entry, a significant added laborintensive task. Commenters also stated that many contractors are small business owners who do not have payroll software and many housing authorities do not have sufficient staff to track hours worked on all projects. Commenters also noted that many medium and smaller sized PHAs do not use LCPtracker and instead rely on contractor payrolls to monitor DavisBacon and Section 3. Other commenters stated that tracking hours could be more burdensome than tracking new hires, because new hires are only reported once. Tracking the workers’ hours necessitates verifying each Section 3 employee each week for the duration of their employment. HUD Response: HUD carefully considered the diverse public comments on the use of labor hours versus retaining new hires as the measurement for assessing compliance with Section 3 requirements. HUD believes that the use of new hires provides an incomplete measure of the economic opportunities available to low and very low-income persons envisioned by the Section 3 statute. HUD believes that moving to the labor hours metric provides a more robust measure of how Section 3 is intended to work and mitigates contractors’ ability to manipulate Section 3 outcomes. HUD concluded the benefits of the labor hours approach outweighs the marginal cost that would result from this shift. HUD has determined that, while public commenters have concerns about possible burdens that result from the E:\FR\FM\29SER4.SGM 29SER4 jbell on DSKJLSW7X2PROD with RULES4 61530 Federal Register / Vol. 85, No. 189 / Tuesday, September 29, 2020 / Rules and Regulations proposed transition to recording labor hours instead of new hires, it is in the best interest of the communities served by HUD to implement a more impactful Section 3 standard across all HUDfunded programs. The use of labor hours is intended to ensure that recipients of these program funds are fully in compliance with the intent of Section 3—maximizing the economic opportunities arising from Federally funded activities that are available to low- and very low-income persons, including those who reside in public housing. HUD also notes that the comments revealed a diversity of understanding with respect to HUD’s record-keeping expectations in measuring the labor hours metric. HUD does not anticipate the level of detail in record-keeping that is required under the Davis-Bacon prevailing wage framework for purposes of Section 3. The proposed rule does not require prevailing-wage-style payroll reports. HUD does anticipate that either employers have some form of time and attendance system, particularly where employment uses an hourly wage structure, or that employers have salaried staff. The final rule does not require any change in these systems, nor necessitate any software approach to tracking payroll. Those employers that use a time and attendance system to track hourly wages may rely on that data, while the final rule provides a good faith reporting exception which applies to all entities that do not have an existing time and attendance system. The final rule has been modified in an effort to clarify that the good faith exemption applies to all Section 3 reporting entities (not only contractors and subcontractors) and that data from any existing salary-based or time-andattendance-based payroll records can be used in good faith reporting under Section 3. HUD is mindful of the need to update policies and procedures for planning purposes, and the importance of implementing the rule such that employers will be able to comply. Therefore, HUD has provided for a transition period and a bifurcated compliance date. Public housing financial assistance recipients must comply with the reporting requirements starting with the recipient’s first full fiscal year after this final rule’s effective date. Section 3 project recipients must comply with the reporting requirements starting with the recipient’s first full program year for projects committed or awarded after this final rule’s effective date. VerDate Sep<11>2014 20:48 Sep 28, 2020 Jkt 250001 Many Section 3 Positions Are ShortTerm in Nature One commenter stated that many of the jobs made available under Section 3 requirements are short term positions specific to the needs of the individual project and/or worksite. These positions provide opportunities for the target population of low-skilled workers to build work experience (leading to possible economic advancement) while helping ensure project costs remain reasonable. Another commenter stated that the Section 3 goal leading to longterm employment and career advancement is unrealistic, as most opportunities generated by Section 3 projects are construction-related and therefore seasonal or project-based; it would be burdensome and complicated to track via labor hours long-term employment that results from a Section 3 worker being hired on a subsequent Section 3 project by a different contractor. Contractors do not keep pools of long-term general laborers on hand for consecutive projects as a means of employing Section 3 workers. Other commenters stated that nothing in the statute states that long-term employment through public housing or other housing and community development funding is the goal of Section 3; the statutory intent is to provide employment and training opportunities to residents of lowincome communities where Federal housing and community development dollars are being spent, and tracking new hires better meets this intent. Similarly, commenters stated Section 3 workers are more likely to assist in temporary work for PHAs. Using new hires better fits with this economic reality. One commenter stated that contractors do not reduce the number of part-time employees so they can provide full-time, long-term employment to fewer Section 3 workers. Other commenters stated that the nature of the construction industry is episodic; workers are not employed by one company for long periods of time, but from project to project, and workers often move from one company to another. The number of hours that a specific person works is generally based on what is required for the project and the type of work they are doing. Commenters asserted it is unreasonable to think that hours for lower-skilled employees will dramatically be increased for a specific construction project by moving to a ‘‘labor hours’’ standard. Commenters also stated that the move to labor hours will confuse contractors and create more complexity. Another PO 00000 Frm 00008 Fmt 4701 Sfmt 4700 commenter anticipated pushback from contractors declining to bid, which can lead to an increase in the cost of developing affordable housing. Commenters stated that tracking labor hours could provide contractors with an incentive to hire fewer low-income residents by employing those hired for a greater number of hours. This would have a negative effect on the number of low-income residents hired overall. HUD Response: HUD recognizes that many Section 3 opportunities are shortterm employment opportunities. The shift from measuring new hires to measuring labor hours continues to value these short-term opportunities as creating significant economic opportunities for low- and very-lowincome workers, and these short-term opportunities will likely remain a primary source of Section 3 opportunities. At the same time, the shift in metrics more accurately reflects the nature and extent of these employment opportunities and places greater relative weight on those opportunities which do provide longterm career ladders and sustained employment opportunities. There is no obligation on a reporting employer to track an employee’s work beyond the immediate short-term seasonal or project-based employment. The opportunity to track an employee over time is solely an opportunity which can be seized by those reporting employers who have invested the extra time and effort to nurture an employee over time. That extra effort to develop a career track is not recognized by the previous new hire metrics but is recognized in the labor hour metrics. It should be noted, however, that the use of the labor hour metric to reward retention applies only to the relationship with the current employer. (See § 75.11(a)(2) ‘‘A worker who currently fits or when hired fit at least one of the following categories, as documented within the past five years . . .’’) This provides an option for employers to look back to the worker’s status at the time of original employment but does not require that an employer do so if the employer only wants to reference the employee’s current status. Contrary to the concept referenced in the comments, there is no ability to claim long-term employment when hired on a subsequent Section 3 project by a different contractor. This rule updates HUD’s Section 3 regulations to create more effective incentives for employers to retain and invest in low- and very low-income workers. It is HUD’s opinion that the change from new hires to labor hours, in combination with the opportunity to E:\FR\FM\29SER4.SGM 29SER4 Federal Register / Vol. 85, No. 189 / Tuesday, September 29, 2020 / Rules and Regulations jbell on DSKJLSW7X2PROD with RULES4 provide good faith assessments, is consistent with businesses’ existing payroll systems. Finally, HUD is of the opinion that this change will better advance the goal of sustained employment and career opportunities for low- and very low-income workers. Alternatives Several commenters suggested alternative frameworks for measuring Section 3 results, in some cases using the labor hours metric and/or the new hire metric already articulated in the current and proposed rules and in some cases proposing new alternative metrics entirely. Some commenters recommended including definitions for both Alternative 1 and Alternative 2 so that agencies may exercise whichever option best suits their local circumstances. One commenter recommended using the $200,000 project threshold or $400,000 recipient threshold to determine whether labor hours or new hires should be the appropriate reporting metric, as larger projects have greater potential to create long term employment opportunities. One commenter focused on the safe harbor benchmark, stating PHAs should have the choice of labor hours at 10% or new hires at 30%. A commenter stated that if labor hours is adopted, all recipients and subrecipients should have the same flexibility allowed to PHAs. Another commenter stated that ‘‘labor hours worked’’ should be used in conjunction with ‘‘30% new hires.’’ The commenter wrote that many PHAs do not track the generated new hires metric making the current 30% of new hires mandate irrelevant—some PHAs allow contractors and subcontractors to select how many hires they will take onto a project despite it coming short of the 30% benchmark. The commenter wrote that tracking both ‘‘labor hours worked’’ along with the ‘‘30% new hires’’ provides further assurance that a recipient’s contractors and subcontractors do not avoid their responsibilities to pay the prevailing wage in accordance with the Davis Bacon Act. Other commenters argued neither labor hours worked, nor number of new hires are accurate metrics for Section 3 compliance and impact, where the goal of Section 3 is sustained economic independence and economic enhancement for Section 3 workers in and around HUD’s investment areas. Commenters suggested compliance should instead be measured by: (1) Payroll dollars paid to Section 3 employees; (2) training dollars spent training Section 3 workers; and (3) VerDate Sep<11>2014 20:48 Sep 28, 2020 Jkt 250001 contract dollars paid to Section 3 contractors. Commenters further asserted tracking employment status would be unnecessary if all Section 3 employment payroll dollars were captured as a percentage of gross payroll dollars instead. Another commenter stated that an alternate suggestion would be to delineate Section 3 workers as full-time or part-time, and that tracking hours by using these two categories would be effective while still giving HUD information about the hours being completed by each worker. One commenter recommended Alternative 2, which continues to track new hires with the addition of Targeted Section 3 workers. One commenter stated that transparency is needed, and the new revisions of Section 3 should include that contractors and subcontractors must make public the total amount of workers expected to complete a construction project. Commenters proposed a third alternative to the two proposed, which is to stay with the current existing Section 3 goals, for both new hires (30% of new hires) and for contracting with Section 3 business concerns (10% of construction dollars and 3% of other dollars). Changes to what is already understood by contractors will be administratively burdensome and will require additional education and training for contractors and subcontractors. HUD Response: HUD appreciates the alternatives suggested and has considered the various comments regarding the alternatives presented in the proposed rule and the modifications to those alternatives presented in the comments. HUD has concluded that both the use of Alternative 2 (New Hires) and the use of a hybrid drawing from both Alternative 1 and Alternative 2 provide an incomplete measure of employment opportunities generated through Section 3. Therefore, HUD decided not to retain the new hire standard. Rather than apply new hires recordkeeping to some programs and labor hours to others, HUD believes it is more efficient and effective for purposes of HUD’s objectives with respect to Section 3 to apply the same standard across the board. HUD has determined to align Section 3 reporting requirements with typical payroll business practices by tracking labor hours (whether based on prevailing wage data, non-prevailing wage timeand-attendance system data, good faith assessments of hourly workers not tracked through a data system, or good faith assessments of salaried employees). While commenters varied PO 00000 Frm 00009 Fmt 4701 Sfmt 4700 61531 on whether tracking Section 3 outcomes through labor hours will be easier for recipients of HUD funding, HUD has concluded that the consistent labor hours metric more accurately reflects the impact of Section 3 and the economic development opportunities created. With respect to the alternatives regarding aggregate payroll tracking or tracking full-time and part-time positions, HUD believes that tracking of labor hours will adequately show hours worked. HUD has determined that tracking of training will be done qualitatively when appropriate. Process for Tracking Labor Hours Commenters stated that while they appreciated the idea of streamlining the metric, tracking new hires vs. hours may be a disincentive to developers if the tracking is more onerous or complicated than the current method. If tracking labor hours is a goal similar to Davis Bacon, then the process should be fully integrated with the Davis Bacon procedure including the duration of tracking (only until project completion), reporting requirements, and procedures. Commenters stated that ascertaining whether an employer has any new hires is not a simple task; it involves (1) reviewing pre-award payroll records to determine who was on the employee’s payroll at the time of contract award and (2) reviewing ongoing payroll records for the duration of the contract to determine whether any new employees have been hired. Commenters also stated that it makes no sense to apply the ‘‘labor hours’’ standard to only one type of construction and rehabilitation project but not to another, based solely on the type of HUD funds involved. If a contractor employs no Section 3 workers, there should be no requirement to provide the data. Commenters stated inexpensive software is available that enables contractors to submit electronic payroll reports and allows PHAs and other Section 3 funding recipients to easily determine the hours worked on the project, in each trade, by all workers and by Section 3 residents. Commenters noted such software is available to recipients of housing and community development assistance and also to PHAs and other public housing financial assistance recipients. Commenters stated that commonly used Contract Management and Payroll systems such as LCPtracker and B2GNow have features that align with compliance practices and make monitoring more effective. One commenter stated that HUD could provide appropriate software to all E:\FR\FM\29SER4.SGM 29SER4 jbell on DSKJLSW7X2PROD with RULES4 61532 Federal Register / Vol. 85, No. 189 / Tuesday, September 29, 2020 / Rules and Regulations agencies to assist them in tracking and reporting labor hours. A commenter noted that its city has a Federal labor standard software tracker which only 21% of contracts use, and this rule would require 100% of contractors to use the software, resulting in increased administrative work, contract costs, and system management. One commenter noted that it would be easier to track labor hours with LCPtracker software if the reporting were more aligned with Davis-Bacon reporting. Commenters also saw potential in the hourly tracking if there were a way to eliminate double paperwork by adding Section 3 reporting to the existing Davis-Bacon worksheets. On the other hand, when Davis-Bacon does not apply to a Section 3 project, some commenters felt the administrative burden of tracking hours could be higher. More information would be needed about how the reporting requirements would be implemented before it could be definitively agreed that tracking hours is less burdensome than tracking new hires. HUD Response: HUD recognizes the diversity of views on whether tracking labor hours would be less burdensome for organizations obligated to report Section 3 results. Based on the comments, HUD has concluded that it is likely to be less burdensome to track labor hours in many circumstances, and HUD has clarified the applicability of the good faith exemption to mitigate any potential burden for those who do not have payroll systems which would align to a labor-hours reporting metric. For those efforts subject to Davis Bacon requirements, which includes many HUD-funded construction endeavors, tracking labor hours consistent with existing tracking for prevailing wage requirements would almost certainly reduce burden on recipients. HUD is aware that there are existing software options that have the potential for capturing total labor hours and labor hours contributed by Section 3 workers. HUD also is exploring whether and how to operationalize and integrate HUD’s Section 3 Performance Evaluation and Registry System (SPEARS) with outside software vendors. The SPEARS system already has optional data fields to capture the Aggregate Number of Staff Hours Worked and Total Staff Hours Worked by Section 3 Employees, and the system will be modified to align with the final rule. Underlying these considerations, however, is HUD’s belief, as described above, that tracking labor hours will better allow HUD to determine if long-term employment opportunities are being generated, and VerDate Sep<11>2014 20:48 Sep 28, 2020 Jkt 250001 that the metric should be consistent without regard to the identity of the recipient of HUD funds. Unlike a labor hours measure, the new hire measure does not consider the share of actual work done by low- and very low-income workers, and new Section 3 hires may not be given the opportunity to work a substantial number of hours. concluded that even with this margin of error, the labor hours metric provides a more accurate reflection of the economic opportunities created in connection with HUD-funded activities than the new hires metric. The exception does not apply if the employer is subject to other timespecific requirements. Labor Hours Based on Good Faith Assessment One commenter stated that the proposed new rule allows for recipients to rely on a contractor’s ‘‘good faith assessment’’ of labor hours (rather than payroll reports) if the contractor is not subject to other requirements specifying time and attendance reporting. Since a large proportion of housing rehabilitation and construction projects do not meet the unit thresholds that trigger Federal labor standards (i.e. eight units for CDBG, 12 units for HOME), grant administrators will regularly have to report labor hours based on a contractor’s ‘‘good faith assessment.’’ Use of this approach will introduce an unknown error margin into the calculation of labor hour benchmarks. This lack of data integrity calls into question the meaning of the proposed benchmarks and the soundness of using ‘‘labor hours’’ as a unit of measurement. Commenters stated that Section 3 businesses who report labor hours in ‘‘good faith’’ need to have specific recording requirements (i.e., software) to avoid manipulation; it is more efficient to rely on tracking systems instead of contractors’ good faith submissions. Commenters stated that not all HUD construction projects are subject to Davis-Bacon compliance and even a good faith assessment of labor hours will require significant PHA resources to monitor, review, and compile. One commenter stated that while the proposed rule states that HUD will permit ‘‘a good faith assessment of the labor hours’’ for certain employers, recipients could still be required to establish new compliance procedures, including determining how to protect the privacy of Section 3 workers and businesses when supplied with labor hours supporting documentation. HUD Response: The final rule is explicit that employers are not required to acquire a time-and-attendance system in order to comply with the Section 3 rule. The ‘‘good faith assessment’’ is a limited exception to be used by employers who do not have systems in place to track labor hours. This rule was put in place to avoid increased administrative burdens. HUD is aware of the margin of error represented in the good faith assessments, but has Section 3 Applicability Threshold, HUD’s Lead Hazard Control and Healthy Homes Programs and All Section 8 Programs PO 00000 Frm 00010 Fmt 4701 Sfmt 4700 Total Funds Threshold or per Project Threshold Versus an Increased Threshold The proposed rule set the Section 3 applicability threshold for Section 3 projects to projects where the amount of assistance exceeds $200,000. HUD received comments both in favor of maintaining the current $200,000 threshold and in favor of the new proposed threshold. Commenters also addressed the use of a project versus a total funding threshold. In addition, other commenters provided a range of alternative frameworks for setting the threshold amount—different numbers and the inclusion or exclusion of different kinds of funding in the threshold calculations. Some commenters recommended that the $200,000 threshold be based on the total amount of funding received within the fiscal year because it is a more simplified and streamlined process. Commenters stated the change to a per project threshold would result in many housing production projects that are mainly small and resource constrained having to comply with Section 3 requirements for the first time, noting that a per project threshold can become complicated and burdensome when a recipient handles a large volume of contracts that are funded by multiple sources. Commenters went on to state that a per project threshold would reduce the number of economic opportunities directed to low-income persons and recommended continuing to subject Project Based Voucher programs to Section 3 requirements to ensure those opportunities are directed toward low-income persons and businesses that employ them. Commenters in this line of thought noted that the $200,000 per project threshold would potentially exempt projects where the HUD funding is less than $200,000, even though the combined total project funding is much higher. Commenters stated this could lead to a decrease in the number of projects subject to Section 3 and an E:\FR\FM\29SER4.SGM 29SER4 jbell on DSKJLSW7X2PROD with RULES4 Federal Register / Vol. 85, No. 189 / Tuesday, September 29, 2020 / Rules and Regulations overall reduction in Section 3 program impact. Other commenters supported the per project threshold generally without commenting on the amount or supported the $200,000 per project threshold and saw it as an improvement. Some of these commenters noted that while $200,000 is an improvement over the current threshold, it does not relieve underlying concerns that contractors may break up activities into small contracts of less than $200,000 each to avoid accountability. Several commenters agreed that a $200,000 per project threshold would still allow contractors awarded significant funding to avoid Section 3 requirements by carrying out small discreet activities even though they cumulatively spend more than the threshold amount. A commenter suggested that the final rule include a prohibition on such activity, so that HUD has authority to pursue enforcement measures if HUD determines a recipient is ‘‘gaming the system’’ to avoid Section 3 obligations. Other commenters provided alternative threshold amounts at a range of figures up to $1 million. Some commenters stated the $200,000 per project threshold will not necessarily result in employment opportunities for low-income people, arguing a higher project amount does not inevitably translate to the need for new employees or a benefit to Section 3 business concerns. Commenters suggested an alternative $250,000 threshold which would coincide with the Office of Management and Budget simplified acquisition threshold and could automatically change when that amount is updated. Other commenters supported using the $250,000 threshold for all projects to include PHAs. Some large PHAs with Section 3 experience recommended raising the threshold to $350,000 on a per project basis and making this threshold consistent across all programs and funding sources. Commenters in agreement with this notion also noted that HUD has determined that employment opportunities in CDBG funded projects under $350,000 are very minimal, and these commenters argued that the same is also true of public housing projects. Commenters also recommended $400,000 or higher to increase the number of program recipients exempted from Section 3 requirements from less than 4 percent to 20 percent, greatly reducing the compliance burden for smaller grantees. Still other commenters recommended a higher threshold of $750,000, tied to the single audit threshold, noting that smaller grants VerDate Sep<11>2014 20:48 Sep 28, 2020 Jkt 250001 generally will not involve sufficient hiring opportunities to warrant the increased administrative burden. Other commenters recommended that a $1 million threshold would be a better measure of a project of a scale that would have the potential to drive the hiring of Section 3 workers and justify the additional administrative burden on recipients, subrecipients, and contractors to implement the program, particularly state CDBG programs that primarily fund public infrastructure. Another commenter recommended exempting grantees that receive $1 million or less annually in CDBG or HOME funds because such grantees focus on a finite set of activities that involve small projects. Commenters stated that a low threshold will create an undue compliance burden for small projects. Commenters suggested that adopting a higher per project threshold would still ensure the majority of CPD grants are covered but would likely offer significant regulatory relief for smaller grantees, builders, developers, contractors, and subcontractors who are disproportionately burdened by regulatory obligations. Some commenters who advocated for a higher threshold linked their reasoning to the effect of the threshold amount on contractors and subcontractors, noting that Section 3 obligations apply to recipients, their sub-recipients and so on. Commenters described cases in which builders forgo using covered funds to avoid the liability and compliance burdens of Section 3, and situations where developers experience costly delays on projects while searching for qualified subcontractors who are not deterred by the Section 3 paperwork and certifications. Commenters also suggested that both a recipient threshold at $400,000 and a project threshold of $200,000, applicable across all programs, would be most appropriate to reduce reporting burdens with a limited impact on the dollar amounts of funding covered. Another recommendation was to apply Section 3 obligations to any entity that receives at least $200,000 during a program year for a specific program activity. Other commenters suggested either the threshold for contracts should remain $100,000 in HUD assistance; or a ‘‘total contract value’’ threshold should be defined that will trigger Section 3 on HUD-funded contracts, regardless of the dollar amount of the HUD funding. Other commenters offered an alternative threshold of 10 percent of construction costs per project. Commenters also reiterated that some CDBG grant awards are very small, PO 00000 Frm 00011 Fmt 4701 Sfmt 4700 61533 ranging from $50,000 to $200,000, so units of general local government have difficulty finding contractors to bid on the projects, let alone finding a contractor that is a Section 3 business concern and is willing to work on a small project. Finally, commenters suggested limiting activities that trigger the threshold to only construction and rehabilitation, as defined within the Section 3 statute for CDBG, HOME and other CPD programs. HUD Response: HUD acknowledges the considerations raised by all the commenters in their responses. HUD found that the portion of Section 3 expenditures excluded by the $200,000 per project threshold generate relatively few Section 3 jobs. After weighing the various considerations, this final rule maintains the $200,000 per project threshold in general but makes changes to the Lead Hazard Control & Healthy Homes Programs threshold. HUD believes that project funding levels help accurately define thresholds because the amount of funding spent on a project is directly related to the economic opportunities generated by the project. HUD acknowledges the potential disadvantages mentioned by commenters to using a per project threshold but reiterates the per project threshold will help provide opportunities for those who are recipients of Federal financial assistance for housing or residents of the community in which the Federal financial assistance is spent. In addition, HUD remains open to adjusting thresholds in the future based on updated data analysis. The final rule clarifies that HUD may change the thresholds and benchmarks at a later date via Federal Register notice, subject to public comment, based on updated data input and accounting for inflation. HUD also notes that not every contractor, subcontractor or subrecipient must use Section 3 workers. A funds recipient could meet its Section 3 benchmarks with one contract to a Section 3 business concern where the number of labor hours worked is 25% or more of all the labor hours worked by all workers on a Section 3 project while not using Section 3 workers for other work. The recipient has flexibility in determining how to meet its benchmarks. Lead Hazard Control & Healthy Homes Programs Inclusion Commenters who advocated for a single consistent per project threshold across all programs stated that the Lead Hazard Control and Healthy Homes programs should also be subject to the same threshold. Other commenters E:\FR\FM\29SER4.SGM 29SER4 61534 Federal Register / Vol. 85, No. 189 / Tuesday, September 29, 2020 / Rules and Regulations jbell on DSKJLSW7X2PROD with RULES4 agreed that Lead Hazard Control and Healthy Homes projects should be exempted from administrative and compliance burdens based on a threshold of $200,000 or greater, stating these projects are unlikely to generate many employment opportunities because they are small and Lead Hazard Control abatement and interim controls is to be done by trained and certified workers. Some commenters agreed that including Lead Hazard Control projects with no threshold would increase the administrative burden without a benefit, and while the exclusion is understandable, HUD should pursue a standardized threshold to avoid complicating Section 3 by creating a different scope for Lead Hazard Control and Healthy Homes programs. Commenters generally supported higher thresholds for Lead Hazard Control and Healthy Homes programs. A commenter suggested it may be appropriate to use the community development assistance threshold for simplicity. Alternatively, commenters suggested a more modest reporting threshold of not less than $50,000 for Lead Hazard Control and Healthy Homes projects, stating that for grantees working on multifamily projects in high cost cities, projects where the contract is less than $50,000 tend to be awarded to smaller contractors. A $50,000 threshold would meet HUD’s admirable intention of ensuring greater Section 3 participation from Lead Hazard Control and Healthy Homes grantees without imposing hardship on such small contractors. HUD Response: HUD agrees that the $200,000 threshold should not apply to Lead Hazard Control and Healthy Homes programs since those projects are generally smaller dollar amounts. However, in keeping with Section 3’s statutory priorities and applicability, HUD is choosing to adopt a $100,000 project threshold regarding application of Section 3 to Lead Hazard Control and Healthy Homes programs. Section 8 Programs Exclusion Many commenters supported the exclusion of Section 8 programs in the proposed rule, as Section 8 programs are not included in the statute. Commenters went on to note that because Section 3 programs are development subsidy sources and Section 8 programs provide operating subsidies, Section 8 assistance recipients should not be subject to Section 3 regulatory responsibilities. Commenters noted that the primary purpose of Section 8 programs is to provide a rental subsidy that covers the difference between the contract rent and 30 percent of the tenant’s income, VerDate Sep<11>2014 20:48 Sep 28, 2020 Jkt 250001 stating these programs are ‘‘affordability tools, not construction tools,’’ and agreed HUD should not increase regulatory burdens on housing providers by expanding the scope of Section 3 to programs not covered in the statute. Some commenters urged that for Subpart B, HUD should retain an option for PHAs to report on Section 3 requirements for Section 8 funded programs, noting that these programs generate significant employment and training opportunities for Section 3 workers. Commenters suggested HUD format Section 3 reporting so that Section 8 funded placements can be captured as part of a PHA’s overall efforts. Commenters also suggested the current reporting system be updated to allow for the reporting of other placements that might be excluded with the new proposed rule, such as placements under professional service contracts. HUD Response: Section 8 programs are not covered under the Section 3 statute. Therefore, HUD in this final rule maintains the clarification in the proposed rule that Section 8 programs are excluded from Section 3 requirements. Section 3 Project Definition Commenters recommended that HUD more clearly define ‘‘project’’ for the purpose of Section 3, and asked how HUD would view a job order contract of more than $200,000 that may work on various locality-owned sites (e.g., all of a locality’s schools or homeless shelters). These commenters also asked, if several unrelated HUD-funded activities are taking place at the same location and have a combined value of more than $200,000 constitutes a project. Lastly, the commenters asked whether the per-project threshold is based solely on construction-related activities, and whether the level of Federal assistance to a project must exceed the $200,000 threshold to trigger Section 3. Another commenter recommended that HUD define ‘‘project’’ as follows: Project means a site or sites together with any building or multiple buildings located on the site(s) that are under common ownership, management, and financing and are to be assisted with Section 3 covered funds as a single undertaking. A program that funds multiple buildings under separate ownership, management and financing is not a project. HUD Response: HUD supports the Section 3 Project definition within the proposed rule and believes it is consistent with the statutory PO 00000 Frm 00012 Fmt 4701 Sfmt 4700 requirements of HUD programs. HUD also intends to provide sub-regulatory guidance and technical assistance on a program-by-program basis to assist recipients with Section 3 implementation. Section 3 Worker Rule Rewards Creating Opportunities for Persons Who Are Not Low-Income Commenters stated that the rule, particularly the definitions of Section 3 worker, rewards creating opportunities for persons who are not low-income, which would be counterproductive to the intent of the Section 3 program. A commenter stated that the proposed definition could inadvertently include individuals who are not low-income because categories (ii) and (iii) are not income-based. Specifically, some commenters objected to category (ii) which allowed workers who live in a Qualified Census Tract (QCT) to be included in the definition of ‘‘Section 3 worker’’ because these individuals will not necessarily be low-income. One commenter noted this is especially true in large metropolitan cities with mixed income communities and gentrifying areas. Another commenter stated that researching employee residence as of the date of hire to determine census tract qualification will be difficult or impossible for long-term employees who may have moved multiple times. Commenters warned that the QCT designation would create a risk of potential abuse by recipients. Some commenters suggested removing the QCT criteria altogether since the definition already includes a low- or very low-income person. Other commenters objected to category (iii) which included all Section 3 business concern employees as Section 3 workers. These commenters stated that someone working at a Section 3 business concern is not necessarily a resident of HUD-assisted housing, nor is it likely that a business owned by 51% low-income people would hire only public housing or HUDassisted residents. For this reason, commenters recommended that HUD should exclude ‘‘a worker employed by a Section 3 business’’ from its definition and benchmarks and the definition of Section 3 worker and Targeted Section 3 worker. One commenter noted the phrase ‘‘worker is employed by a Section 3 business’’ is included in both the Section 3 worker and Targeted Section 3 worker definitions and recommended including this term in the Targeted Section 3 worker definition E:\FR\FM\29SER4.SGM 29SER4 Federal Register / Vol. 85, No. 189 / Tuesday, September 29, 2020 / Rules and Regulations jbell on DSKJLSW7X2PROD with RULES4 only and not the Section 3 worker definition. HUD Response: HUD agrees that paragraph (1)(ii) could inadvertently include individuals who are not lowincome. This final rule removes paragraph (1)(ii) regarding the QCT from the definition of ‘‘Section 3 worker’’ from this final rule. However, HUD disagrees that the category of Section 3 business concerns should be removed from the Section 3 worker and Targeted Section 3 worker definitions. The Section 3 statute states that HUD must prioritize Section 3 business concerns. If HUD did not include Section 3 business concerns in the definitions that are used for the benchmarks, PHAs and other HUD funded entities would have no incentive to hire Section 3 businesses. Including all Section 3 business concern employees in the definition of Section 3 worker and Targeted Section 3 worker creates an incentive to contract with a Section 3 business while maintaining a single reporting metric. The final rule maintains that all hours worked on the project by the Section 3 business counts towards the benchmarks. HUD believes these changes are consistent with the statute. Prior Conviction One commenter wrote that convictions for certain categories of crimes may have a direct bearing on the worker’s suitability for particular jobs. Previous theft convictions, for example, may be relevant for a worker who will be involved in procurement and distribution of materials. Other commenters supported this language, stating that ‘‘there is no evidence that hiring an individual with a criminal history will have a negative impact on employee success.’’ The commenters also noted that the language is consistent with other HUD guidance on the use of background reports in housing decisions. However, one commenter suggested a minor revision to clarify the regulation: ‘‘A recipient, contractor, or subcontractor shall not refuse to hire a Section 3 worker on the basis of a prior arrest or conviction, unless otherwise required by Federal, state, or local law.’’ HUD Response: HUD agrees with the commenters that convictions for certain crimes, such as fraud or theft, might affect a worker’s qualifications for a particular position, and that ‘‘there is no evidence that hiring an individual with a criminal history will have a negative impact on employee success.’’ HUD notes that the Section 3 worker definition provides that an individual’s prior arrest or conviction shall not negatively impact their Section 3 worker VerDate Sep<11>2014 20:48 Sep 28, 2020 Jkt 250001 status, but the definition maintains the requirement that the individual is qualified for the job. Job qualifications may include the worker’s arrest or conviction history. The rule does not require a Section 3 worker with a criminal history to be hired. HUD has considered the suggestions and has chosen to keep the regulatory language in § 75.5. See Section 3 business concern, § 75.5 (‘‘The status of a Section 3 business concern shall not be negatively affected by a prior arrest or conviction of its owner(s) or employees.’’); Section 3 worker, § 75.5 (‘‘The status of a Section 3 worker shall not be negatively affected by a prior arrest or conviction.’’); Targeted Section 3 worker, § 75.5 (‘‘does not exclude an individual that has a prior arrest or conviction.’’) Additional Categories One commenter stated that the proposed rule no longer explicitly lists a public housing resident as a ‘‘Section 3 resident’’ and does not provide for the employer to continue counting that worker in the future. Another commenter suggested that staff hired by a PHA should be counted toward Section 3 requirements. Commenters suggested additional categories and expansion of existing categories, and requested HUD explicitly list the following: people immediately prior to hiring are public housing, Section 8, Section 811, Section 202 residents or other low-income people, and women. Commenters recommended that a ‘‘Section 3 worker’’ should be a worker whose income is below the limit set by HUD, or a resident of public or HUDassisted housing. One commenter supported the change to using an individual’s status as lowincome versus household income, which will increase the pool of persons that can be counted as a Section 3 worker and make meeting the benchmarks more attainable. Commenters requested clarification on whether the HUD-defined low-income level will be based on individual or family income and one commenter recommended the use of only an individual’s income. HUD Response: HUD wants to clarify that, while the definition of Section 3 worker does not include public housing residents, it does include all workers whose income is below the income limit established by HUD, which is the same limit that would qualify someone for public housing. Therefore, public housing residents would be considered Section 3 workers. HUD does not believe that all staff hired by a PHA should be counted as Section 3 workers. PO 00000 Frm 00013 Fmt 4701 Sfmt 4700 61535 Those staff that meet the qualification of a low or very low-income person, as defined by HUD’s income limit, would already qualify, and HUD does not think it is appropriate to include all PHA staff. As for expanding the categories further, the Section 3 statute is specific as to the priorities that HUD should be providing with employment and other economic opportunities generated by Federal financial assistance. Therefore, HUD is not expanding the scope of Section 3 workers beyond those listed in the statute. HUD changed the Section 3 worker definition to include a worker whose income is below the income limit established by HUD in place of the family income and appreciates the comments in support of the change. Setting Time Limits Commenters recommended that HUD should keep the existing standard of a three-year period for counting workers in order to account for staff turnover and to generate more accurate metrics. Other commenters recommended HUD limit someone counting as a Section 3 person to 5 years. Another commenter stated that because many contractors and subcontractors report no new hires for specific projects, a Section 3 worker should be defined as one who ‘‘at the time of hire’’ was low- or very lowincome. One commenter asked HUD to be more specific in defining a Section 3 worker rather than stating low-income is a ‘‘limit established by HUD.’’ HUD Response: HUD agrees with the commenters that a worker whose income has risen should only be counted for Section 3 purposes for five years. HUD wants to ensure employers are invested in keeping Section 3 workers employed, and that there is enough opportunity to build skills and experience so that Section 3 workers may develop self-sufficiency and compete for other jobs in the future. An employer may choose whether the workers are defined as Section 3 workers for that five-year period at the time of the workers’ hire, or the date from which the workers are certified as meeting the Section 3 worker definition. Guidance Commenters requested that HUD provide more specific guidance regarding how to calculate labor hours for the purpose of determining Section 3 status. For example, is there a set timeline for consideration, such as during the past year or several years? Or is it based on the business’ last 1–2 payrolls to capture the most recent picture of employment? Commenters stated that it is unclear over what time period labor hours are to be measured. E:\FR\FM\29SER4.SGM 29SER4 61536 Federal Register / Vol. 85, No. 189 / Tuesday, September 29, 2020 / Rules and Regulations One commenter stated that it is unclear whether the ‘‘labor hours’’ standard relies on the labor hours on the Section 3 project, or in general. HUD Response: HUD will provide additional guidance to assist PHAs and grantees in how to calculate labor hours. Generally, labor hours will be calculated based on the labor performed on a Section 3 project for housing and community development financial assistance or on all labor hours performed within the fiscal year for public housing assistance. jbell on DSKJLSW7X2PROD with RULES4 Subrecipient One commenter stated that using the applicable definition of subrecipient in the HOME program would mean that multifamily owners contracting directly with the State may not have to comply with Section 3 requirements because they are not included in that definition for the HOME program in 24 CFR 92.2. This commenter also noted that multifamily owners are also not often contractors (under the proposed definition), because they do not enter into a contract with a recipient to perform the work. This commenter suggested inclusion of owners in the HOME program and changing the definition of subrecipient to say ‘‘has the meaning provided in the applicable program regulations, and in 2 CFR 200.93’’ or suggested HUD amend the definition of contractor to further define the phrase by adding ‘‘work in conjunction with a Section 3 project,’’ to more clearly identify that it includes an owner in the HOME program that contracts with general contractors. HUD Response: HUD appreciates the comment. However, subrecipient has different meanings in different programs, which is why HUD defined it as either the meaning as is applied in the specific program or 2 CFR 200.93. Targeted Section 3 Worker Definition Some commenters supported the new ‘‘Targeted Section 3 worker’’ definition and eliminating tracking Section 3 business concern types separately. Some commenters stated that the Targeted Section 3 worker concept is consistent with the goal of expanding employment opportunities for individuals that receive Federal assistance for housing. Another commenter agreed with HUD’s efforts to track and target certain high priority Section 3 workers separately and efforts to fold Section 3 business concern engagement into other benchmarks. Other commenters opposed the ‘‘Targeted Section 3 worker’’ definition, stating that it is duplicative with worker categories already given preference VerDate Sep<11>2014 20:48 Sep 28, 2020 Jkt 250001 under § 75.9. Commenters stated a separate reporting category for ‘‘Targeted Section 3 worker’’ merely complicates reporting requirements for recipients, contractors, and subcontractors, and recommended HUD keep the existing definition and the existing priority preference order. Other commenters noted that tracking additional information to determine Section 3 compliance would be burdensome. A commenter recommended that hours worked by Section 3 business employees be categorized as regular Section 3 worker hours and Targeted Section 3 worker hours depending on the employee’s status to avoid inflated reporting of hours worked by targeted Section 3 workers. Other commenters suggested that a worker employed by a Section 3 business only be included in the ‘‘Targeted Section 3 worker’’ definition because it was created to better align the regulation with the law. Commenters stated that counting all Section 3 business concern employees as Targeted Section 3 workers is problematic and risks questionable data. HUD should exclude ‘‘a worker employed by a Section 3 business’’ from the definition of Targeted Section 3 worker and Section 3 worker. Including ‘‘a worker employed by a Section 3 business’’ in the definition of ‘‘Targeted Section 3 worker’’ dilutes the purpose of creating a Targeted worker designation. It also frustrates the purpose of the statute, which is to give priority to public housing and other HUD-assisted residents in employment and training opportunities, along with low-income families near the Section 3 project location. Commenters also suggested that HUD include public and HUD-assisted housing residents in the Targeted Section 3 worker definition for Section 3 projects, not just PHA projects. The proposed definition of Targeted Section 3 worker for PHA projects more accurately interprets the statutory priority of Section 3 to employ public housing and other Federally assisted residents than the definition for CPD recipients. One commenter recommended that HUD include the word priority in the definition of ‘‘Targeted Section 3 worker’’ to clarify the requirements and add objective criteria or guidance by which to monitor or measure success or satisfactory performance. HUD Response: HUD appreciates the commenters’ recommendation to target public and HUD-assisted housing residents in both funding types. However, the statute specifies priority categories differently for recipients of PO 00000 Frm 00014 Fmt 4701 Sfmt 4700 public housing financial assistance and housing and community development financial assistance. The Targeted Section 3 worker is a concept designed to serve as a proxy for the highest priority categories, allowing HUD to collect data through standardized reporting regarding the funding recipients’ efforts with respect to the priority categories. HUD believes that the definitions of Targeted Section 3 worker for both public housing financial assistance and other housing and community development financial assistance funds provide good reporting proxies for the statutory priorities and should remain as proposed. As Targeted Section 3 workers are a proxy for the priority categories solely for reporting purposes, and do not replace the prioritization that funding recipients must apply in their efforts under Section 3, the use of the word ‘‘priority’’ in the definition would be inappropriate. § 75.11 Targeted Section 3 Worker for Public Housing Financial Assistance Commenters stated that HUD should combine 75.11(a)(2)(i) and (ii) into a single category, ‘‘residents of public and HUD-assisted housing’’ to more clearly include residents of all HUD-assisted housing programs and conversion projects. Commenters supported the addition of Section 8 assisted households. This change mirrors the Section 3 statute, which broadly emphasizes employment and training opportunities for ‘‘recipients of government assistance for housing.’’ Some commenters recommended deleting paragraph § 75.11(a)(1), because it is redundant with § 75.5. Commenters also asked HUD to clarify what ‘‘residents of other projects managed by the PHA’’ covers. One commenter suggested HUD add ‘‘administered by the PHA’’ when describing Section 8 assisted housing. HUD Response: HUD appreciates the support for the categories in § 75.11 and recommendations to make changes to include additional HUD programs. HUD believes that consistent with the statute, the Targeted Section 3 worker definition for public housing financial assistance should focus on the categories as listed. To be inclusive of residents in other housing assisted by the PHA and residents of housing in the property management portfolio of the PHA, both categories have been included in the regulation in place of the vaguer term ‘‘managed by the PHA.’’ Those residents would also count as Section 3 workers for purposes of Targeted Section 3 workers for public housing financial assistance. The rule’s current ‘‘resident E:\FR\FM\29SER4.SGM 29SER4 Federal Register / Vol. 85, No. 189 / Tuesday, September 29, 2020 / Rules and Regulations jbell on DSKJLSW7X2PROD with RULES4 of other projects managed by the PHA’’ has been replaced, which should address the commenter’s concerns. § 75.21 Targeted Section 3 Worker for Housing and Community Development Financial Assistance One commenter wrote that limiting the definition to a geographic area eliminates large sectors of nearby Section 3 workers and business. Another commenter noted some State CDBG programs do not operate in areas where public housing residents or YouthBuild participants typically live. Commenters also stated that the proposed definition gives broader opportunity to identify low-income construction employees for Section 3 projects but requires wage calculations and census tract verification from contractors already burdened by paperwork and will remove the focus from employing eligible persons living within a neighborhood. HUD Response: HUD retained the proposed Targeted Section 3 worker definition in the final rule. The rule creates the ‘‘Targeted Section 3 worker’’ concept so that HUD can track, and recipients can target, the hiring of Section 3 workers in selected categories based on the statute’s hiring priorities. The Targeted Section 3 worker category also incorporates the statutory requirements of contracting with business concerns employing low- and very low-income persons. For other HUD housing and community development financial assistance programs, such as the State CDBG program or HOME Investment Partnerships programs, Targeted Section 3 workers would be low- or very lowincome workers residing within a onemile radius of the Section 3 project. If fewer than 5,000 people live within that one-mile radius, the circle may be expanded outward until that population is reached. The requirement that contractors verify whether workers are low or very low-income for tracking purposes is not new. Contractors were already required to verify new hires as qualifying for Section 3 status, and the statute requires that employment and other economic opportunities generated by work in connection with housing rehabilitation, housing construction or other public construction projects receiving housing and community development assistance be directed to low- and very low-income persons in the local community. HUD’s proposal to use Targeted Section 3 workers for housing and community development programs that fall within a defined service area should reduce burden because HUD’s mapping tool VerDate Sep<11>2014 20:48 Sep 28, 2020 Jkt 250001 will identify the jurisdiction the contractor should target. § 75.5: Section 3 Business Concern Definition Previous Rule’s ‘‘Dollar Value’’ Method Commenters stated that the previous ‘‘dollar value’’ method of reporting contracts awarded to Section 3 business concerns should be kept, as it gives recipients and general contractors a clear benchmark to achieve when selecting subcontractors and aligns with methods many are already using to report on minority-, women-, and veteran-owned businesses. Commenters noted Section 3 is designed to promote wealth-building in addition to employment opportunities and the ‘‘dollar value’’ method is a better measure of economic opportunities provided to low-income owners of Section 3 business concerns than the labor hours worked by their employees. Without having a metric tied to the number of contracts awarded to Section 3 business concerns, commenters anticipated a reduction in the number of contract awards, and a reduction in employment opportunities. One commenter stated that both definitions will likely continue to be a challenging means of qualifying for eligibility and may prove difficult to document. HUD Response: HUD found the Section 3 business concern definition to be consistent with both the previous regulation and with the statute, although HUD notes that the final rule’s definition does impose more rigorous criteria for qualifying as a Section 3 business concern with respect to the percentage of workers who must be Section 3 workers. This additional rigor in the criteria ensures that, if qualifying on the basis that the firm employs Section 3 workers, a high percentage of workers are in fact Section 3 workers, and ensures that, if qualifying on the basis that the owner is a low-income individual, the owner is in operational control and will benefit from the wealth creation opportunities. The changes to the Section 3 business concern definition do not depend on the change in reporting to a labor hours metric. HUD recognizes that some in the industry have found the ‘‘dollar value’’ method to be workable, and that the dollar value metric does provide a measure of the extent of contracting to Section 3 business concerns. However, HUD believes there is value in having a unitary reporting metric—labor hours— and has designed the metric to measure both direct employment and to reflect prioritization of contracting with Section 3 business concerns. HUD PO 00000 Frm 00015 Fmt 4701 Sfmt 4700 61537 believes that this new method will be effective, will encourage wealth creation opportunities for the owners of Section 3 business concerns, and will provide the opportunity for recipients of HUD financial assistance to determine which projects use Section 3 businesses in a way that is not administratively burdensome. Rule Rewards Creating Opportunities for Persons Who Are Not Low-Income One commenter stated that the focus on hours worked is appropriate in light of the statute’s focus on providing economic opportunities to low-income residents, but aggregating hours poses a risk that non-low-income people at Section 3 business concerns may report hours, though this risk is mitigated by the Section 3 business concern definition. Another commenter stated that the 51% owned and 75% labor hours requirements allow Section 3 business concerns to employ persons who are not low-income or very lowincome. Another commenter supported replacing the aggregate dollars spent metric, but stated that including all Section 3 business concerns’ employee hours will lead to the misleading inclusion of non-low-income worker hours in the data; only the hours worked by the low- and very lowincome employees of a Section 3 business concern should be reported as Section 3 hours worked. HUD Response: According to the Section 3 statute, HUD must prioritize businesses that provide economic opportunities for low- and very-lowincome persons. The statute does not require that HUD prioritize business that only provide economic opportunities for such persons. If HUD were to include only the Section 3 workers in the reporting metrics, the regulation would not effectuate the statutory requirement to also place an emphasis on Section 3 business concerns. The Section 3 statute states that HUD must prioritize Section 3 business concerns in the awarding of contracts. By collecting labor hour data on all employees of Section 3 business concerns, HUD is creating an incentive to contract with a Section 3 business concern while maintaining a unitary reporting metric for Section 3 performance. The final rule maintains the provision of the proposed rule that all hours worked on the project by the Section 3 business concern counts towards the benchmarks, with the awareness that this reporting framework will collect labor hour data for workers who are not low-income. This serves as the incentive to contract with Section 3 E:\FR\FM\29SER4.SGM 29SER4 61538 Federal Register / Vol. 85, No. 189 / Tuesday, September 29, 2020 / Rules and Regulations jbell on DSKJLSW7X2PROD with RULES4 business concerns. HUD believes these changes are consistent with the statute. Verification A commenter stated that nothing addresses processes for verification of Section 3 business concern eligibility, and that HUD should enhance the Section 3 business concern registry to include confirmation of eligibility or work with Equal Employment Opportunity Commission to assist jurisdictions with certification programs. One commenter noted that using the Section 3 business concern registry to project availability of Section 3 workers is unreliable because the registry is a self-reporting structure with no mechanism to verify the business on the list, it assumes such businesses are able to work in any geographic area, and many PHAs in rural and suburban areas have reported that there are no Section 3 business concerns in their areas. Another commenter raised the issue that verifying Census tract designations would create an additional burden, especially Census tract data that changes over time, which will result in fewer contractors participating in Section 3 projects. One commenter stated apprehension about this part of the definition because accurately tracking and reporting labor hours will be much more challenging than tracking and reporting full-time employees. The proposed definition also makes it difficult for Section 3 business concerns and the entities that contract with them to predict with confidence that they will retain their Section 3 status, as labor hours can be dependent on the number of contracts a business bids for and receives. Another commenter requested clarification regarding how long a business retains the Section 3 business concern status once it is certified as a Section 3 business concern. Commenters suggested HUD or the local government should bear the responsibility for verifying the eligibility of a Section 3 business concern, rather than shunting that responsibility to the builder, general contractor, or subcontractors. HUD’s online Section 3 Business Registry 4 was a positive first step, but HUD does not verify the self-certifications submitted by the business concerns, and it cautions database users to perform due diligence before awarding contracts. HUD Response: HUD plans to continue the use of the Section 3 Business Registry as an available public 4 HUD, What is the Section 3 Business Registry?, Hud.gov, https://portalapps.hud.gov/Sec3BusReg/ BRegistry/What. VerDate Sep<11>2014 20:48 Sep 28, 2020 Jkt 250001 tool. While HUD appreciates the suggestion that HUD or the local government make determinations of eligibility for Section 3 business concerns, HUD believes that, consistent with other paperwork requirements, it is appropriate that the entity receiving HUD financial assistance ensure compliance with Section 3 requirements, which includes confirming that both Section 3 workers and Section 3 Business concerns qualify as such under this regulation. HUD addressed commenters’ concerns about Census tract designations by removing that language from the rule, and concerns about labor hours are addressed in previous comment responses. Once a business is certified as a Section 3 business concern, it will retain that status as long as it continues to meet the definition. Status is determined at the time of hiring for each contract and is no different from any other definition. Currently, business concerns self-certify, and verification is done by HUD. The timing is on a project by project basis. (1)(i) ‘‘At least 51 percent owned by lowor very low-income persons’’ One commenter stated that this part of the definition follows the statute’s intent. Another commenter stated that 51 percent ownership by low- or very low-income persons is unrealistic without training programs on business management. HUD Response: HUD appreciates the feedback from commenters and is keeping this part of the Section 3 business concern definition as it is. HUD has found this definition to be consistent with both the previous regulation and with the statute. HUD notes that the definition also includes other methods by which a business concern may be defined as a Section 3 business concern. See 24 CFR 135.5; 12 U.S.C. 1701u (e)(2). (1)(ii) ‘‘Over 75 percent of the labor hours. . . performed by low- or very low-income persons’’ Commenters supported changes to definitions of Section 3 business concerns, Section 3 workers, and Targeted Section 3 workers under the new hire approach. One commenter stated that the decision to focus on percentage of hours worked by Section 3 individuals will result in a decrease of self-identified Section 3 business concerns. The commenter asserted that although it is a better metric for proving actual commitment to long-term employment of Section 3 individuals, gathering the data will be overly burdensome. One commenter stated that this option will present undue hardship PO 00000 Frm 00016 Fmt 4701 Sfmt 4700 to small businesses and should be omitted. Another commenter stated that this requirement will negatively affect HOME and CDBG funded projects. Some commenters supported tracking Section 3 hiring separately from Section 3 business concern tracking. Section 3 business concerns are already encouraged to retain existing employees to meet the previous Section 3 business concern definition. Counting existing employees to meet both the contract and hiring goals may result in decreased new hiring in connection with Section 3 covered assistance. Commenters recommended only tracking new Section 3 hires employed by Section 3 business concerns relative to a contractor’s hiring goals. One commenter also stated that even though the proposed rule provides a mechanism for PHAs to continue documenting compliance through a ‘‘new hire’’ metric, this proposed definition would still require PHAs to analyze a business’s labor hours in order to determine whether a business could qualify as a Section 3 business concern. One commenter noted the new burden would affect businesses who may not meet the new markers and might reevaluate the benefits of working with PHAs given the increased work to track labor hours. The commenter noted in an environment where getting bids is already difficult this would further dissuade them from doing business with PHAs. Other commenters suggested focusing on long-term employment goals for employees, developing benchmarks for growth of Section 3 business concerns, providing microbusiness support, and targeting capital construction projects for mentorship and sub-contracting with Section 3 business concerns. Some commenters stated that the definition of a Section 3 business concern should remain defined in part as a business where at least 30% of the permanent, full-time workforce are currently Section 3 residents, or were Section 3 residents within three years of the date of first employment at the business concern. Commenters stated that this proposed amendment would render most Section 3 business concern owners in the commenter’s city ineligible, as over 50% qualified by meeting the existing standard for the makeup of their workforce (30% full time permanent employees who are Section 3 residents). The result will be fewer Section 3 business concerns maintaining and/or seeking certification and will further compound the challenges of helping low-income workers access jobs. Most Section 3 business concerns do not E:\FR\FM\29SER4.SGM 29SER4 jbell on DSKJLSW7X2PROD with RULES4 Federal Register / Vol. 85, No. 189 / Tuesday, September 29, 2020 / Rules and Regulations possess the infrastructure to support tracking this information. A commenter stated that 75 percent of labor hours is too high as a standard for determining Section 3 business concern eligibility. A smaller percentage would be more appropriate, or perhaps HUD could allow businesses to qualify either by labor hours or percentage of staff. Commenters stated that the 75 percent criterion would defeat important purposes of the Section 3 program which include encouraging business creation and increasing contract opportunities for businesses that employ a substantial number of lowincome residents. One commenter stated that it would significantly increase compliance costs, and that HUD appears to assume that every project will be tracking employee hours worked due to the applicability of federal prevailing wage requirements, but this is not the case. This commenter’s program includes projects that are not subject to prevailing wage requirements, but that are subject to Section 3. Another commenter stated that the new definitions could pose significant challenges to businesses as they will have to first determine which employees are considered low- and very low-income persons, and then have to calculate if their labor hours are over 75 percent. One commenter agreed that reporting on business concerns should not be an aggregate of dollars spent. The commenter recommended that HUD keep the self-certification tool and website resource and incentivize Section 3 contractors to register to make this resource as useful as possible. The commenter observed a review of the website shows that some states do not have any Section 3 contractors listed. Commenters stated that the change from 30 percent of full-time employees to 75 percent of labor hours performed will limit Section 3 business concerns only to those lower-skilled businesses (cleaning companies, moving companies, perhaps landscaping or painting companies) that hire an overwhelming majority of their workers as low-income. One commenter stated that the proposal will not have the intended impact of increasing access to opportunity. This change would look backwards rather than measuring opportunities provided as a direct result of the contract award. In practice, this change would significantly impact administrative efforts, would adversely affect other qualified Section 3 business concerns, and potentially limit employment opportunities available to the targeted population. VerDate Sep<11>2014 20:48 Sep 28, 2020 Jkt 250001 One commenter stated that the rule should keep the threshold at 30% but change it to hours worked rather than new hires and retain other elements of the current definition. The commenter recommended that HUD only count the hours worked by Section 3 residents toward the percentage goals of hours worked by Section 3 residents (not all employees of the Section 3 business concern). The commenter believes the 30% benchmark creates an incentive for established businesses to create a professional development component to their project approach, while 75% is much too high for most businesses to pursue. One commenter recommended the definition be modified to include more than 75 percent of the labor hours worked at the business are performed by public housing, Section 8, Section 811, or Section 202 residents or persons who, immediately prior to the date of hire, were low-or very low-income, particularly women. Commenters suggested removing the 75 percent labor hour portion all together. If HUD proceeds with this definition, it should consider a transition period so existing Section 3 business concerns can adjust to the new definition. HUD Response: HUD believes that the refined definition continues to reflect the language and intent of the Section 3 statute, defining Section 3 business concerns in a way that furthers economic opportunities for low- and very low-income persons. HUD recognizes that 75% is a higher number than the prior new hire standard but believes that Section 3 business concerns should be either majority owned by low or very low-income persons or should primarily employ such individuals. HUD believes that the prior 30% standard does not ensure that a sufficiently substantial number of lowor very-low-income persons benefit from the priority contracting status that the Section 3 statute and regulation provide. Section 3 business concern employees are counted as Targeted Section 3 workers, giving HUD funding recipients and Section 3 projects an incentive to hire them to meet their Targeted Section 3 Benchmark numbers. HUD acknowledges that the revised definition of Section 3 business concerns may result in a decrease in firms qualifying for the designation, but the benefits of qualification will be more directly targeted to low- and very-lowincome persons. HUD notes that the safe harbor benchmarks can be adjusted by notice periodically, which is intended to allow HUD to modify the benchmarks to accommodate geographies where the initially proposed benchmarks cannot PO 00000 Frm 00017 Fmt 4701 Sfmt 4700 61539 be met due to the unavailability of Section 3 workers and Section 3 business concerns. HUD amended this provision to clarify that the 75% of labor hours should be determined based on looking back over the last 3 months of work performed for the business. The determination as a Section 3 business concern is made at the time the contract or subcontract is executed, so that the program participants have certainty in their Section 3 strategies. However, the final rule also provides flexibility to establish Section 3 business concern status during the Section 3 covered activity, to provide further incentive to employ Section 3 workers. If the business performed multiple projects, all of the hours on the projects over the prior three-month period should be considered for making the determination. HUD notes the comment that observed a Section 3 business concern might need to track labor hours to be qualified, even if the federal funding recipient is reporting new hires. By eliminating the new hire alternative reporting metric, HUD anticipates that this dimension of documenting qualification as a Section 3 business concern will be mitigated. HUD further notes that businesses do not need to track labor hours precisely. HUD is not presuming the applicability of prevailing wage requirements, but rather is presuming that all employers paying an hourly wage will have some method to tabulate the number of hours worked, and for those that do not have a tracking mechanism in place, the final rule permits them to rely on a good faith assessment. An objective of Section 3 is to provide employment opportunities for public housing and low-income residents, which can lead to a focus on long-term employment goals. Other activities identified by the commenters are better suited for business development and therefore are outside the scope of this rule. As for the concern that the definition will limit wage growth or promotion or result in Section 3 business concerns where all employees have low-income wages, HUD provides that the qualification of a Section 3 worker takes place at either the date of the Section 3 covered activity or the date of initial hire by the employer, not more than five years previously. Labor hours of an employee who is low- or very lowincome at hire will continue to count for 5 years even if that person grows into a new, more advanced position. HUD anticipates that the employee with 5 years of experience with that same employer would be moving up in the business and would eventually need to E:\FR\FM\29SER4.SGM 29SER4 jbell on DSKJLSW7X2PROD with RULES4 61540 Federal Register / Vol. 85, No. 189 / Tuesday, September 29, 2020 / Rules and Regulations be replaced by a new, presumably lowor very-low-income entry-level employee. The definition has been modified to clarify this framework and to reduce the potential incentive to maintain workers at lower salaries simply to qualify as a Section 3 business concern. HUD also acknowledges that many entry-level opportunities for lowwage workers are in businesses and industries with a high percentage of low-wage employment possibilities. HUD determined not to implement a transition period, although contracts with Section 3 business concerns entered into under the regulations in place prior to the final rule’s compliance date will continue to be considered Section 3 business concerns. (1)(iii) at least 25 percent owned by current public housing residents or Section 8 residents One commenter stated that the revised definition of at least 25 percent owned by current public housing residents, or residents who currently live in Section 8 assisted housing, will be easier to justify than evidence of a commitment to subcontract 25 percent or more of the dollar amount to all subcontracts. Other commenters stated that the third option for defining ‘‘Section 3 business concern’’ should be modified to require that the business have 51% ownership by public housing or Section 8 residents. These commenters warned that unless residents have majority control there is a danger of the business being a front for owners who might not represent residents’ interests. Further, the statute defines a Section 3 business concern as one with Section 3 residents having a controlling interest, or the business employs a substantial number of Section 3 residents. The commenter does not believe that this new proposed criterion is appropriate. Commenters also thought it would be inconsistent with the Congressional statutory intent that economic opportunities be provided to business concerns that are majority owned and controlled by low- and very low-income people and/or residents of government assisted housing. (12 U.S.C. 1701u(b)). Commenters further argued reducing the required ownership percentage would also be inconsistent with HUD’s public housing regulations at 24 CFR part 963, which defines resident-owned business as one ‘‘(1) which is at least 51% owned by one or more public housing residents and, (2) whose management and daily business operations are controlled by one or more such individuals.’’ Commenters felt reducing the required ownership percentage would invite VerDate Sep<11>2014 20:48 Sep 28, 2020 Jkt 250001 manipulation and abuse, the prevention of which would require a significant administrative burden. Commenters recommended the Section 3 regulations should be designed to encourage entrepreneurial development, not a passive ownership interest. HUD Response: HUD agrees with commenters that the 25% ownership language may create the risk of unscrupulous business practices. Therefore, HUD revised the final rule to require a Section 3 business concern seeking to meet this third test be 51% owned and controlled by PHA residents and Section 8 residents, in place of the 25% test contained in the proposed rule. This number is also more consistent with HUD’s current contracting provision for PHA resident owned businesses in 24 CFR part 963. Wages Commenters stated that businesses should not be rewarded for paying low wages; businesses should not receive a contracting preference by virtue of the fact that they pay their employees low wages. The commenters asserted Section 3 regulations should be designed to reward businesses that provide economic opportunities to lowincome persons so that they have a chance to work their way out of poverty, and the income determination must be made immediately prior to the date of hire. According to the commenters, HUD’s regulations should also reward employers who provide decent-paying jobs so that their employees no longer need to depend on HUD assistance to make ends meet. Commenters observed that by determining the low-income status of employees at the time of contract award (the labor hours ‘‘are performed by low- or very low-income persons’’) the definition inadvertently restricts eligibility to businesses whose employees are currently low-income. For these reasons, the commenters proposed that the definition of ‘‘Section 3 business concern’’ be changed to ‘‘Over 75 percent of the labor hours performed for the business are performed by persons who were low- or very low-income immediately prior to the date of hire and whose current wage is equal to or greater than 80 percent of the area median income.’’ HUD Response: The Section 3 regulations are designed to provide jobs for low-income persons. As these individuals gain experience, HUD anticipates wages will increase, and the individuals should be able to work their way out of poverty. The definition has been modified to clarify this framework by including a three-month documentation period and to reduce the PO 00000 Frm 00018 Fmt 4701 Sfmt 4700 potential incentive to maintain workers at lower salaries simply to qualify as a Section 3 business concern. Contract Requirement One commenter expressed concern over the elimination of Section 3 business concern contracting requirements because the commenter’s agency spends a lot of resources on outreach, but recognized many housing authorities lack the resources or diverse vendor marketplaces to do the same. HUD Response: HUD recognizes that not all PHAs will have the same resources to outreach to Section 3 business concerns. HUD believes, however, that counting the Section 3 business concern employees as Targeted Section 3 workers will incentivize PHAs to target Section 3 business concerns to help meet their Targeted Section 3 worker benchmark. HUD will continue to have a Section 3 business concern directory as well to make it easy for PHAs and other entities to identify Section 3 business concerns in their jurisdiction. HUD also believes that making the definition consistent with the PHA resident-owned businesses definition in 24 CFR part 963 will also provide another avenue for finding Section 3 business concerns. Alternative Suggestions for the Definition of Section 3 Business Concern One commenter recommended that HUD extend Section 3 business concern status to businesses funded through the Opportunity Zone program.5 Commenters suggested defining a Section 3 business concern as meeting one of the following categories, in the following priority order: (1) Businesses owned 100% by Section 3 persons; (2) businesses owned and operated at a minimum 51% by Section 3 Persons; (3) Businesses whose total employees consist of a minimum of 75% Section 3 persons who reside within the project area; (4) Businesses whose total contract specific staffing (not back office administration unless the opportunity created is a back office position) has more than 50% Section 3 persons residing in the project area; (5) businesses owned by persons providing a negotiated employment level greater than 30% of total project staffing to Section 3 persons; (6) businesses who commit to directly conduct or to subcontract professional employment readiness and employment trade skills training related to the project work or other in-demand employment 5 See HUD, Opportunity Now, Hud.gov, https:// opportunityzones.hud.gov/. E:\FR\FM\29SER4.SGM 29SER4 Federal Register / Vol. 85, No. 189 / Tuesday, September 29, 2020 / Rules and Regulations disciplines, at a minimum of 10% of their total contract award, plus or minus change orders, to Section 3 persons. Under (1), (2), (5), and (6), there is a priority order for the Section 3 persons as well: (A) Public housing assisted persons at the property where the work is being executed. When a contract is issued for service work covering multiple properties of the PHA, any public housing person from that PHA’s portfolio shall compete equally for any opportunities created as a direct result of the expenditure. (B) When the service contract only covers one public housing property, the persons from that property will receive first priority for opportunities and then persons from other properties of the PHA’s public housing portfolio will be secondly considered. (C) Housing Choice Voucher holders of that specific housing authority that administers that voucher will be third priority. (D) Persons residing in any project-based Section 8 property owned in whole or in part by that PHA. (E) Current YouthBuild participants. (F) All other low- and very low-income persons within the legal boundaries of the service area of the project. HUD Response: HUD appreciates all the different options provided by commenters. However, HUD believes the final Section 3 business concern definition provided in this final rule provides a balance that is consistent with the statute and ensures that most Section 3 business concerns are in fact aimed at employing low- and very lowincome persons. See responses above for additional discussion of the Section 3 business concern definition. jbell on DSKJLSW7X2PROD with RULES4 Small PHA Reporting Support Some commenters supported reporting flexibility for small PHAs, and especially the removal of the nonconstruction contract goal of 3 percent of all covered contracts to Section 3 business concerns, which they said is challenging to meet due to the amount of professional service contracts. One commenter suggested that for consistency and clarity, the final rule should exclude all PHAs with 250 or fewer units from reporting on benchmarks, regardless of procurement cost. The commenter also suggested that since the proposed rule exempts Section 8 funding from having to meet Section 3 requirements, the final rule should clarify the definition of a small agency for the purposes of Section 3 reporting to mean an agency with 250 or fewer public housing units. Another commenter recommended defining VerDate Sep<11>2014 20:48 Sep 28, 2020 Jkt 250001 ‘‘small PHA’’ in a way that alleviates regulatory burdens for as many agencies as possible and suggested defining small PHA as those having 550 or fewer combined public housing and Section 8 units; or, as Section 8 funding is not covered by Section 3, utilize a 250 unit threshold. Another commenter supported the small PHA reporting exemption suggesting that HUD should define a small PHA in a way that would maximize the number of agencies exempted from detailed reporting, recommending 550 combined units (consistent with the Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018 and the Housing and Economic Recovery Act of 2008) or 250 public housing units (as Section 8 assistance is not covered by Section 3). HUD Response: HUD continues to support the Small PHA reporting provision in the proposed rule. Small PHAs with less than 250 public housing units will not be required to report the number of labor hours and instead will be required to report their qualitative efforts. The final rule does not require a commitment to award at least 3 percent of the total dollar amount of all other Section 3 covered contracts to Section 3 business concerns. HUD currently is also not changing the number of public housing units for determining the Small PHA exception. All PHAs Should Report for Data Collection and Compliance Some commenters recommended that all PHAs, regardless of size, should be required to report for data collection and compliance. Other commenters specifically objected to the labor hours reporting exemption for PHAs with fewer than 250 housing units, because inexpensive software is available for PHAs to track and report labor hours. Other commenters suggested removing all exceptions for PHAs. Additional commenters elaborated that reporting requirements should be the same for all entities with no exceptions, noting that every recipient and every dollar should be included in order to guarantee that opportunities reach the poorest and smallest communities. Commenters noted that small PHAs should not be exempt because they could have significant contractor and subcontractor activity in any given year. Specifically, one commenter noted that the $200,000 threshold should apply to small PHAs because they have the same opportunity to create jobs as other entities. Another commenter noted that not requiring small PHAs to report creates a loophole that hinders opportunity. PO 00000 Frm 00019 Fmt 4701 Sfmt 4700 61541 HUD Response: HUD has heard from small PHAs that they do not receive enough funding or have sufficient pools of Section 3 workers to support annual new hire or labor hour reporting. Close to one-half of small PHAs with less than 250 public housing units receive less than the $200,000 project threshold applicable to Section 3 projects that receive other HUD assistance such as CDBG and HOME funding. Due to Operating Fund shortfalls, small PHAs can take advantage of the authority under section 9(g)(2) of the United States Housing Act of 1937 to use its Operating and Capital Funds flexibly to fund any eligible activities under either funding stream. Some small PHAs compensate by promoting economic opportunities through referrals of residents to employers and job fairs, providing training facilities and offerings, and other local efforts. To recognize these other activities and the generally low amount of funds available or used for capital projects, small PHAs will report qualitatively on their efforts. No Good Faith Assessment for Small PHAs Some commenters objected to allowing small PHAs to supply a ‘‘good faith’’ assessment of hours worked because doing so would invite those entities to bypass important tracking requirements, suggesting that HUD should require quarterly, instead of annual reporting. HUD Response: The small carve out for good faith assessment is not limited to small PHAs. As stated in the proposed rule, it is a limited exception where PHAs and other recipients of public housing financial assistance could use the reporting of a good faith assessment of the labor hours of a fulltime or part-time employee from contractors and subcontractors that have not been subject to requirements specifying time and attendance reporting, and do not have systems already in place to track labor hours. This is to address employers that do not already track labor hours without making changes in time and attendance or payroll. It is not a permanent exception and if in the future the contractor or subcontractor is required to track labor hours under some other authority, or begins to voluntarily track labor hours, the exception would no longer apply. Qualitative Reporting Another commenter noted that the rule lacks information on what qualitative reporting will be required of small PHAs to substantiate the claim that such reporting will be less E:\FR\FM\29SER4.SGM 29SER4 61542 Federal Register / Vol. 85, No. 189 / Tuesday, September 29, 2020 / Rules and Regulations burdensome and recommended that small PHAs have the option to track labor hours or do qualitative reporting. HUD Response: The rule seeks not to be too prescriptive on qualitative reporting to provide small PHAs with the flexibility to report on a range of activities. HUD is considering some of the following to signify qualitative efforts: Outreach efforts to generate job applicants who are Targeted Section 3 workers; direct on-the-job training (including apprenticeships); indirect training such as arranging for, contracting for, or paying tuition for, offsite training technical assistance to help Section 3 workers; and outreach efforts to identify and secure bids from Section 3 business concerns. HUD plans to create a form for tracking and reporting qualitative efforts, to ease burden on recipients. HUD agrees that small PHAs should have the option of conforming to the more quantitative reporting standards and has modified the text to permit such option. jbell on DSKJLSW7X2PROD with RULES4 Dollar Threshold for Small PHAs A few commenters also recommended use of a dollar threshold for public housing assistance similar to that used for other HUD assistance as a means to reduce reporting burdens on small agencies. One commenter suggested that using a dollar threshold, rather than a threshold based on number of public housing units, is a more practical and effective means of identifying those smaller projects that are less likely to generate significant Section 3 employment opportunities. Another commenter further suggested that thresholds established in the proposed rule for Community Planning and Development (CPD) should be applied across the board to all programs and noted that using a per-project or perrecipient threshold would more accurately exclude or include small PHAs based on funding. This commenter also suggested establishing a threshold for work-able non-working residents below which small PHAs would not have to report. HUD Response: HUD continues to maintain that a dollar threshold for public housing financial assistance is not consistent with the statute. Section 3 applies to public housing operating, development, modernization, and management assistance, which covers virtually all housing authority projects and activities. HUD believes that the statute’s expansive coverage of public housing projects and activities indicates that any attempt to diminish the coverage would be inconsistent with the statute. VerDate Sep<11>2014 20:48 Sep 28, 2020 Jkt 250001 Subcontractors Several commenters noted that Section 3 requirements should not apply to subcontractors. Commenters stated that extending reporting requirements to subcontractors would discourage participation in PHA contracting opportunities, adversely impacting competition in the market, driving up construction costs and limiting economic opportunities. Other commenters added that HUD should consider ways to reduce administrative requirements on subcontractors wherever possible, echoing concerns that regulatory burdens which do not acknowledge subcontractor’s practical limitations will discourage private sector partners from working with PHAs. The commenters also suggested that regulatory relief for subcontractors could be achieved in a number of different ways, which range from exempting small subcontractors, excluding subcontractors from Section 3 obligations if their contracts are below a certain dollar threshold or below a percentage of the total covered funding on the Section 3 project. Commenters also suggested HUD consider limiting Section 3 obligations to the recipient, general contractor and immediate subcontractor(s), noting that relieving some or all Section 3 obligations on subcontractors may attract more high-quality tradespeople to affordable housing construction projects and possibly also lower the construction costs on Low Income Housing Tax Credit (LIHTC) and other affordable housing projects with covered HOME or CDBG funds. Other commenters who expressed concerns about the reporting requirements for grantees and subcontractors also suggested thresholds for subcontractor reporting. Some commenters suggested retaining the existing $100,000 threshold, though one commenter recommended a reduced compliance level, allowing subcontractors to track Section 3 employees instead of labor hours, to reduce the administrative burden on small entities who lack the capacity to track hours. Some commenters suggested a reporting requirement threshold of $250,000 to align with the OMB procurement threshold, one of whom recommended this threshold also apply to contractors and offered the $10,000 micro purchase threshold as an alternative. Other commenters suggested a compliance threshold of $200,000. A number of commenters supported reporting requirements for both contractors and subcontractors. One PO 00000 Frm 00020 Fmt 4701 Sfmt 4700 commenter recommended excluding second tier and below subcontractors from requirements, noting that large PHAs are more likely to award or fund multimillion-dollar projects that have more than 25 first-tier subcontractors. Two commenters mentioned the role of contractors simplifying the reporting mechanism for subcontractors and encouraging subcontractors to comply with requirements. One commenter also suggested that the funding recipient should be allowed to decide the extent of the Section 3 reporting requirements for subcontractors. One commenter requested clarification as to how Section 3 requirements ‘‘flow down’’ to contractors and subcontractors for housing and community development financial assistance, noting the current regulation includes references to recipients as well as contractors and subcontractors when describing numerical goals and hiring/contracting preferences. The commenter went on to state that Subpart C of the Proposed Rule references only the recipient when describing the employment, training and contracting requirements and safe harbors, and removes the $100,000 contractor and subcontractor threshold in the current regulation for triggering Section 3 requirements. The commenter noted that while the Proposed Rule does mandate that each recipient ‘‘require subrecipients, contractors, and subcontractors’’ to meet the hiring/ contracting requirements, they would propose a clarification on the extent to which contractors, subcontractors and subrecipients on Section 3 projects are bound by the requirements. HUD Response: HUD is sensitive to the potential burden that Section 3 compliance may impose and has focused on outcomes, allowing the recipient to direct where the recipient’s efforts, and its contractors’ and subcontractors’ efforts, will have maximum effect. In the statute, the sections addressing public housing programs specifically include ‘‘contractors and subcontractors’’ in Section 3 requirements. In contrast, the statute does not reference ‘‘subcontractors’’ in the sections addressing other covered housing and community development assistance. Section 3’s applicability to subcontractors as set forth in this final rule closely tracks the statute’s requirements. The reporting requirements, however, focus on outcomes, deferring to the recipient to focus their efforts for maximum impact with respect to Section 3, and aligning the contractual obligations the recipient imposes on contractors and E:\FR\FM\29SER4.SGM 29SER4 Federal Register / Vol. 85, No. 189 / Tuesday, September 29, 2020 / Rules and Regulations jbell on DSKJLSW7X2PROD with RULES4 subcontractors accordingly. Unlike the current rule, which applies Section 3 compliance to all subcontractors in excess of a $100,000 contract threshold, the final rule does not apply specific Section 3 reporting obligations to any subcontractor and instead such requirements would stem from the recipient. See § 135.3(a)(3)(ii)(B). The proposal to reinstate the $100,000 contract size threshold or any alternative threshold would limit the recipient’s flexibility to determine how to achieve the ‘‘greatest extent feasible’’ standard most effectively. Similarly, subcontractors are excluded from the contract language provisions in Section 75.27(a), but subcontractors are still required to meet Section 3 requirements in Section 75.19, which provides the recipient flexibility to achieve the goal. The rule implements the suggestion provided in the comments that the recipient be allowed to decide on the extent of the Section 3 reporting requirements for subcontractors where the statute does not constrain HUD from providing this flexibility. Definition for ‘‘neighborhood’’ or ‘‘service area’’ Some commenters supported the proposed definition, stating that the definitions are reasonable and will simplify compliance. Other commenters accepted only the one-mile radius definition of ‘‘service area’’ or ‘‘neighborhood,’’ but suggested that HUD eliminate the population requirement given the impact on rural areas. Some commenters disagreed with the proposed definition, stating that metrics will be skewed based on close proximity to more affluent areas. Another commenter thought the definition is inconsistent with the statutory intent to encourage employment opportunities among low- and very low-income persons, noting a single definition cannot capture the expansive geographic areas. Another commenter noted the definition will actually limit mobility and the long-term success of resident programs because contracts will not provide opportunities to residents in successive projects in different neighborhoods. Some commenters wrote that the definition limits businesses in diverse economies and in high-cost cities that need more flexibility to recruit. One commenter wrote that this new definition would significantly reduce the labor pool of eligible Section 3 new hires, making it difficult to achieve benchmarks. Other commenters wrote that it may exclude local public housing or Section 8 residents. Another commenter thought VerDate Sep<11>2014 20:48 Sep 28, 2020 Jkt 250001 that it would add challenges for contractors in identifying and prioritizing eligible workers. Other commenters noted that the restriction does not account for Section 3 covered projects in areas that are not low-income, such as some CDBG expenditures. In addition, commenters noted that such a limitation could have the unintended consequence of excluding large groups of people from the pool of potential employees, especially in cities that are combatting racial segregation. Another commenter stated that the requirements are too geographically limited as to whom and where recipients/contractors must provide opportunities. Additionally, it does not account for opportunities that are accessible beyond the prescribed radii by using mass transit and other commuting opportunities. Some commenters noted that a new definition would add unnecessary administrative burdens which increases the cost of program management and compliance. One commenter wrote that determining how to meet a 5,000-person radius would be burdensome. Other commenters wrote that completing data analysis of employee home locations and certification would be administratively burdensome and could be covered under state and local data privacy laws. In addition, a commenter stated that the definition may limit PHAs’ abilities to hire individuals in their communities who would otherwise qualify as a Section 3 worker and stated that entities receiving community development funds are better at determining which individuals would benefit most from Section 3 employment. Several commenters suggested that HUD retain the definition of ‘‘service area’’ as it exists in the current rule at 24 CFR 135.5. Another commenter supported Section 3 and encouraged the retention of flexible approaches to compliance, such as those outlined in 24 CFR 135.30. Any proposed rule changes should consider geographical and service population differences. The commenter supported maintaining the rule as is, noting it provides flexibility for compliance through training, hiring, or contracting. Similarly, another commenter noted that there should be flexibility and factors other than hours worked and earned to provide Section 3 credit. HUD Response: HUD notes that the neighborhood or service area requirement applies to the prioritization of effort with respect to housing and community development financial assistance, not public housing funds. The hiring prioritization is different for PO 00000 Frm 00021 Fmt 4701 Sfmt 4700 61543 this category of funding, and pursuant to the statute is focused on residents of the geographic area in which the work is being done, not on the rent-assisted status of the workers. Consequently, in this context, HUD is not adjusting the regulatory text to acknowledge the availability of transit or to prioritize employment of low- and very-lowincome people from a broader geography. The rule seeks not to limit the labor pool available within specific geographic areas, but to allow flexibility for smaller and more rural areas through the definition. HUD believes counting individuals who live within one mile of the worksite and within an expandable circle centered around the worksite that encompasses 5,000 people provides a definitive means of determining who counts as a Targeted Section 3 worker within the service area or the project neighborhood. Where the one-mile radius circle centered around the worksite has less than 5,000 people, the radius would be expanded outwardly to achieve the desired population of 5,000 people. This expansion would address many of the commenters’ concerns regarding smaller communities or rural areas. For the benefit of densely settled urban areas, HUD recognizes there may be more than 5,000 people, but will hold at the one-mile geographic diameter. HUD believes this final rule does take into consideration geographical and service population differences and retains flexibility for compliance through training, hiring, or contracting. Additionally, the rule is meant to streamline the Section 3 process to make it consistent with the statute and easier to implement. Compliance can be evaluated qualitatively if the labor hours benchmark cannot be met. Under this rule, both measurements are permissible, and the requirements for qualitative evaluation are laid out in the rule. In addition, HUD intends to create a web-based tool to support recipients, subrecipients, contractors, and subcontractors in determining the geographic area encompassing Targeted Section 3 workers. Allow Grantees To Define ‘‘Neighborhood’’ or ‘‘Service Area’’ Commenters recommended that grantees be given the ability to define ‘‘service area’’ for themselves. Another commenter urged HUD to adopt something other than a ‘‘one-size-fitsall’’ approach so that small rural counties would not have difficulty utilizing federal funding. One commenter noted for example that in New Orleans, there are clearly defined E:\FR\FM\29SER4.SGM 29SER4 jbell on DSKJLSW7X2PROD with RULES4 61544 Federal Register / Vol. 85, No. 189 / Tuesday, September 29, 2020 / Rules and Regulations neighborhoods that most residents and officials understand and recognize, some having a larger area than a onemile radius. The commenter stated that allowing for a more localized definition of ‘project area,’ rather than using HUD’s definition of a one-mile radius or 5,000 person population guideline, increases local participation in projects that impact those individuals and their immediate surroundings and makes the most sense for their community. This commenter stated that recipients should be able to define their geographic size for purposes of how they focus their priorities regarding low-income persons residing within the service area or neighborhood in which the project is located, and communicate their determination to sub-recipients, contractors and subcontractors. Another suggestion was to have localities work with their local HUD office to define service area based on the locality’s characteristics. Commenters suggested that HUD allow residents and businesses from anywhere in the state to receive priority consideration or to give state recipients deference in establishing areas for purposes of meeting Section 3 requirements. Additionally, one commenter stated that service area may change based on project type, some serving entire communities while others serve smaller sections of a community, rendering the one-mile radius inapplicable depending on the project’s scope of impact. The commenters noted that limiting preference to a certain ‘‘service area’’ may have the unintended consequence of excluding large groups of people from the pool of potential employees. The commenters proposed allowing localities to either target job opportunities to low-income hires from anywhere within the locality, or work with their local HUD offices to define appropriate service areas based on the characteristics of the locality. One commenter wrote that the one-mile radius is too limiting and that residents within the community should be considered. Some commenters suggested that HUD define service area to be ‘‘the area within or contiguous to a PHA’s jurisdictional boundaries.’’ Other commenters suggested that HUD define ‘‘service area’’ or ‘‘neighborhood’’ in the following tiered manner: (1) PHA residents in project area; (2) Section 3 residents in project area; (3) extremely low-income or homeless individuals in project area; (3) YouthBuild in project area; and (5) next closest PHA in project area. VerDate Sep<11>2014 20:48 Sep 28, 2020 Jkt 250001 One commenter suggested that HUD should give preference to eligible residents of the neighborhood surrounding the PHA before other residents of the metropolitan area and should utilize the language in Subpart C § 75.19 reading ‘‘Section 3 workers residing within the service area or the neighborhood of the project.’’ One commenter stated that Section 3 Employment Priorities, as written, is very clear as to the order of Section 3 applicant priorities, starting with residents in closest proximity to the construction project, but disagreed that the one mile and 5,000 population radius is an appropriate geographic, using two PHA examples of Cayce Place and Edgehill to show that these metrics would be skewed based upon the close proximity to those earning twice the AMI and with property values in the hundreds of thousands of dollars. HUD Response: As noted above, the neighborhood or service area requirement applies to the prioritization of effort with respect to housing and community development financial assistance, not public housing funds, and the focus in this context is on residents of the geographic area in which the work is being done. HUD believes that its proposed framework of counting individuals who live within one mile of the worksite and within an expandable circle centered around the worksite that encompasses 5,000 people provides a definitive means of determining who counts as a Targeted Section 3 worker within the service area or the neighborhood of the project. HUD believes the proposed Section 3 regulation takes the varied geographical areas into account and provides a streamlined framework that more specifically determines who might benefit from employment and training opportunities available within the area surrounding a Section 3 project. Where the radius or circle centered around the worksite has less than 5,000 people, the radius would be expanded outwardly to achieve the desired population of 5,000 people. All Targeted Section 3 workers identified by the geographic radius must also qualify as Section 3 workers, so this would not include higher-income workers within the neighborhood or service area. Rural Areas and Contractors Several commenters noted concerns about the effect of the proposed ‘‘service area’’ definition on Section 3 implementation in rural areas. One commenter stated it would be unrealistic and burdensome for employers in rural areas to administer and monitor the one-mile radius, and PO 00000 Frm 00022 Fmt 4701 Sfmt 4700 that it does not reflect the realities of construction employment in small rural states where the service area is the entire state. One commenter also stated that in areas of low population density, there often will not be sufficient residents or businesses that are capable of performing the work required for housing and community development projects. Other commenters wrote that, given chronic and widespread labor shortages, it is inadvisable to have such a small geographic restriction on the labor pool of Section 3 workers. Other commenters accepted the onemile radius definition of ‘‘service area’’ or ‘‘neighborhood,’’ but stated the 5,000person population radius is too large for rural areas. Another commenter noted that the population threshold could increase the service area size exponentially in cities and counties where the population is less than 5,000. One commenter in Utah opposed the proposed definition, arguing that changing the definition of ‘‘neighborhood’’ to 5,000 people would not work because of the state’s very large rural geographic area. The commenter stated HUD’s determination that most (77%) current CPD projects had a population of 5,000 people within one mile of the project site is not applicable in Utah, which has only 29 counties. The commenter detailed that 70% of Utah’s population resides its 4 urban counties, and Utah’s CDBG projects are part of the 23% that do not have 5,000 people within a one-mile radius of a project site. One commenter mentioned the impact of the proposed definition on small contractors or those outside the immediate service area, noting that CBDG and HOME funds are often financing projects completed by small contractors who need to travel outside of a service area to complete work on a project. Another commenter rejected the proposed definition, suggesting that for small town jurisdictions, the ‘‘service area’’ or ‘‘neighborhood’’ should apply within the recipient’s jurisdiction, which may be an entire county. One commenter mentioned that finding Section 3 contractors or businesses is already challenging and should not be limited by a ‘‘service area’’ or ‘‘neighborhood’’ definition. HUD Response: HUD acknowledges and has carefully considered the concerns of commenters representing small and rural areas regarding the proposed definition of neighborhood/ service area. As previously stated, HUD supports the proposed framework of counting individuals who live within one mile of the worksite and within an expandable circle centered around the E:\FR\FM\29SER4.SGM 29SER4 61545 worksite that encompasses 5,000 people. This concept was designed specifically to address the unique needs and challenges facing rural and small communities. The graphic provides an example on how a circle centered around a worksite with fewer than 5,000 people may be expanded until the desired population goal of 5,000 people is met or eligible Targeted Section 3 workers are counted. The text as written will provide a definitive means of determining who counts as a Targeted Section 3 worker within the service area or the neighborhood of the project. HUD believes the proposed Section 3 regulation takes the varied geographical areas into account and provides a streamlined framework that more specifically determines who might benefit from employment and training opportunities available within the area surrounding a Section 3 project. HUD also notes that over time, as outcome results are reported to HUD, the benchmarks may be tailored to certain types of projects and geographies by notice, with the explicit intention that it may be appropriate to set different benchmarks for rural areas given the availability of labor and the patterns of contracting work in rural areas. encompasses Targeted Section 3 workers, some commenters still argued for a broader definition and geographic areas that define Targeted Section 3 workers. Some commenters thought the web tool would not alleviate burden from the contractor that would still need to determine if a worker meets the requirements to be in the geographically defined area. HUD Response: HUD agrees with the suggestion to provide a web tool to aid in the process of determining a geographic neighborhood/service area. As stated in the proposed rule, HUD will create and provide this tool at the issuance of the final rule to aid recipients, subrecipients, contractors, and subcontractors to determine the geographic area that encompasses Targeted Section 3 workers under this VerDate Sep<11>2014 20:48 Sep 28, 2020 Jkt 250001 Web Tool Some commenters noted that HUD’s proposal to provide a web tool to aid in the process of determining a geographic service area would be helpful. One commenter urged HUD to provide the proposed web tool that will help determine the geographic area that encompasses Targeted Section 3 workers before it proceeds with the current definition and finalizes the rule. Commenters requested that HUD provide it to state and local recipients, sub-recipients, contractors, and subcontractors for testing before implementation. Though encouraged by the prospect of a web tool to help determine the geographic area that PO 00000 Frm 00023 Fmt 4701 Sfmt 4700 E:\FR\FM\29SER4.SGM 29SER4 ER29SE20.077</GPH> jbell on DSKJLSW7X2PROD with RULES4 Federal Register / Vol. 85, No. 189 / Tuesday, September 29, 2020 / Rules and Regulations 61546 Federal Register / Vol. 85, No. 189 / Tuesday, September 29, 2020 / Rules and Regulations definition. HUD will also explore the option of creating a mobile tool to help recipients with monitoring and compliance determinations. jbell on DSKJLSW7X2PROD with RULES4 Exceptions Commenters suggested the proposed definition should not apply to Puerto Rico considering its geographic composition. HUD Response: HUD has decided to retain the proposed definition for all recipients, including Puerto Rico. HUD believes the proposed regulation takes the varied geographical areas into account and provides a streamlined framework that will enable eligible workers to benefit from employment and training opportunities available within the area surrounding a Section 3 project. YouthBuild Participants Some commenters were in favor of or not opposed to expanding the definition to include previous YouthBuild workers that are under 24 years of age and those who are still eligible to participate in YouthBuild but may have graduated out of the program. One commenter was opposed to expanding the definition on the grounds that it would require onerous and complex background checks and research to determine whether a participant meets the alternate definition. One commenter recommended that the definition be changed to include previous YouthBuild workers who successfully graduated from the program and are either under age 24 or are otherwise still eligible for YouthBuild programs. Other commenters proposed that the definition of YouthBuild participant should be as broad as possible, regardless of age, while other commenters proposed the definition to include other programs which teach relevant skills, such as Service and Conservation Corps participants and graduates, participants/graduates of ‘‘pre-apprenticeship’’ training programs, participants/graduates of ‘‘youth corps,’’ VFW Local Program participants, and AmeriCorps participants. HUD Response: HUD appreciates the commenters’ support of the YouthBuild program, and after careful deliberation, has decided to keep the definition consistent with the current regulations and current YouthBuild participants. See 29 U.S.C. 3226; 24 CFR 135.5. HUD determined that given the work required to certify current YouthBuild workers, that adding a longer-term duration would create an additional paperwork requirement on both the person claiming the status and the entity reporting the status. It may also cause VerDate Sep<11>2014 20:48 Sep 28, 2020 Jkt 250001 confusion using a certain period of time. Additionally, a YouthBuild worker can still qualify for 5 years if they are employed at the end of their YouthBuild experience. Applicability and Scope One commenter supported the rule’s change to applicability. Another commenter supported Section 3 as an important mechanism to strengthen communities, reduce poverty, and increase residents’ economic selfsufficiency. One commenter proposed that these rules should apply to all developers, contractors, and subcontractors; all professional, skilled, unskilled, technical, and consulting service contracts compensated partially or fully by HUD funds—no exceptions. Another commenter suggested these rules shall be applicable to all professional, skilled, unskilled, technical, and consulting service contracts line items. Other commenters suggested that HUD should clarify that owners and managers of HOPE VI, Choice Neighborhoods and Mixed-Financed Developments are subject to Section 3 Hiring and Contracting requirements in their own operations and should extend this requirement to Rental Assistance Demonstration (RAD) converted projects. One commenter supported HUD’s separation of PHA requirements from non-PHA requirements because it did not make sense for non-PHAs to follow regulations intended for PHAs. A commenter supported HUD’s clarification regarding Section 3 applicability to projects receiving HUD assistance of $200,000 or greater. Another commenter warned that this rule states that Section 3 will apply when the amount of HUD assistance is greater than $200,000 on a per-project basis, which would potentially exempt projects where the HUD funding is less than $200,000, even though the combined total funding is much higher, leading to a decrease in number of projects subject to Section 3. One commenter suggested that PBV and PBRA contracts should be exempt from Section 3 compliance. Another commenter suggested that, rather than a per-project basis, it would be simpler to apply Section 3 to individual contracts for housing and public construction funded with HUD assistance. HUD Response: HUD shares the view that Section 3 is an important mechanism to strengthen communities, reduce poverty, and increase economic self-sufficiency. HUD seeks to focus Section 3’s applicability where it can have a real impact, and to exempt from Section 3 those cases where PO 00000 Frm 00024 Fmt 4701 Sfmt 4700 applicability imposes burdens not commensurate with outcomes. HUD has concluded that in certain circumstances, particularly professional services, there are very few opportunities for Section 3 outcomes. The proposed definitions defined the scope of programs subject to Section 3 requirements but did not expand such coverage beyond what HUD’s existing regulations already required for compliance. HUD proposed the $200,000 threshold for housing rehabilitation, housing construction and other public construction projects because work below that amount would likely not trigger long-term employment opportunities for which the recipient could show measurable labor hours. HUD disagrees that Section 3 should be applied to all types of work, without exception, and reaffirms in the final rule the exception for professional services. The proposed rule does, however, give credit in the reporting for opportunities that are created in the professional services context by including professional services labor hours in the numerator, and not in the denominator, of the reported outcome ratios. The final rule applies Section 3 in a manner consistent with the statute. HUD has determined that monthly rental assistance payments, such as those provided under Section 8 project-based voucher or project-based rental assistance housing assistance payment contracts, are not covered by the statute. Properties converted to Section 8 rental assistance through the RAD are covered by the rules applicable to Section 8. However, the RAD governing notice does apply Section 3 requirements to those activities occurring after the date of the RAD conversion which are contractually obligated as part of the RAD conversion. Employment Priorities § 75.9 / § 75.19 Some commenters supported separating the agencies which fund Section 3 projects from PHAs and mirroring the statute. Other commenters felt that the priorities should be the same for both Section 3 projects and PHA financial assistance. Other commenters suggested that HUD give preferences to certain groups, while other commenters thought HUD should consider adding geographic considerations into the definition. One commenter suggested that the last priority level should be expanded to any person if the PHA can reasonably demonstrate there are not sufficient Section 3 residents with the requisite job skills within a project’s geographic area. Commenters also asked HUD to clarify that otherwise eligible workers of PHAs, even if under private E:\FR\FM\29SER4.SGM 29SER4 Federal Register / Vol. 85, No. 189 / Tuesday, September 29, 2020 / Rules and Regulations management, are included in this category, as well as recipients of Section 8 assistance or voucher assistance residing in properties managed by other entities. One commenter suggested HUD change the regulatory language to insert the word ‘‘priority’’ in § 75.19 to clarify the requirement and make the sections consistent with § 75.9. HUD Response: HUD appreciates the comments that supported the employment prioritizations. These prioritizations follow the statutory prioritizations, and HUD is including that language for clarity for recipients implementing the regulations. HUD has rephrased § 75.19 to include the word ‘‘priority,’’ consistent with the language of the statute. While HUD appreciates the alternative suggestions, these regulations are meant to streamline the Section 3 process to make it consistent with the statute and easier to implement. HUD believes that the existing regulatory text does that and is making no changes to this section. HUD, however, encourages the HUD financial assistance recipients to consider all the diverse suggestions provided when working on outreach to persons who are low- and very low-income persons to meet the Section 3 benchmarks including residents of PHAs under private management such as those residing in a mixed-finance development project. Reporting § 75.15 / § 75.25 Consolidated Plan Regulations A commenter recommended that the Consolidated Plan regulations at 24 CFR 91.520(a) be amended to specifically include Section 3 reporting; PIH will need to develop a Section 3 reporting format. HUD Response: HUD will review Department-level strategies on how to effectively incorporate Section 3 reporting into current systems and data collection tools, including the Consolidated Plan. As a result, HUD will issue sub-regulatory guidance on reporting per program area and provide technical assistance to recipients for Section 3 compliance. jbell on DSKJLSW7X2PROD with RULES4 Systems A commenter warned that HUD will need to modify IDIS to allow CDBG and HOME recipients to report on their Section 3 actions annually because CDBG and HOME recipients will report on their Section 3 actions in IDIS using a similar form as HUD Form 60002 that has been modified to capture labor hours worked. This commenter stated that this move will eliminate VerDate Sep<11>2014 20:48 Sep 28, 2020 Jkt 250001 redundancy and ease the administrative burden for grantees. HUD Response: HUD agrees that the Integrated Disbursement and Information System (IDIS) and DRGR should be modified to ensure accurate Section 3 compliance reporting for CDBG and HOME recipients. HUD will also adjust our data collection systems as necessary to ease administrative burden for grantees and to eliminate redundancy. Report Through Action Plan and/or CAPER and Effective Date A commenter supported HUD’s effort and recommended reporting through the Action Plan and/or the Consolidated Annual Performance Evaluation Report (CAPER), only on completed projects. One commenter recommended that the final rule be effective for funds granted in the next Federal fiscal year after publication of the final rule so there is time for contracts/written agreements with sub-awardees to be amended, and in order to avoid having CAPER reporting requirements from annual federal years with two separate program requirements. HUD Response: HUD supports efficient and effective Section 3 compliance reporting through current mechanisms, such as the Annual Action Plan and/or CAPER, for applicable HUD programs. As stated in the proposed rule, HUD believes that requiring reporting annually, but consistent with timeframes that PHAs and other recipients of other housing financial assistance are already using to submit documents to HUD, will relieve existing burden. HUD may also look into reporting into other existing systems rather than requiring PHAs and other recipients to log into and report under a separate system, such as the existing SPEARS. Double Counting A commenter stated that reporting responsibilities when multiple government agencies provide HUD CPD funds are unclear and requested HUD determine whether agencies will be responsible for reporting outcomes for each federal investment or whether HUD will prevent double counting by limiting reporting to one funding agency per Section 3 project. HUD Response: Section 75.29(b) specifies that when there is funding from multiple programs that exceed the threshold in § 75.3(a)(2), the recipient will report to the applicable HUD program office. Some HUD systems allow for indicating when there are multiple HUD funds so that reporting can be limited to one system. However, PO 00000 Frm 00025 Fmt 4701 Sfmt 4700 61547 not all HUD systems provide for that type of designation. HUD will provide additional guidance to recipients that have multiple funding sources on the proper process for reporting Section 3 project completion. Separate Reporting by Funding Source One commenter requested HUD clarify whether PHAs will still be required to report separately by funding source (e.g., Operating Funds and Capital Funds) or whether the hires report will be aggregated to report only on PHA total funds. This decision will impact how PHAs currently collect and track Section 3 hires. A commenter supported elimination of separate reporting on contracting with Section 3 business concerns. Other commenters stated that the reporting and monitoring required to remove professional services labor hours from overall labor hours would add additional administrative burden to PHAs and could prove challenging in the overall reporting process. HUD Response: Under the final rule, for non-MTW agencies, reporting initially will remain at the grant or individual program level, but HUD may explore agency-level reporting where possible to streamline and simplify. PHAs will still be required to report by separate funding source or in the aggregate for MTW agencies. For ease in administration, the rule will provide separate definitions for these types of funding and separate subparts relating to: (1) Public housing financial assistance, which covers (a) development assistance provided pursuant to Section 5 of the United States Housing Act of 1937 (the 1937 Act), (b) operations and management assistance provided pursuant to Section 9(e) of the 1937 Act (Operating Fund), and (c) development, modernization, and management assistance provided pursuant to Section 9(d) of the 1937 Act (Capital Fund); and (2) Section 3 projects, which means housing rehabilitation, housing construction and other public construction projects assisted with HUD housing and community development assistance when the amount of the assistance to the project exceeds $200,000, or $100,000 where the assistance is from HUD’s Lead Hazard Control and Healthy Homes programs. There are no current plans to aggregate the information or eliminate reporting on contracting with Section 3 business concerns. Small PHAs with less than 250 public housing units will be permitted to report qualitatively. HUD is exploring how best to implement qualitative reporting for small PHAs, and as indicated above E:\FR\FM\29SER4.SGM 29SER4 61548 Federal Register / Vol. 85, No. 189 / Tuesday, September 29, 2020 / Rules and Regulations jbell on DSKJLSW7X2PROD with RULES4 may study whether other reporting methods should be contemplated in the future. As stated in the final rule, HUD believes that tracking labor hours consistent with existing tracking for prevailing wage requirements would reduce burden on recipients. HUD also believes that tracking labor hours will better allow HUD to determine if longterm employment opportunities are being generated. Exempt Commodity Purchases, NonConstruction, and Professional Services Commenters strongly agreed with the change to exempt both commodities purchases (material supply contracts) as well as professional services (contracts for legal, accounting, financial consulting, environmental assessment, A&E services and other professional services) from the calculation of contract dollars and new hires for reporting. One commenter supported exclusion of Section 3 requirements on non-construction professional services (e.g., legal, accounting, and engineering) but has concerns that not all Section 3 workers want careers in the construction field and some employment is generated in nonconstruction contracts. HUD Response: The final rule maintains the exemption of material supply contracts and maintains the structure presented in the proposed rule which does not require separate reporting of contracting with Section 3 business concerns. HUD is providing clarification on the exemption for professional services in the definition of ‘‘professional services’’ in this final rule, by defining professional as services that require an advanced degree or professional licensing. HUD acknowledges that many lowincome workers seek employment in jobs other than construction. However, data indicate that there are relatively few opportunities for Section 3 hiring in professional services fields such as legal services and civil engineering. Many of the positions within these professional services fields require specialized degrees and in many cases the hiring is not directly tracked to a specific federally funded project or activity. The reporting structure in the rule allows a recipient to count as Section 3 labor hours and as Targeted Section 3 labor hours any work performed by a Section 3 worker or a Targeted Section 3 worker (i.e., in the numerator of the calculation), even when the professional services as a whole are not counted in the baseline reporting (i.e., in the denominator of the calculation). The effect of this reporting structure is to give a recipient a bonus if they are able VerDate Sep<11>2014 20:48 Sep 28, 2020 Jkt 250001 to report Section 3 hires in the professional services context. Frequency of Reporting Commenters stated that annual reporting does not facilitate capture and correcting of non-compliance. Some commenters recommended all PHAs should provide Section 3 reports quarterly instead of at the end of the fiscal year. Another commenter recommended that reporting should be done on a monthly basis. One commenter strongly supported a return to annual reporting and integration of reporting with other funding program reporting requirements. Another commenter supported annual reporting for reducing administrative burden of more frequent reporting. Another commenter supported the proposed change to annual reporting on projects completed within the reporting year. HUD Response: The reporting requirements represents a balance between frequent reporting, effective reporting, and administrative burden. Frequent reporting allows HUD to keep a closer eye on compliance, and early oversight can result in identification of non-compliant actors when there is still opportunity to influence change. Frequent reporting also risks identifying as non-compliant those endeavors where the Section 3 opportunities are sequenced later in the effort’s timeline, resulting in ineffective reporting. This is often the case in construction efforts that begin with heavy machinery work and end with trades where Section 3 opportunities are more commonly created. Additionally, there is an administrative burden for the reporting entity, and an oversight responsibility for HUD, each time Section 3 reports must be submitted. HUD notes the variety of opinion represented in the comments, with suggestions of monthly, quarterly, and annual reporting, as well as the project-based reporting permitted in the proposed rule. HUD has determined not to revise the rule. As a result, reporting is on an annual basis for ongoing endeavors such as PHA operations or multi-year infrastructure or disaster recovery efforts. For discrete projects such as development of a singular multifamily apartment building, the reporting is on a project basis, and reported to HUD in the recipient’s annual report corresponding to the year of the project’s completion. Acknowledging the value of early intervention, the final rule also shifts oversight of Section 3 from a centralized HUD office, which typically does not have visibility into whether the funding recipient is embracing and effectively PO 00000 Frm 00026 Fmt 4701 Sfmt 4700 implementing its Section 3 obligations, to the program office which is in regular communication with the funding recipient. Part of HUD’s intention with respect to this shift in oversight is to integrate discussions of Section 3 compliance into regular oversight discussions so that there are opportunities to influence improvement in Section 3 performance on an ongoing basis. Submission Timing Commenters recommended that HUD should provide further guidance on how and when annual reports will be submitted and stated that meeting the current January 10th deadline is a challenge for PHAs because end-of-year hires may be undercounted because paperwork may still be in process in January. Commenters stated that if the new regulations require reporting consistent with the timeframes that PHAs are already using, it will assist PHAs in providing the most accurate and up-to-date information. The commenters recommended that HUD refine the proposed reporting frequency regulations to read: ‘‘recipients must report annually after the end of their reporting year to HUD . . .’’ and HUD should provide PHAs 90 days from the end of their reporting year to have sufficient time to collect and aggregate data. Another commenter noted that MTW PHAs provide annual reports based on the past fiscal year and updating the system to include such Section 3 reporting would be easier to use. This commenter also noted that it needs to be clarified how the reporting would deal with differing timelines for annual reporting versus the duration of projects with funds triggering Section 3 reporting. HUD Response: As noted above, HUD will issue sub-regulatory guidance on reporting by program area. HUD anticipates that it may be able to integrate Section 3 reporting into the funding recipients’ other, programmatic, reporting structures, which already have existing time frames for submission of reports. The rule does specify that reporting is based on the recipient’s fiscal year, which language has not been changed. Section 3 requirements may not be waived by MTW agencies. MTW only provides flexibility for requirements promulgated under the 1937 Act, while Section 3 is a provision of the Housing and Urban Development (HUD) Act of 1968. Since HUD has a specific online system to collect Section 3 data—SPEARS—all PHAs, including MTW agencies, should report into that system. HUD will consider providing E:\FR\FM\29SER4.SGM 29SER4 Federal Register / Vol. 85, No. 189 / Tuesday, September 29, 2020 / Rules and Regulations training specific to MTW agencies, in addition to training for a more general audience, on how to use the SPEARS system. jbell on DSKJLSW7X2PROD with RULES4 Major Construction Project Administrative Burdens Commenters warned that large workforces and the use of multiple subcontractors on major construction projects would lead to heavy administrative burdens which may discourage subrecipients or contractors from bidding. These commenters recommended contractors be allowed to self-certify to relieve administrative burdens. HUD Response: HUD appreciates the commenters’ concerns but determined that self-certification would not provide HUD with an adequate compliance oversight mechanism. There is no provision in the rule for selfcertification of meeting the benchmark requirements. Increasing Costs One commenter stated that the requirements are already burdensome to their local governments, administrators, contractors and sub-contractors and the proposed rule would increase the burden, leading to fewer contractors willing to participate in CDBG projects, driving up costs, and leading to smaller projects and fewer beneficiaries. One commenter supported keeping reporting requirements to a minimum because both PHAs and HUD staff have limited capacity for reporting and providing constructive feedback. One commenter stated the ability to identify workers individually rather than relying on the business concern to meet Section 3 definitions provides additional opportunity to demonstrate Section 3 compliance where there was none before, but this creates an additional burden to document safe harbor, particularly for Lead Hazard and Healthy Homes projects where a lower project dollar threshold is imposed. The commenter went on to suggest HUD consider providing additional funding for contractors to meet the financial impact of the paperwork burden of documenting compliance. Similarly, other commenters noted that under the previous rule the dollar threshold is zero, whereas under the proposed rule, despite the type of HUD funds received, every penny contracted, invested, or applied to any contract project, regardless of ownership, would have triggered full Section 3 compliance. Commenters also expressed concern for the burden on contractors to meet hourly benchmarks while working through a pool of unskilled new hires VerDate Sep<11>2014 20:48 Sep 28, 2020 Jkt 250001 and potential costs to the owner if a new hire fails to meet job requirements. One commenter stated that a significant increase in Federal funding would be required to fund the increased administrative burden of the proposed rule. Other commenters stated that due to the lack of resources many PHAs have, HUD should ask for increased funding for public housing so that PHAs can sufficiently meet Section 3’s intended goals. Commenters suggested HUD consider creating Section 3 technical assistance funding that can be used to build PHAs’ technical knowledge and capacity. HUD Response: HUD will continue to look for ways to reduce the impact of Section 3 reporting requirements using existing reporting and compliance systems that decrease administrative burden on recipients. HUD believes the use of labor hours, rather than new hires, will reduce costs as many construction contractors already track labor hours to meet prevailing wage requirements. This practice is proposed to provide a consistent labor hour tracking mechanism that will make compliance with Section 3 easier not only for recipients of HUD assistance, but also for contractors and subcontractors. HUD anticipates a reduction in reporting and recordkeeping burdens equal to approximately 64,270 hours, or $2.4 million annually. This rule will not have any impact on the level of funding for covered HUD programs. Funding is determined independently by Congressional appropriations, authorizing statutes and regulatory formulas that set the amounts of Federal financial assistance provided by HUD grants. HUD is exploring ways to build upon ongoing Section 3 technical assistance and capacity building activities for recipients. Disaster Recovery A commenter warned that additional reporting requirements will be problematic for those managing disaster recovery and requested additional guidance for flexibility with the CDBG– DR program. Another commenter recommended HUD provide outreach and guidance on using CDBG–DR funds for job training and hiring initiatives during rebuilding efforts. HUD Response: Reporting requirements already exist for reporting Section 3 compliance for CDBG–DR program activities. The proposed Section 3 rule will change the reporting scope, such as reporting hours instead of new hires. The rule, however, does not create additional reporting requirements. Like current practice, the PO 00000 Frm 00027 Fmt 4701 Sfmt 4700 61549 size of a grant award and project scope will dictate the length of time it takes to complete reporting. Technical assistance on using CDBG–DR funds for job training and hiring initiatives during rebuilding efforts, as well as other Section 3 topics, will be provided to grantees upon request and as part of the ongoing grant management process. Reporting Should Be on Projects Underway One commenter recommended CPD project reporting should be based on projects underway, not only those projects completed during the program year. The rule is unclear on how Safe Harbor is met for Section 3 projects, though Reporting § 75.25 states HUD requires a compilation of data through the recipient’s fiscal year. Commenter recommends Section 3 compliance be measured by combining all workers for all Section 3 projects. If percentages of Section 3 workers and Targeted Section 3 workers are met, this will show intent to comply. HUD Response: HUD believes that CPD project reporting should be based on those projects completed during a program year. HUD anticipates that CPD programs will continue to report on Section 3 through CPD’s current data collection mechanism. At minimum, CPD programs are required to report annually, but many programs update status more frequently during a recipient’s fiscal year. HUD intends to issue guidance on the Section 3 requirements and provide technical assistance on a program-by-program basis. Special Oversight Role of States in State Programs One commenter recommended that the proposed Section 3 rule be amended to acknowledge the special oversight role of states in State programs. The current Section 3 regulation provides guidance on this point, while the proposed rule fails to include such guidance. Any final rule should include such guidance. See 24 CFR 135.32(f) and 24 CFR 570. HUD Response: HUD supports retaining the current proposed rule’s language. HUD believes the proposed language does fully address the roles and responsibilities of Section 3 recipients and provides adequate guidance to implement, monitor, and enforce Section 3 requirements. Qualitative Form One commenter recommended that HUD should provide the form for qualitative reporting required of small E:\FR\FM\29SER4.SGM 29SER4 61550 Federal Register / Vol. 85, No. 189 / Tuesday, September 29, 2020 / Rules and Regulations PHAs to allow commenters to provide informed feedback. HUD Response: HUD will provide a form for Small PHAs and others to use for qualitative reporting when an entity does not meet the benchmark. The form will be issued consistent with Section 3507 of the Paperwork Reduction Act of 1995, 44 U.S.C. Chapter 35, and HUD will provide the opportunity for the public to provide comments on the form. jbell on DSKJLSW7X2PROD with RULES4 Recordkeeping (§ 75.31) One commenter recommended moving § 75.31 to Subpart A where it would have general applicability to all recipients. HUD Response: Subpart A and Subpart D provisions apply across the board. The rule is structured so that Section 3’s general requirements are in Subpart A. Subpart B and C only apply depending on funding source. Other detailed requirements that apply across the board, such as recordkeeping and compliance, are in Subpart D. HUD believes this structure makes sense and is consistent with other rule structures. Administrative and Compliance Costs According to one commenter, this section implies the responsibility for ensuring workers meet the defined requirements in § 75.5, such as Census tract designation and annualized wage calculations, for CDBG Section 3 projects will lie with contractors, which will therefore be costly for contractors who lack the capacity or are already burdened by paperwork. The commenter suggested it may be easier to have recipients bear this burden. In contrast, one commenter noted contractors would have to provide a personnel profile that includes, at a minimum, income, current address, address at time of hire, and YouthBuild status to establish whether an employee of a non-Section 3 business concern meets any of these criteria. Contractors and employees may balk at a request for this type of personal information, which may become public record. The additional administrative burden placed on otherwise qualified contractors may reduce contractor participation, thereby increasing costs and lessening the impact of Section 3 covered programs on their intended beneficiaries. HUD Response: HUD believes the rule will not impose additional administrative and/or compliance costs for contractors. Administrative and compliance costs associated with Section 3 requirements should be properly resourced within a contractor’s bid for a project and are already required for confirming compliance VerDate Sep<11>2014 20:48 Sep 28, 2020 Jkt 250001 with existing Section 3 requirements. Contrary to the comments, contractors do not have to provide a personnel profile or any sort of personally identifiable information. HUD has never requested this detailed information and this rule does not change that; the data is only reported in aggregate, and records are maintained for verification only. Recipients may, but are not required to, assist contractors who lack capacity to adequately implement the Section 3 requirements. Contracting Provision § 75.17 and § 75.27 Commenters urged HUD to retain standard Section 3 language to be included in contracts because the use of consistent language makes it easier for contractors to be certain of their obligations, limits the possibility of confusion for contractors working on multiple projects, and decreases administrative burden for agencies. Other commenters expressed concern about whether the Voluntary Compliance Agreement clause will continue to exist in contracts and who will enforce it. HUD Response: HUD considered commenters’ requests for standard contract language; however, the contract language must be customized depending upon the contract and the program. HUD anticipates providing sample language and/or discussion of contracting best practices but determined that the recipient is in the best position to determine what contract language is appropriate in each context. Multiple Funding Sources/ Recordkeeping for Multiple Funding § 75.29 / § 75.31 Clear Standards and Secure Online Tool Other commenters recommended that there should be clear standards for reporting on Section 3 regardless of the funding source to reduce the possibility of errors and to eliminate the need to report in different formats. These commenters suggested that if HUD defers to localities, the agency that is the primary recipient of HUD funding should determine which option of reporting should be used by subrecipients to allow for consistency in reporting approach. These commenters also recommended that public housing financial assistance guidelines should dictate reporting requirements for PHAs administering projects with multiple funding sources. For projects that are mix-funded with PHA and other HUD funding, § 75.29(a) says that the other HUD funding stream (e.g. CDBG) may report using the PHA criteria. PO 00000 Frm 00028 Fmt 4701 Sfmt 4700 Commenters recommended that compliance documentation be accessible in a secure online tool or standard form which would measure new hires, hours percentages and training persons and hours. These commenters went on to suggest developing a form for contractors or subcontractors to complete to confirm workers’ Section 3 eligibility, which would ease administration and will foster consistency. With respect to the self-certifications discussed in proposed § 75.31, it would be helpful if HUD were to provide a form for this purpose. HUD Response: HUD thanks the commenters for their recommendation and notes that there will be a standard set of data reporting regardless of which system is used for reporting. The same data will be collected across programs for consistency; the only difference will be how it looks when reported. Benchmarks for Section 3 Workers and Targeted Section 3 Workers Many commenters supported including benchmarks for Section 3 workers and Targeted Section 3 workers. Some commenters supported HUD’s initial benchmarks, as a starting point, and focus on labor hours. Additional commenters supported using both benchmarks stating that limiting the benchmark to only Targeted Section 3 workers would fail to encourage hiring of other Section 3 workers. Another commenter supported elimination of the 3% goal for non-construction contracts to be Section 3 business concerns. Other commenters supported the benchmarks with the caveat that HUD retain the new hire framework for PHAs or the tracking of the labor hours if they do not have an hour tracking system already in place. These commenters suggested evaluating the efficacy of this approach and revising as necessary if data indicates the change is not supporting sustained employment. Other commenters stated that HUD’s benchmark that Targeted Section 3 workers make up 5 percent of the total number of labor hours is too low. The commenters proposed that at least 15 percent of labor hours worked be the benchmark for Targeted Section 3 workers. The commenters stated that the Section 3 statute clearly prioritizes employment for residents of public housing and other HUD-assisted housing programs. Some commenters noted that the benchmark for labor hours is too ambitious and unreasonable. Commenters cited to the fact that lowincome workers are not necessarily qualified for construction jobs, even those jobs at the lower end of the E:\FR\FM\29SER4.SGM 29SER4 jbell on DSKJLSW7X2PROD with RULES4 Federal Register / Vol. 85, No. 189 / Tuesday, September 29, 2020 / Rules and Regulations construction pay scale, and finding lowincome workers who are both qualified for the positions and willing to work in construction is much harder than identifying the number of potentially eligible low-wage workers. Commenters also noted that many low-income persons have childcare and transportation challenges and many contractors do not have open positions to fill by low-income persons. Another comment opposed the 5% Targeted Section 3 goal, stating it was unrealistic given most PHA residents are seniors, have some form of disability, or already work. Commenters also noted that the benchmarks will be especially difficult to achieve in rural locations. One commenter opposed the two categories of Section 3 workers, noting the pool of workers is already small, and makes achievement of benchmarks challenging. While the additional categorization provides data collection value, it creates additional burden and goes beyond the statute’s requirement. The commenter noted that the benchmark fails to recognize many other initiatives to assist residents to work towards long-term employment and selfsufficiency (such as Family SelfSufficiency (FSS) programs). Commenters also noted the current benchmarks have been difficult to meet, and that the new bar would likely require that all positions engaged, rather than only new hires, go to Section 3 workers. The commenter recommends that in an environment of under-funding and over-regulating that HUD establish a modest benchmark that recognizes training and adjust upward later, if necessary. The commenter noted the current recommendation is extremely aggressive and unreasonable; and would result in few agencies meeting the mark. Additionally, it would fail to reduce reporting burdens, align regulations with standard business practices, or increase Section 3 successes. Other commenters focused on the Targeted Section 3 worker benchmark, noting that the category complicates tracking and decreases the likelihood of meeting benchmarks. The commenter suggested taking an alternate approach to tracking Targeted Section 3 workers without establishing a separate benchmark. One commenter stated that the benefits and goals of the Section 3 statute would be difficult to measure by tracking only Targeted Section 3 workers in that it would fail to represent the value of providing economic opportunities to individuals who are low-income but may live outside the immediate project area, who otherwise still qualify for Section 3 preference. VerDate Sep<11>2014 20:48 Sep 28, 2020 Jkt 250001 Other commenters stated that for Subpart C, HUD should only measure compliance of Section 3 with overall Section 3 worker tracking and should not apply Targeted Section 3 workers metrics or benchmarks. The commenters stated support for retaining the existing 30 percent benchmark for all Section 3 new hires but that it should not be required to be disaggregated between Section 3 and Targeted Section 3 workers. The commenters stated that this approach would keep the benchmarks in line with the goals of Section 3 while providing contractors and administering agencies with the ability to tailor implementation depending on the composition of the local workforce and specific project needs. A commenter noted that they ran numbers with the new metric, along with other PHAs, and they all reported much lower percentages, in most cases half of the proposed numbers. The commenter raised a concern with employee displacement if contractors are required to meet this new ratio, which is inconsistent with the goal of Section 3 to create new jobs rather than displace existing employees or inflate project costs. The commenter noted that recipients hiring contractors instead of replacing or hiring more employees could game the system or add significant costs by hiring additional but unnecessary Section 3 workers for the project life. HUD Response: The statute requires Section 3 prioritization and this rule’s goal is to ensure statutory adherence and streamlined reporting. HUD created the Targeted Section 3 worker category to include both the statutory priorities and policy priorities, for example, tracking the hiring of public housing residents where public housing assistance is involved and tracking the residents of the neighborhood or service area when other housing and community development assistance is used. Prioritization is meaningless without the categorical distinction and HUD believes that technology enables better tracking compared to at the statute’s inception. As for the benchmarks, HUD will establish the benchmarks via Federal Register Notices which will allow them to change over time, as data is reported and gathered. HUD believes 5% is a reasonable estimate from the Office of Policy Development and Research (PD&R) data. Additionally, compliance can be evaluated qualitatively if the hours benchmark cannot be met. Under this rule, both measurements are permissible, and the requirements for qualitative evaluation are laid out in the PO 00000 Frm 00029 Fmt 4701 Sfmt 4700 61551 rule. HUD believes this flexibility will deter any incentive to hire unnecessary Section 3 workers. Qualitative Measurement One commenter supported changes to reporting requirements and appreciated the ability to report qualitative efforts if benchmarks are not met. One commenter stated that compliance should be evaluated qualitatively rather than using hours as a benchmark. Commenters stated that the proposed certification related to prioritization of Section 3 hiring efforts would be burdensome to agencies and contractors. The commenter wrote that HUD should require agencies to certify what efforts they have implemented to achieve the goals of the Section 3 program to be considered in compliance. This approach would maintain the benefits and incentives of the program and provide HUD with a tool for accountability. HUD Response: The statute requires agencies and contractors to prioritize their hiring efforts according to the statute’s terms. The rule requires funding recipients to certify that they have acted in compliance with the statute, and to report on the quantitative outcomes of their efforts relative to the benchmarks. HUD does not consider it burdensome for a recipient of HUD funding to certify that they have acted in compliance with the statute. Furthermore, compliance can be evaluated qualitatively if the hours benchmark cannot be met. Under this rule, both measurements are permissible, and the requirements for qualitative evaluation are laid out in the rule. If reporting is above the benchmark, then HUD will presume compliance with the regulatory requirements; HUD wants to see actual positive outcomes rather than just a recipient’s inputs. HUD appreciates the request for additional compliance tools but believes that requiring such reporting for all agencies would be overly burdensome. Safe Harbor Commenters stated that the proposed rule is not clear on how Safe Harbor would be met for Section 3 projects. The commenters questioned what type of data collection would be used to assure accurate reporting and how to meet the percentages of Section 3 and Targeted Section 3 workers. The commenters asked whether there would be a tool to assist with this data collection. HUD Response: HUD will issue subregulatory guidance and provide technical assistance on a program-byprogram basis to assist recipients with E:\FR\FM\29SER4.SGM 29SER4 61552 Federal Register / Vol. 85, No. 189 / Tuesday, September 29, 2020 / Rules and Regulations jbell on DSKJLSW7X2PROD with RULES4 clearly understanding the Section 3 safe harbor parameters. Recipients will provide data regarding Section 3 and Targeted Section 3 workers through existing HUD information systems, as defined by each covered program. HUD will not impose additional data collection burdens on recipients because of the rule. Small PHAs Should Have a Separate Benchmark One commenter recommended that Safe Harbor benchmarks should be established for small PHAs and suggested HUD establish a minimum threshold of work-able and non-working residents. Another commenter stated that some smaller businesses do not usually track labor hours performed on specific projects, and it can be a struggle for them to learn how to do so. On Davis-Bacon projects, contractors are required to submit certified payroll; however, some projects may be subject to Section 3 that are not subject to Davis-Bacon and related acts. The commenter stated that requiring the tracking and reporting of labor hours could pose a significant additional burden to small contractors. HUD Response: One of HUD’s goals through this rule is to ensure that employment and other economic opportunities generated by Federal financial assistance for housing and community development programs are, to the greatest extent feasible, directed toward low- and very low-income persons, particularly (though not exclusively) those who receive government assistance for housing. HUD believes that it is essential to achieving this goal that small PHAs report on their efforts to comply with Section 3 but acknowledges that small PHAs may have more difficulty achieving the quantitative benchmarks and consequently has permitted a qualitative reporting alternative for small PHAs. HUD is considering further ways to streamline and ease qualitative reporting by creating a tracking form and timing submission deadlines consistently with timeframes that PHAs and other recipients of public housing financial assistance are already using to submit documents to HUD. HUD has established that small PHAs with less than 250 public housing units will not be required to report labor hours or meet benchmarks, but instead will be permitted to submit qualitative reports on their efforts to involve residents in job-seeking and training endeavors. HUD recognizes the challenge when small PHAs have very few work-able, non-working residents that would make meeting benchmarks very difficult. VerDate Sep<11>2014 20:48 Sep 28, 2020 Jkt 250001 Alternatives One commenter suggested limiting the benchmark to only Targeted Section 3 workers in order to provide a more streamlined approach to reporting. The commenter stated that if the benchmark is narrowed to Targeted Section 3 workers, then tracking data for Section 3 workers should not be required. Other commenters recommended removing the Targeted Section 3 worker benchmark. One commenter stated that if labor hours are tracked, the requirement should be limited to Section 3 workers in general and that the benefits of adding the Targeted Section 3 worker subcategory are not apparent enough to outweigh the complications. One commenter supported giving PHAs and entities using housing and community development assistance a choice to use either targeted Section 3 workers or Section 3 workers as their benchmark. Other commenters recommended other benchmarking alternatives. Some commenters recommended that the benchmark include a focus on Section 3 business concerns, such that 3% of all contracts are for Section 3 business concerns. One commenter stated benchmarks should ensure that local jobs are provided to local persons to reduce commute times and recommended using geographically determined numbers. The commenter noted that many factors can affect regions and a national number can skew the worker availability distribution. One commenter suggested that such regional benchmarks allow HUD to forecast how many PHAs and Section 3 projects could meet the benchmarks assuming agencies are using their ‘‘best efforts’’ to hire Section 3 workers and Section 3 projects are hiring and contracting with Section 3 workers and business concerns to the ‘‘greatest extent feasible.’’ According to comments, regional benchmarks can help account for uneven distribution of potential Section 3 workers throughout the country. Geographic standards may also help address differences between union and non-union states. If HUD were to set regional standards, there should be a national level appeals process. Commenters also suggested allowing use of local adjustment factors and economic data when establishing compliance benchmarks, especially unemployment rates which affect the ability to meet benchmarks. One commenter stated the benchmark does not ensure Section 3 workers are engaged in a mix of job categories or trades, or opportunities for upward mobility; 30% of hours worked should PO 00000 Frm 00030 Fmt 4701 Sfmt 4700 be measured for each job category/trade and protected classes. Other commenters suggested HUD consider the type of public housing financial assistance or other variables. The commenter recommended that in addition to different types of benchmarks HUD should maintain a ceiling for these benchmarks. The commenter noted a goal of 80% of entities meeting the benchmarks would be appropriate. Other commenters stated that in order to fulfill the statutory objectives of Section 3 to direct the financial opportunities to low- and very lowincome persons and recipients of housing assistance, the final rule must: (1) Set benchmarks in a way that actually prioritizes HUD tenants; and (2) employ a definition of Section 3 worker and Targeted Section 3 worker that includes exclusively low-income individuals. Commenters also proposed separate benchmarks for public housing projects and non-public housing projects and provided a specific hierarchy of workers. Other commenters noted proposed benchmarks for PHAs should reflect the law’s emphasis on providing opportunities for public and assisted housing recipients. Commenters suggested an alternative approach for workforce utilization setting goals for all construction and other blue-collar employment, such as landscaping and janitorial. The commenters suggested that labor hours also consider demographics, length of project, geography, and size of contractors. One commenter recommended that the determination of Section 3 compliance be measured by combining all workers for all Section 3 projects to get an overall picture of the number of low-income workers being paid with these federal dollars. If the percentages of Section 3 and Targeted Section 3 workers are met, this better shows intent to comply with the spirit of Section 3. HUD Response: HUD appreciates the suggestions and has considered multiple benchmarking options. Creating separate benchmarks would make projects with co-funding difficult; the commenter’s suggestions increase both complexity and the burden of reporting. HUD believes the current benchmark is a good starting place and notes that the regulation permits adjusting the benchmarks via Federal Register publication. HUD program staff will evaluate the level of effort expended by those recipients that fail to meet the benchmark safe harbor, and thus will ensure that the statutory terms are being properly enforced. HUD is most interested in strong outcomes for E:\FR\FM\29SER4.SGM 29SER4 Federal Register / Vol. 85, No. 189 / Tuesday, September 29, 2020 / Rules and Regulations Section 3 employees. In addition, HUD has no programs that align with specific regions and intends to see reporting data before making any additional distinctions, if appropriate. Compliance (§ 75.33) jbell on DSKJLSW7X2PROD with RULES4 General A comment stated HUD needs to strike a balance between the limits of state and local agency resources and Section 3’s goals to provide more effective resources to foster compliance. Similarly, another comment suggested HUD utilize Community Compass technical assistance funds to create best practice resources and employ contractors to provide Section 3 compliance support to those jurisdictions and PHAs without designated staff for this purpose. Another comment recommended HUD simplify the compliance requirements by establishing a ‘‘presumed eligibility’’ criteria for businesses or residents located in HUD-approved Neighborhood Revitalization Strategy Areas, Choice Neighborhood target areas, Promise Zones, Empowerment Zones and Enterprise Communities, Opportunity Zones and other areas defined at 24 CFR part 570.208(a)(1)(vii). A commenter suggested states and entitlement communities be required to develop Section 3 Plans that become part of the 5-year Consolidated Plan to allow time for compliance with the labor hours percentages while requiring demonstrated improvement over time. The plan should track Section 3 performance and demonstrate labor partnerships, construction, and training programs to target and find workers and an environment that promotes Section 3 goals. HUD should describe the plan’s components, including how to notify the public of opportunities for involvement in designing the plan, how and when to notify the public when Section 3 employment and bidding opportunities arise, how to inform workers of their rights, and complaint processes. Commenters recommended HUD establish ethics standards for organizations who have a fiduciary responsibility over Section 3 funds. Other commenters suggested compliance failures to adhere to Section 3 business concern criteria should be cured within two payroll periods or be terminated; terminated contractors should be banned from receiving HUD funds for 3 years from the termination date; and that persons found to have falsified their residence to qualify as a Section 3 worker should be suspended from participation for 3 years. VerDate Sep<11>2014 20:48 Sep 28, 2020 Jkt 250001 Commenters stated HUD should: provide greater clarity on the obligations created by § 75.33(a), especially since the preceding section, § 75.31, imposes highly specific recordkeeping requirements; explain whether the recordkeeping obligation in § 75.33 is a restatement of the recordkeeping obligations set forth in § 75.31, or whether additional records are required to demonstrate compliance; and HUD should provide guidance on documentation and recordkeeping related to ‘‘best efforts’’ or ‘‘greatest extent feasible’’ efforts. HUD Response: This rule is intended to strike a balance and foster compliance with Section 3’s goals and will result in a reporting and recordkeeping burden reduction. HUD wants to ensure employers are invested in keeping Section 3 workers employed, and that there is enough opportunity to build skills and experience so that Section 3 workers may develop selfsufficiency and compete for other jobs in the future. HUD will review Department-level strategies on how to effectively incorporate Section 3 reporting into current systems and data collection tools, including the Consolidated Plan. HUD will issue subregulatory guidance on reporting by program area and provide technical assistance to recipients for Section 3 compliance. HUD appreciates the suggestions and notes that there will be standardized compliance procedures across programs, and this will include ethics standards. Section 75.33 is a reaffirmation of the recordkeeping requirement set forth in § 75.31, as recipients of HUD funding will need to have the records described in § 75.31 available if HUD needs to do a compliance review of a recipient’s Section 3 performance. HUD determined not to define the difference between ‘‘best efforts’’ or ‘‘greatest extent feasible,’’ but rather to increase the emphasis on outcomes as a result of these efforts. Please see the ‘‘Best efforts’’ and ‘‘greatest extent feasible’’ section above. A recipient’s reported results will be compared to the outcome metrics defined in the benchmark Notice. HUD program staff will evaluate the level of effort expended by those recipients that fail to meet the benchmark safe harbor, and thus will ensure that the statutory terms are being properly enforced. Complaints and Monitoring Commenters stated each HUD program should have a detailed complaint process. A commenter supported the integration of Section 3 into each program area but noted the PO 00000 Frm 00031 Fmt 4701 Sfmt 4700 61553 lack of detailed complaint provisions, and suggested the final rule require each HUD program to have a detailed complaint process, with enforcement assigned to Davis-Bacon and Labor Relations (DBLR), Office of Field Policy and Management (FPM), or the Office of Fair Housing and Equal Opportunity (FHEO). Commenters supported removing Section 3 enforcement from FHEO but strongly suggested HUD identify an office independent of the program offices to monitor and enforce Section 3 requirements, such as FPM, or a new Section 3 office fully funded and trained to work on Section 3. Giving responsibility for Section 3 compliance to the program that is responsible for funding that triggers Section 3 obligations is problematic because (1) HUD program staff have in the past referred to PHAs and jurisdictions, not the residents who are supposed to benefit from HUD programs, as their ‘‘constituents,’’ (2) there is currently no process for accepting and reviewing complaints in the proposed rule, (3) significant training and resources will be required to prepare program staff to oversee Section 3 compliance since they are not currently engaged in it. HUD should require that Section 3 policies, plans, procedures, and complaints are made publicly available by both the recipient and on HUD’s website. Other commenters agreed with the proposed shift of oversight from FHEO to program offices and believed this will improve oversight because program offices already monitor recipients on a day-to-day basis, thus Section 3 monitoring will become part of normal overall monitoring. Another commenter stated transferring oversight and compliance from FHEO to program offices is an appropriate change on the condition that oversight practices are standardized across program offices. Another commenter was concerned about the Section 3 complaint process for residents; HUD program areas do not have detailed provisions for residents to file complaints on the part of PHAs or jurisdictions that do not meet program requirements. At a minimum, if HUD defers to grantees to field complaints from individuals, the process should require a grantee to inform HUD of the resolution of each complaint much like CPD does with CDBG–DR complaints. A further commenter stated it is not clear how the public will make complaints if the current complaint process is removed and asked how they will know which program office to contact. Other commenters suggested the final rule require a detailed complaint process identical or similar to E:\FR\FM\29SER4.SGM 29SER4 jbell on DSKJLSW7X2PROD with RULES4 61554 Federal Register / Vol. 85, No. 189 / Tuesday, September 29, 2020 / Rules and Regulations what is in the current rule. Further commenters expressed that HUD should keep the existing complaint process until it adopts a new one after public review and comment. Other commenters were concerned about the 958 Complaint Form’s elimination and the impact on residents who will be left without protections or a process for monitoring and overseeing contractors who are violating Section 3 requirements. One commenter felt that to move the review process from FHEO to local HUD CPD would be disastrous. A commenter noted that HOME and CDBG recipients do not seem to understand the importance of Section 3 and the compliance enforcement— appropriate remedies are not in place. According to one commenter, the promise of Section 3 has not yet been realized, largely due to the fact that none of the entities responsible for its administration—HUD, state and local governments, PHAs—have been sufficiently resourced to implement, monitor, and enforce Section 3 requirements. The HUD program offices responsible for funding all are currently under-resourced and could better fulfill their obligations in monitoring and enforcing Section 3 with dedicated staff. One commenter had concerns about moving Section 3 regulations from 24 CFR part 135 under FHEO to the new part 75 under the Office of the Secretary; the commenter assumed Office of Field Policy and Management would have oversight of Section 3 under the proposed rule amendment and expressed concern over FPM’s lack of capacity and technical knowledge to oversee monitoring and enforcement of Section 3. The commenter argued HUD has never seriously monitored and enforced the statute and that HUD program staff treat PHAs and jurisdictions as their constituents, not the residents who are the intended beneficiaries. Additionally, alternative procurement provisions should be created to help Section 3 business concerns compete with larger more established businesses. One commenter was concerned about different program offices providing conflicting information and hoped HUD would provide standardization and clear guidance; others suggested HUD request adequate funding to hire the necessary headquarters and field office staff to provide Section 3 technical assistance and to robustly monitor and enforce Section 3, as well as seeking adequate funding so that all jurisdictions and PHAs can hire and retain staff to serve as Section 3 coordinators and to monitor and enforce Section 3 obligations. A commenter has VerDate Sep<11>2014 20:48 Sep 28, 2020 Jkt 250001 received conflicting guidance from different program offices, resulting in findings and fines on several occasions. HUD should provide further detail as to what standards each program office would be using to provide oversight and what procedures are in place to ensure that PHAs receive consistent oversight across offices. Further clarification is also needed as to how the responsible program office would be designated for oversight when a project uses multiple funding sources and triggers oversight from multiple program offices. A commenter recommended HUD strengthen its compliance practices to incentivize performance while recognizing legitimate constraints. The commenter also recommends stating in the rule that HUD will deduct points in relevant HUD program Notices to applicants for competitive HUD funding who have not achieved Section 3 benchmarks and allowing applicants the ability to provide justifications for failure to meet benchmarks despite good faith efforts. The commenter also recommended allowing program offices to incentivize Section 3 compliance in funding Notices but have a Departmentwide entity focus on all aspect of compliance (reporting, analysis, and information technology systems). HUD Response: HUD took the concerns about the complaint process under advisement, and § 75.33(b) has been amended to include ‘‘or local HUD field office.’’ HUD believes Section 3’s objectives will be better achieved by moving Section 3 oversight into the program offices so that HUD staff who are actively engaged with recipients in their program planning and activities will bring Section 3 concerns and considerations into their routine interactions with the recipients. HUD will provide external and internal technical guidance on complaint handling and routing. The Office of Field Policy and Management (FPM) will be taking a greater role at the field level by filtering complaints to the corresponding office, rather than every HUD program office having its own complaint process. The local HUD field office is part of the FPM organizational structure, and also provides individuals with a complaint venue when the complainant does not know which program office would be responsible. There will be variation in what guidance and/or compliance looks like for each program office, but HUD will provide support to the extent it is standardized across program offices. Enforcement Commenters stated any contractor or Section 3 resident found to falsify data PO 00000 Frm 00032 Fmt 4701 Sfmt 4700 in order to receive benefits from HUD funded training, contracting, and employment should be immediately removed and/or barred from participation in Section 3 programs for ten years. Violations should be posted and made available to the public for review. Every PHA should have a written Section 3 Plan-Policy in place and attached to any Request for Proposals for bids. HUD Response: HUD believes that recipients should have the flexibility to determine how to implement Section 3. HUD also believes this new regulation will make such implementation easier. While the final rule does not require recipients to have Section 3 plans or policies, HUD views having them as a best practice that will aid recipients in achieving the Section 3 benchmarks. As for the concern about potential fraud, program offices will continue to monitor compliance with Section 3 requirements through evaluation of qualitative or quantitative reporting, complaint review, and program audits, if appropriate. General Comments One commenter said all policies should be expressed in ‘‘simple’’ terms for all stakeholders, especially residents, to understand. Commenters stated there is little point in creating policies and programs that produce only six-week or six-month jobs, or jobs that do not lead workers out of poverty. HUD recipients have difficulty in assisting residents in obtaining and maintaining any jobs, let alone high-wage jobs that will lead to careers and help residents leave poverty behind. A commenter expressed the Section 3 rule is ‘‘of great benefit to have in effect and keep up to date.’’ Section 3 funding recipients should be mandated to actively seek employment at all times to the best of their ability and report an employment log to track job applications. One commenter indicated many of the proposed changes do not reflect the construction trade’s current realities and would impose costly new obligations on PHAs without a funding source to pay for those requirements. Another commenter argued Section 3 is ‘‘just another burdensome regulation’’ that ‘‘doesn’t produce a positive outcome.’’ One commenter stated the proposed rule would have an adverse impact on the Section 3 participation that HUD desires, whereas others supported the proposed rule amendments. One commenter stated public housing living conditions are poor; Section 3 programs are practically non-existent in the commenter’s area; and the way that E:\FR\FM\29SER4.SGM 29SER4 jbell on DSKJLSW7X2PROD with RULES4 Federal Register / Vol. 85, No. 189 / Tuesday, September 29, 2020 / Rules and Regulations public housing residents’ income is calculated is problematic. A commenter stated Section 3 is one of HUD’s most important responsibilities since it creates the standards for employment, training, and contracting opportunities generated from HUD financial assistance. This commenter felt a stronger Section 3 rule can lead to increased hiring and contracting opportunities; overall the proposed rule has many merits and is an improvement. Similarly, another commenter stated the potential benefits of Section 3 have never been realized; the improvements to the rule have potential to improve outcomes. According to one comment, the proposed rule amendments try to address Section 3 program implementation difficulties but still present incongruities; HUD should consider methods to enact preferences or incentives. A commenter stated it is difficult to find Section 3 employers in some jurisdictions, and some jurisdictions have no active YouthBuild program. Commenters noted most HUD households are headed by or include females, minorities, or female minorities. Section 3 regulations should be designed to give low- and very lowincome people (particularly recipients of Federal housing assistance) a pathway out of poverty, and PHAs should be required to work with organizations that have a proven track record of successfully recruiting, training, and retaining women and minorities in the construction industry. A commenter recommended HUD work directly with the National Task Force on Tradeswomen’s Issues. HUD Response: HUD thanks the commenters for their responses. This rule is intended to strike a balance and foster compliance with Section 3’s goals and will result in a reduction of reporting and recordkeeping burdens. HUD wants to ensure employers are invested in keeping Section 3 workers employed, and that there is enough opportunity to build skills and experience so that Section 3 workers may develop self-sufficiency and compete for other jobs in the future. HUD agrees that this regulation is designed to give low- and very lowincome people (particularly recipients of Federal housing assistance) a pathway out of poverty. There is no mandate in the rule for Section 3 funding recipients to constantly apply for new jobs, nor are there requirements for PHAs to work with certain organizations. VerDate Sep<11>2014 20:48 Sep 28, 2020 Jkt 250001 Other Programs Commenters noted opportunity discrimination is unconstitutional; all citizens have a right to wealth and prosperity. States can support and invest in their cities’ workforce through equity and management but should first complete a local needs assessment. One commenter referred to Perkins V (the Strengthening Career and Technical Education for the 21st Century Act) requirements for eligible recipients to conduct a comprehensive local needs assessment every two years. One commenter suggested creating a Section 3 Score Card for public information to capture grantee compliance and ensure that contractor compliance with Section 3 requirements are considered for future employment and contracting opportunities, and improving the effectiveness of the program will enhance compliance to realistically measure targeted outcomes. A commenter recommended HUD consider developing an annual recognition program for PHAs, subrecipients, contractors, and subcontractors for excellence in Section 3 performance, rather than redesigning the tracking and reporting requirements. HUD Response: HUD thanks the commenters for their responses. HUD affirms that discrimination based on protected classes is unconstitutional. The Perkins programs noted in the comment are administered by the U.S. Department of Education and there are no requirements for eligible recipients to conduct a comprehensive local needs assessment every two years in the rule. There are no provisions to create a public Section 3 Score Card or an annual PHA recognition program at this time. Technical Fix One commenter noted in the amendment to 24 CFR 93.407(d), the proposed rule still references 24 CFR part 35 instead of 24 CFR part 75. The commenter recommended that HUD change the citation to reflect 24 CFR part 75. HUD Response: Thank you for your comment, but HUD declines to change the citation. The amendment referred to is a technical amendment to the regulations unrelated to the Section 3 regulations. The cross-reference to 24 CFR part 35 is in reference to records demonstrating compliance with leadbased paint requirements, which continue to be covered by 24 CFR part 35. HUD Program Collaboration Commenters stated that funding for Section 3 coordinators, and technical PO 00000 Frm 00033 Fmt 4701 Sfmt 4700 61555 assistance or written guidance on coordination with other self-sufficiency programs such as FSS would allow for Section 3 to more effectively meet its goals. One commenter opposed changes to the rule stating that HUD should not scale back its existing operations and rule. The commenter also recommended that HUD and other agencies ensure coordination with benefit planners so that people with disabilities are involved in planning neighborhoods and community opportunities for work. HUD Response: HUD appreciates the suggestion for more funding for Section 3 coordinators. HUD believes that this rule will streamline the Section 3 regulations to create additional incentives and streamline reporting requirements, thereby offsetting the need for more funding. HUD notes that by conducting in-service trainings and proactively engaging with appropriate partners in the Social Security Administration (Work Incentives Planning Assistance), Department of Labor (ETA & ODEP) and Health and Human Services (CMS, ACF & ACL) to identify best practices and model approaches, FPM will make the appropriate decisions regarding potential coordination with FSS, other self-sufficiency programs, and/or programs for people with disabilities. HUD continues to encourage PHAs and recipients of HUD funds to coordinate with other agencies and local communities to assist in hiring Section 3 workers. This rule does not change that. Moving the oversight of the rule to FPM and the program offices will not scale back HUD’s role in ensuring compliance with Section 3 requirements. HUD believes that the move will actually ensure better compliance given the new location of oversight and the new tracking mechanisms. Title VI One commenter suggested the Section 3 rule should include information that Title VI of the Civil Rights Act also applies to Section 3, prohibits against discrimination, and requires language assistance. HUD Response: Title VI applies to any program or activity receiving Federal financial assistance from HUD. Section 3 is a requirement, not a program that receives HUD funding. Extend Comment Period One commenter recommended HUD extend the comment period for affordable housing developers to suggest more effective changes. HUD Response: HUD believes that the 60-day comment period provided ample E:\FR\FM\29SER4.SGM 29SER4 61556 Federal Register / Vol. 85, No. 189 / Tuesday, September 29, 2020 / Rules and Regulations opportunity for affordable housing developers and other members of the public to suggest changes to this rule. Outside the Rulemaking Scope One commenter, a stakeholder in a major metropolitan area PHA that is being monitored by a ‘‘Federal Monitor’’ as a result of a 958 Complaint, stated that the appointed Federal Monitor has no housing experience and that all parties involved have missed the most important purpose of Section 3, which is economic empowerment for low and very low-income persons residing in local communities for HUD invested projects. One commenter proposed defining an execution fee as a ‘‘percentage of bidder’s final submitted price added by the recipient or general contractor because the contractor/subcontractor provided no Section 3 benefit.’’ One commenter stated concern about the lack of focus on higher level training as a vehicle for individuals to develop skills and build a better future. The commenter stated that the proposed benchmarks and guidelines provide no framework for differentiating training or skilled work classifications from general labor, so there would be no incentive for creating higher level opportunities. The commenter requested that HUD provide guidance on how to encourage this sort of activity under the new benchmarks. HUD Response: HUD thanks the commenters for their suggestions, however, these comments are outside the scope of this rulemaking. Miscellaneous jbell on DSKJLSW7X2PROD with RULES4 Impact on Rural Areas and States Commenters stated it is difficult to comply with Section 3 requirements in rural areas. The goals of Section 3 are more feasible in densely populated urban areas. The proposed rule does not improve this circumstance. Section 3 eligible individuals cannot take advantage of Section 3 opportunities in rural areas because they are nonexistent. There are not ample conditions to facilitate Section 3 in small communities and rural areas. Rural areas have less availability of contractors and employees and there needs to be flexibility to engage people outside their service area to complete projects. One commenter noted benchmarking methodology seems strongly skewed toward large urban centers and overlooks geographically large states with relatively small rural populations, and asked HUD to make exceptions for jurisdictions with smaller and more rural populations. Some commenters noted that contractors in VerDate Sep<11>2014 20:48 Sep 28, 2020 Jkt 250001 rural states rarely need to hire new employees because the projects are small, the contractors have limited growth potential, or the employers have tenured staff. The commenter further stated that the new hire’s length of employment coincides with the project and terminates at project completion. Commenters noted Section 3 is particularly difficult for states to administer. Another commenter explained that as a state, it does not hire the contractors for the CDBG projects. The local jurisdictions do that. It has no opportunity to promote the hiring of Section 3 business concerns. The very small communities with which it works have implemented procurement policies that award contracts to the lowest responsible bidder. They will not award a contract to a higher bidder just because the bidder is a Section 3 business concern. The commenter stated that the Section 3 regulation should apply to the CDBG Entitlement program and not the Small Cities program. One commenter suggested that state CDBG recipients should have the same flexibility in reporting as small PHAs. HUD Response: HUD acknowledges that implementing Section 3 in various geographic areas presents different challenges for rural areas versus densely populated urban areas. HUD believes this has been addressed within the proposed Section 3 regulation by using a circle centered around the worksite that expands until it reaches a population of at least 5,000. HUD further acknowledges that, in particularly remote areas, the expandable circle may reach a size that may be impracticable to match those benefiting from the project with the Section 3 benchmark. If the recipient is unable to meet the Section 3 benchmark described in § 75.11, it will be required to report in a form prescribed by HUD on the qualitative nature of its activities or those of its contractors and subcontractors. This will allow the recipient to explain in qualitative means why it was unable to meet the Section 3 benchmark. HUD is sympathetic to the issues raised for rural areas and will watch implementation carefully as it progresses, allowing for updates as deemed necessary. HUD will also provide sub-regulatory guidance on the submission of qualitative reports to enable smoother implementation of the requirement. Coordination With Nonprofit Organizations and Other Agencies Commenters suggested HUD require PHAs and other recipients to work with organizations with a proven record of accomplishment of success in the PO 00000 Frm 00034 Fmt 4701 Sfmt 4700 recruitment, training, and retention of women and minorities in the construction industry and other bluecollar occupations. The Department of Labor is already working with many of these organizations and has a list of apprenticeship training and technical assistance providers to help with the recruitment of Section 3 residents, preapprenticeship training and ongoing support. Commenters also suggested that HUD work directly with the many tradeswomen organizations, and other nonprofits already providing construction readiness training programs (also called preapprenticeship training) and the National Task Force on Tradeswomen’s Issues. In 2018, women made up only 3.4% of construction workers. While this figure represents progress, it demonstrates the need for HUD and its recipients to partner with tradeswomen and other organizations who have expertise in successfully getting women and minorities into the construction trades, and, more importantly, creating a real opportunity for careers in the construction industry. One commenter recommended forging closer ties with the Tribal Employment Rights Offices and directing the HOME and CDBG programs to consider this approach to ensure tribal communities’ benefit from HUD program projects nearby. Other commenters suggested planning grants to form or strengthen partnerships with Workforce Investment Boards or interagency collaborations with workforce programs within the Department of Labor. HUD Response: HUD concurs that building strong collaborations between and among several Federal, state, and local partners will aid Section 3’s goals. HUD will consult with the Departments of Labor, Health and Human Services, Commerce, Small Business Administration, and other agencies as determined by the HUD Secretary to meet the Section 3 statue’s mandate at 12 U.S.C. 1701u(f). HUD will also take the comments provided under consideration as it looks for ways to conduct successful outreach and technical assistance strategies for Section 3 implementation. Outreach and Training Commenters recommended that HUD facilitate the competition for Section 3 excellence among developers and contractors by developing an online database of completed Section 3 covered projects that includes the names of the developer and general contractor, the nature and size of the project, and the Section 3 employment, contracting, training and retention outcomes E:\FR\FM\29SER4.SGM 29SER4 jbell on DSKJLSW7X2PROD with RULES4 Federal Register / Vol. 85, No. 189 / Tuesday, September 29, 2020 / Rules and Regulations achieved. Commenters urged HUD to create a national database of Section 3 outcomes and to facilitate the inclusion of training and retention programs in bid materials by collecting and sharing best procurement practices. One commenter suggested HUD should explicitly require PHAs and CDBG recipients to make reasonable efforts to connect Section 3 workers and Targeted Section 3 workers with local workforce development and career and technical education training. Another commenter recommended that the rule should give emphasis to training opportunities as is emphasized in the Section 3 statute because training is a potential response for recipients who are submitting qualitative reports for failure to meet Section 3 benchmarks. One commenter stated there are no provisions in the rule regarding training. Similarly, another commenter noted the benchmark fails to recognize the statutory reference to training and employment opportunities. Likewise, commenters requested HUD clarify whether it is proposing new ways to track or report on Section 3 training. In the discussion of proposed §§ 75.15 and 75.25, HUD states that one of the qualitative measures a locality could use is paying for apprenticeship programs and/or offsite job training. One commenter welcomes any opportunity to expand these programs and recommends that HUD make job training an economic development activity instead of public service under the CDBG regulations. Alternatively, HUD could consider raising the public service cap for CDBG funds in order to accommodate additional job training programs. A commenter recommended HUD provide outreach on training, employment and asset building programs to HUD assisted residents, including Family Self Sufficiency, Jobs Plus, and the Resident Opportunity and Self-Sufficiency programs. HUD should create resource guides on how CDBG has been used to support effective job training programs. A commenter suggested HUD should design a Section 3 worker’s rights poster with input from HOME and CDBG grantees. Commenters noted changes to Section 3 reporting and tracking requirements may require additional resources for administering agencies, particularly PHAs in receipt of public housing assistance funds. HUD funding for the implementation of an IT system to enhance the current system and integrate with contractors would be particularly welcome to ease Section 3 monitoring and reporting for all parties. Having dedicated funding for the overall program, including support for resident VerDate Sep<11>2014 20:48 Sep 28, 2020 Jkt 250001 training, IT system enhancements, and other related measures, would help to further Section 3 goals while limiting potential administrative burdens. One commenter stated PHAs noted they are most successful in helping residents find employment when they can offer employment services and trainings to help them gain the skills necessary to access jobs. However, additional funding is needed for programs like Family Self Sufficiency, Resident Opportunities and SelfSufficiency, Jobs-Plus Initiative, and the Public Housing Operating Fund. One commenter recommended that HUD provide recipients the addresses of all public housing, PBRA projects, and Housing Choice Voucher projects by counties to assist in matching workers’ addresses and automatically designating them as Section 3 workers; that HUD assist Section 3 workers in housing assistance; that Section 3 workers receive a living wage; that HUD help provide life skills such as budget counseling; and that HUD be proactive in supporting and developing (in conjunction with the Department of Labor) apprenticeship and other training programs for assisted housing residents and other low-income people. One commenter recommended that HUD incentivize widespread replication of successful mentorship programs; create regional programs patterned after successful mentorship programs that smaller PHAs can access cooperatively; ensure the program allows for a tiered approach that allows Section 3 contractors to gain vital experience on smaller projects then graduate up to increased responsibility; and ensure that the Section 3 program continues to allow PHAs to use Section 3 contractors to complete work at all levels, including very small projects. One commenter suggested HUD request that the President’s Budget include adequate funding to enable HUD to hire the necessary headquarters and field office staff to provide Section 3 technical assistance and to robustly monitor and enforce Section 3. Also, the President’s Budget should seek adequate funding so that all jurisdictions and PHAs can hire and retain staff to serve as Section 3 coordinators and to monitor and enforce Section 3 obligations. HUD Response: HUD thanks the commenters for their suggestions; as HUD updates its systems, HUD will take the suggestions under advisement. HUD encourages CDBG recipients to collaborate with local workforce development boards and training providers to create effective connections between them and Section 3 and Targeted Section 3 workers. HUD will PO 00000 Frm 00035 Fmt 4701 Sfmt 4700 61557 also provide sub-regulatory guidance and technical assistance promoting career and technical education training. HUD believes tracking labor hours provides a picture as to the success of providing job opportunities with HUD financial assistance, but as noted in the proposed rule the qualitative reporting will consider training. Reporting entities may consider training to help meet its employment goals and provide such information if goals are not met and entities are required to respond qualitatively. HUD will not provide a separate funding source; however, HUD will build on this final rule by providing technical assistance guidance for all HUD Section 3 programs. HUD will consider such guidance in creating materials for use by grantees. PHAs should already be tracking labor hours for Davis-Bacon or wage requirements and should not be doing anything more than what they did before to verify Section 3 workers as new hires. This rule just lays out the process for such verification. Once a PHA determines a Section 3 worker or Targeted Section 3 worker is hired or currently employed, the PHA would just report those hours as the numerator over the total labor hours funded with Operating and Capital Funds as the denominator. HUD appreciates the input on ways HUD can help residents and is continuing to look at ways to make programs like Family Self Sufficiency, Resident Opportunities and SelfSufficiency, Jobs-Plus Initiative more effective. HUD will be sure to consider those recommendations in future rulemaking. Section 3, however, is focused on how to provide job opportunities created by HUD federal financial assistance and does not have funding directly associated with it that can be used for those programs. Reporting entities may consider training to help meet their employment goals and provide such information if goals are not met and entities are required to respond qualitatively. HUD does not think it is appropriate to provide access to a list of all public housing, PBRA projects and Housing Choice Voucher residents to the public; such data sharing would implicate privacy concerns. Additionally, the PHA would have that information for seeking to hire such persons as Targeted Section 3 workers for public housing assistance. HUD appreciates the suggestions and will consider them in providing guidance and technical assistance by both FPM and the program offices. HUD believes that there will be adequate funding for Section 3 technical assistance and monitoring in FPM. The FY2020 President’s Budget Request E:\FR\FM\29SER4.SGM 29SER4 61558 Federal Register / Vol. 85, No. 189 / Tuesday, September 29, 2020 / Rules and Regulations Congressional Justification specifically requested: ‘‘$51.5 million to support 334 FTEs, consistent with the estimated 2019 Annualized CR level. Resources will support ongoing community engagement, monitoring and technical assistance pertaining to Section 3, compliance with the Davis-Bacon and Related Acts, enhancement of the overall customer experience and disaster recovery responsiveness at the state and local levels for clients and customers.’’ 6 Federal financial assistance recipients should make their own determinations about staffing levels necessary to implement the assistance received. jbell on DSKJLSW7X2PROD with RULES4 Rental Assistance Demonstration (RAD) Commenters recommended the RAD Notice should be amended to indicate that Section 3 obligations be extended post-conversion to PBV because currently Section 3 no longer applies unless additional Federal financial assistance is later used for rehabilitation. Commenters also asked for further clarification regarding RAD conversion applicability during and after construction. Eliminating RAD projects from Section 3 applicability will reduce contract awards that can provide opportunities to Section 3 residents. HUD should revise the rule to expand the definition of Targeted Section 3 worker to cover RAD and other HUD assisted tenants, and should require owners and managers of RADconverted projects to hire, train, and contract with Section 3 residents to the greatest extent feasible in their own operations. HUD Response: The Section 3 statute does not apply to properties that are recipients of Section 8 rental assistance unless they are recipients of other Federal funding covered by the Section 3 statute. A RAD transaction is a conversion at a moment in time and, subsequent to the conversion, the property is governed by the Section 8 requirements. HUD has administratively applied Section 3 during the RADrelated construction period even though not required by the RAD statute or the Section 3 statute. See RAD Notice Revision 4 and RAD program documents.7 HUD has declined to extend Section 3 to the Section 8 portfolio, as that would be a significant expansion of the Section 3 statute’s parameters. HUD has defined ‘‘Targeted 6 HUD’s FY2020 Congressional Justification for President’s Budget, https://www.hud.gov/sites/ dfiles/CFO/documents/2020HUDCongressional Justifications4-2-19.pdf. 7 Rental Assistance Demonstration—Final Implementation, Revision 4 Notice H–2019–09 PIH–2019–23 (HA), issued September 5, 2019. VerDate Sep<11>2014 20:48 Sep 28, 2020 Jkt 250001 Section 3 workers’’ to include residents of public housing and Section 8 housing, which means that HUD funding recipients must report on hiring of these types of HUD-assisted tenants, which includes tenants of RADconverted Section 8 properties. Notice of Funding Availability (NOFA) One commenter wrote in support of the NOFA certification’s removal. Several commenters supported the current requirement that NOFA applicants submit a certification of intent to comply with Section 3 requirements along with a statement of their proposed Section 3 activities. Commenters noted that performance among PHAs, developers, and contractors varies greatly when it comes to meeting Section 3 requirements. One commenter gave an example where a contractor might merely hold a job fair and interview any qualified Section 3 residents who apply, while another might make Section 3 hiring a condition of all major subcontract awards, contract with a community organization to conduct outreach and referral services, establish a pre-construction and/or onthe-job training program, provide job coaching and other supports, and retain Section 3 workers after completion of the Section 3 project. Commenters went on to state that using a bidder’s past Section 3 performance and the quality of their proposed Section 3 plan can have a profound effect on the quality of economic opportunities provided to Section 3 residents. HUD Response: HUD decided to continue with the change in the proposed rule and to omit specific requirements for Notices of Funding Availability (NOFA) in the final rule; however, the final rule will require that all NOFAs issued by HUD that announce the availability of funding covered by section 75.3 will include notice that part 75 is applicable to the funding and may include, as appropriate for specific NOFAs, points or bonus points for Section 3 plans. Where Section 3 is applicable, the inclusion of specific requirements in the regulation regarding the NOFA does not change the recipient’s obligation to have a compliant Section 3 implementation strategy. Similarly, where Section 3 is not applicable, the regulatory language would not apply. The presence or absence of the NOFA clause in the regulation has no effect on applicability of Section 3. HUD anticipates that program offices will include scoring for Section 3 plans where relevant and exclude Section 3 scoring where the nature of the grant being awarded is incompatible with Section 3 endeavors PO 00000 Frm 00036 Fmt 4701 Sfmt 4700 (such as funding for sweat-equity homeownership initiatives). HUD is in the process of developing improved databases to inform program offices, funding recipients, and the public-atlarge regarding Section 3-covered projects and the outcomes achieved. HUD hopes that these databases, plus anticipated technical assistance to disseminate information regarding Section 3 best practices, will provide a foundation for more impactful implementation of Section 3 over time. Professional Services Exclusion Commenters stated HUD should retain the 3% benchmark for professional services contracts, as it is not uncommon for professional services companies to meet the qualifications of a Section 3 business concern. It helps businesses who employ workers who were low-income when they were hires or businesses who were started by lowincome or public housing residents that have grown professionally to provide employment opportunities to other lowincome people. Other commenters noted excluding professional services positions— typically higher paying, higher career growth—would effectively limit Section 3 workers to construction services, diminishing the potential positive impact of the statute. Ultimately, it will not provide HUD with adequate data on positive or negative impacts of Section 3’s intended goals. The intended goal of the Section 3 statute is to positively impact the lives of HUD assisted residents through meaningful job placement and training that will ultimately lead to greater selfsufficiency. The current rule includes a goal of 30% of new hires in management and administrative jobs, technical, professional, building trades, and non-construction jobs and all levels. Professional service jobs include accounting, legal services, financial consulting, architectural and engineering services. The proposed rule indicates that professional services will be excluded from benchmarking requirements, but HUD will allow voluntary reporting of these workers. A commenter suggested maintaining the current rule’s requirement of reporting on professional services but moving to total labor hours worked in both construction and non-construction services, and better tracking this data through streamlined reporting systems. Other commenters supported excluding professional services from benchmarking requirements while allowing voluntary reporting of such workers; excluding certain types of contracts such as material and supply, E:\FR\FM\29SER4.SGM 29SER4 jbell on DSKJLSW7X2PROD with RULES4 Federal Register / Vol. 85, No. 189 / Tuesday, September 29, 2020 / Rules and Regulations and professional service; and excluding professional services from covered activities and suggested adding a benchmark for training activities. One commenter noted it experienced the same challenges as other HUD partners in meeting Section 3 goals when working with professional service vendors. However, the commenter noticed that in some cases vendors can carve out small segments of highly skilled work or training for low-income residents (e.g., providing an internship or hiring a recent graduate to perform a small scope of work.) While the rule allows voluntary participation of professional service vendors, commenter suggests that HUD give discretion to recipients to mandate Section 3 participation by these partners, without necessarily holding them to specific benchmarks like contractors. HUD Response: HUD acknowledges that there are occasions when employers can create opportunities for Section 3 employment in the professional services context, and HUD lauds these efforts. At the same time, data indicate that there are relatively few such opportunities for Section 3 hiring in professional services fields such as legal services and civil engineering. Many of the positions within these professional services fields require specialized degrees and in many cases the hiring is not directly tracked to a specific Federally funded project or activity. To ensure that the carve-out for professional services is relatively narrow, however, HUD has revised the definition of professional services. While keeping the modified exclusion for professional services in the final rule, HUD notes that the reporting structure in the proposed rule allows a recipient to count as Section 3 labor hours and as Targeted Section 3 labor hours any work performed by a Section 3 worker or a Targeted Section 3 worker (i.e., in the numerator of the calculation), even when the professional services as a whole are not counted in the baseline reporting (i.e., in the denominator of the calculation). The effect of this reporting structure is to give a recipient a bonus if they are able to report Section 3 hours in the professional services context. As referenced in the comments, vendors can sometimes create opportunities in the professional services context, and HUD seeks to reward this behavior. In addition, recipients are provided significant discretion in how they seek to implement their Section 3 obligations. A recipient could elect to require, at the local level, additional Section 3 obligations with respect to VerDate Sep<11>2014 20:48 Sep 28, 2020 Jkt 250001 professional services through the terms of the funding contract. V. Findings and Certifications Regulatory Review—Executive Orders 12866 and 13563 Under Executive Order 12866 (Regulatory Planning and Review), a determination must be made whether a regulatory action is significant and, therefore, subject to review by the Office of Management and Budget (OMB) in accordance with the requirements of the order. Executive Order 13563 (Improving Regulations and Regulatory Review) directs executive agencies to analyze regulations that are ‘‘outmoded, ineffective, insufficient, or excessively burdensome, and to modify, streamline, expand, or repeal them in accordance with what has been learned.’’ Executive Order 13563 also directs that, where relevant, feasible, and consistent with regulatory objectives, and to the extent permitted by law, agencies are to identify and consider regulatory approaches that reduce burdens and maintain flexibility and freedom of choice for the public. This rule was determined to be a ‘‘significant regulatory action’’ as defined in Section 3(f) of the order (although not an economically significant regulatory action under the order). Consistent with Executive Order 13563, this rule creates new part 75 regulations that would replace the part 135 regulations, with the intention to make compliance with Section 3 more effective and less burdensome, and therefore, help to contribute to job creation for low- and very low-income persons. HUD has prepared a Regulatory Impact Analysis (RIA) that addresses the rule’s costs and benefits. HUD’s RIA is part of the docket file for this rule. The docket file is available for public inspection in the Regulations Division, Office of the General Counsel, Room 10276, 451 7th Street SW, Washington, DC 20410–0500. Due to security measures at the HUD Headquarters building, please schedule an appointment to review the docket file by calling the Regulations Division at 202– 402–3055 (this is not a toll-free number). Individuals with speech or hearing impairments may access this number via TTY by calling the Federal Relay Service at toll-free 800–877–8339. Environmental Impact The final rule does not direct, provide for assistance or loan and mortgage insurance for, or otherwise govern or regulate, real property acquisition, disposition, leasing, rehabilitation, alteration, demolition, or new PO 00000 Frm 00037 Fmt 4701 Sfmt 4700 61559 construction, or establish, revise, or provide for standards for construction or construction materials, manufactured housing, or occupancy. Accordingly, under 24 CFR 50.19(c)(1), this rule is categorically excluded from environmental review under the National Environmental Policy Act of 1969 (42 U.S.C. 4321). Unfunded Mandates Reform Act The Unfunded Mandates Reform Act of 1995 (2 U.S.C. 1531–1538) (UMRA) establishes requirements for Federal agencies to assess the effects of their regulatory actions on State, local, and tribal governments and on the private sector. This proposed rule does not impose a Federal mandate on any state, local, or tribal government, or on the private sector, within the meaning of UMRA. Regulatory Flexibility Act The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) generally requires an agency to conduct a regulatory flexibility analysis of any rule subject to notice and comment rulemaking requirements, unless the agency certifies that the rule will not have a significant economic impact on a substantial number of small entities. As has been discussed in this preamble, this rule updates HUD’s Section 3 regulations and replace them with a new 24 CFR part 75, for which the objective is to increase employment opportunities for low- and very low-income persons and businesses that are owned by or employ such persons. These entities generally are small and therefore strengthening the requirements of Section 3 should benefit small businesses that are Section 3 business concerns. This rule also considers the burden on small public housing agencies (PHAs), defined in this rule as a PHA that manages or operates fewer than 250 public housing units, and reduces the burden on them through a new streamlined reporting process that would not require them to report labor hours or new hires. There are approximately 2,950 PHAs, of which approximately 2,250 are small. As more fully discussed in the accompanying RIA, the number of economic opportunities generated for Section 3 residents and businesses will not increase to the degree that this rule would have a significant economic impact on a substantial number of small entities. In addition, for those small entities that must comply with this rule, the changes made by this proposed rule are designed to reduce burden on them, as well as all recipients. The current recordkeeping and reporting requirements for Section 3 is 90,180 E:\FR\FM\29SER4.SGM 29SER4 61560 Federal Register / Vol. 85, No. 189 / Tuesday, September 29, 2020 / Rules and Regulations hours with a cost of $1,817,000. HUD estimated that this new rule will reduce the number of hours by 68 percent to 25,910 hours. The biggest reduction will be for small PHAs that will no longer need to do quantitative analysis with a total estimated time saving of 12,375 hours with a cost of $281,036, or approximately $125 for small PHAs. HUD also anticipates an across the board savings in recordkeeping given the time savings resulting from less time reporting new hires as a separate metric. For these reasons, HUD has determined that this rule would not have a significant economic impact on a substantial number of small entities. Executive Order 13132, Federalism Executive Order 13132 (entitled ‘‘Federalism’’) prohibits an agency from publishing any rule that has federalism implications if the rule either: (1) Imposes substantial direct compliance costs on State and local governments and is not required by statute, or (2) preempts State law, unless the agency meets the consultation and funding requirements of Section 6 of the Executive Order. This final rule does not have federalism implications and does not impose substantial direct compliance costs on State and local governments nor preempt state law within the meaning of the Executive Order. Paperwork Reduction Act Currently, 24 CFR part 135 requires that all recipients track and report Section 3 information to HUD, includes prescriptive contractual language, requires compliance by contractors of the Section 3 requirements, contains reporting and recordkeeping requirements, and provides for the filing of Section 3 complaints. SPEARS is the main site in which HUD captures the number of Section 3 residents hired and the number of contracts awarded to Section 3 business concerns. The existing information collection requirement for these requirements has Number of respondents jbell on DSKJLSW7X2PROD with RULES4 Information collection § 75.15(a) Labor Hour or New Hire Reporting for PHA ..................................... § 75.15(a) Labor Hour or New Hire Reporting for Contractors or Subcontractors of PHAs ......................................... § 75.15(b)–(d) Qualitative Reporting for PHAs .................................................... § 75.25(a) Labor Hour Reporting for Section 3 Projects ...................................... § 75.25(a) Labor Hour Reporting for Contractors and Subcontractors on Section 3 Projects ............................................. VerDate Sep<11>2014 20:48 Sep 28, 2020 been approved by the Office of Management and Budget (OMB) under the Paperwork Reduction Act of 1995 (44 U.S.C. 3501–3520) and assigned OMB control number 2529–0043. The rule would change the existing reporting requirement to decrease qualitatively those who need to report, excluding small PHAs and recipients of Section 3 projects under the $200,000 threshold, and require reporting only once a year by recipients of completed projects. HUD provides in §§ 75.15 and 75.25 that recipients would be required to submit reports to HUD annually either in a qualitative form or quantitative form. HUD includes all the large PHAs in the § 75.15(a) reporting number for reporting on the Section 3 benchmarks and estimates 2 hours to track and report annually given the amount of funds handled by these PHAs. HUD also estimates that a PHA will employ approximately seven contractors or subcontractors each fiscal year that would need to track and report up to the PHA, each at one-half an hour for reporting time. Lastly, HUD estimates that 5 percent of the 700 large PHAs may fail the Section 3 benchmarks and would need to report on their qualitative efforts along with the 2,250 small PHAs and estimates that such reporting would take one-half an hour. As for § 75.25(a), HUD estimates that 66 percent of most program recipients would complete projects in a fiscal year that need to be reported except that for the HOME program, HUD estimates that 90 percent of HOME recipients would complete projects in a fiscal year, at an estimate of 3,600 recipients. Given these projects are more diverse in size, HUD estimates that the average time to report on the Section 3 benchmarks for recipients would be 1 hour. HUD also estimates that a Section 3 project will engage approximately five contractors or subcontractors each fiscal year that would also need to track and report up to the Section 3 project recipient, each Jkt 250001 Frequency of response per annum Burden hour per response at one-half an hour for reporting time. Lastly, HUD estimates that 5 percent of the 3,600 recipients may fail the Section 3 benchmarks and would need to report on their qualitative efforts and estimates that such reporting would take one-half an hour. HUD also notes that the rule no longer requires the inclusion of prescriptive contractual language. See §§ 75.17 and 75.27. HUD believes that this change will result in a de minimis upfront burden related to updating contracts, if recipients, subrecipients, and contractors chose to do so, but that removing the requirement will actually reduce burden on recipients, subrecipients, and contractors on a sustained basis by giving them flexibility to use alternative or existing contractual language. HUD also provides for recordkeeping requirements at § 75.31 and believes that the maintaining of records by recipients will take a recipient approximately 2 hours. However, HUD notes that some programs, such as HOME, already have recordkeeping requirements that are part of existing approved Information Collection Requests and, thus, excludes those programs from the burden matrix. Lastly, HUD maintains the option for individuals to file complaints and retains the frequency number that was in the existing Section 3 reporting burden. In accordance with the Paperwork Reduction Act, an agency may not conduct or sponsor, and a person is not required to respond to, a collection of information, unless the collection displays a currently valid OMB control number. The current recordkeeping requirements for Section 3 is 90,180 hours with a cost of $1,817,000. HUD estimates that this new rule will reduce the number of hours by 68 percent to 25,910 hours for a total cost savings of approximately $1.2 million. The overall reporting and recordkeeping burden is estimated as follows: Annual burden hours Hourly cost per response Annual cost 700 1 2 1,400 $22.71 $31,794.00 4,900 1 0.5 2,450 22.71 55,639.50 2,300 1 0.5 1,150 22.71 26,116.50 3,600 1 1 3,600 22.71 81,756.00 10,800 1 0.5 5,400 22.71 122,634.00 PO 00000 Frm 00038 Fmt 4701 Sfmt 4700 E:\FR\FM\29SER4.SGM 29SER4 Federal Register / Vol. 85, No. 189 / Tuesday, September 29, 2020 / Rules and Regulations Number of respondents Information collection Burden hour per response Annual burden hours Hourly cost per response Annual cost § 75.25(b) Qualitative Reporting for Section 3 Projects ...................................... § 75.31 Recordkeeping ............................ § 75.33 Complaints .................................. 180 5,900 20 1 1 1 0.5 2 1 90 11,800 20 22.71 22.71 10.00 2,043.90 267,978.00 200.00 Total .................................................. ........................ ........................ ........................ 25,910 ........................ 588,161.90 24 CFR Part 91 HUD will update the appropriate OMB control number 2529–0043 to reflect this reduction in burden. Congressional Review of Final Rules The Office of Information and Regulatory Affairs has determined that this final rule is not a major rule, as defined by 5 U.S.C. 804, for purposes of congressional review of agency rulemaking pursuant to the Congressional Review Act, Public Law 104–121, sec. 251, 110 Stat. 868, 873 (codified at 5 U.S.C. 804). This rule will not result in an annual effect on the economy of $100 million or more; a major increase in costs or prices; or significant adverse effects on competition, employment, investment, productivity, innovation, or the ability of U.S.-based companies to compete with foreign-based companies in domestic and export markets. Aged, Grant programs-housing and community development, Homeless, Individuals with disabilities, Low- and moderate-income housing, Reporting and recordkeeping requirements. 24 CFR Part 92 Administrative practice and procedure, Low- and moderate-income housing, Manufactured homes, Rent subsidies, Reporting and recordkeeping requirements. 24 CFR Part 93 Administrative practice and procedure, Grant programs-housing and community development, Low- and moderate-income housing, Manufactured homes, Rent subsidies, Reporting and recordkeeping requirements. List of Subjects 24 CFR Part 135 24 CFR Part 5 Administrative practice and procedure, Community development, Equal employment opportunity, Government contracts, Grant programs—housing and community development, Housing, Loan programs—housing and community development, Reporting and recordkeeping requirements, Small businesses. Administrative practice and procedure, Aged, Claims, Crime, Government contracts, Grant programshousing and community development, Individuals with disabilities, Intergovernmental relations, Loan programs-housing and community development, Low- and moderateincome housing, Mortgage insurance, Penalties, Pets, Public housing, Rent subsidies, Reporting and recordkeeping requirements, Social security, Unemployment compensation, Wages. 24 CFR Part 14 Claims, Equal access to justice, Lawyers, Reporting and recordkeeping requirements. 24 CFR Part 75 jbell on DSKJLSW7X2PROD with RULES4 Frequency of response per annum 61561 Administrative practice and procedure, Community development, Government contracts, Grant programs—housing and community development, Housing, Loan programs—housing and community development, Reporting and recordkeeping requirements, Small businesses. VerDate Sep<11>2014 20:48 Sep 28, 2020 Jkt 250001 24 CFR Part 266 Intergovernmental relations, Low- and moderate-income housing, Mortgage insurance, Reporting and recordkeeping requirements. 24 CFR Part 570 Administrative practice and procedure, American Samoa, Community development block grants, Grant programs-education, Grant programs-housing and community development, Guam, Indians, Loan programs-housing and community development, Low- and moderateincome housing, Northern Mariana Islands, Pacific Islands Trust Territory, Puerto Rico, Reporting and recordkeeping requirements, Student aid, Virgin Islands. PO 00000 Frm 00039 Fmt 4701 Sfmt 4700 24 CFR Part 576 Community facilities, Grant programshousing and community development, Grant programs-social programs, Homeless, Reporting and recordkeeping requirements. 24 CFR Part 578 Community development, Community facilities, Grant programshousing and community development, Grant programs-social programs, Homeless, Reporting and recordkeeping requirements. 24 CFR Part 905 Grant programs-housing and community development, Public housing, Reporting and recordkeeping requirements. 24 CFR Part 964 Grant programs-housing and community development, Public housing, Reporting and recordkeeping requirements. 24 CFR Part 983 Grant programs-housing and community development, Low- and moderate-income housing, Rent subsidies, Reporting and recordkeeping requirements. 24 CFR Part 1000 Aged, Community development block grants, Grant programs-housing and community development, Grant programs-Indians, Indians, Individuals with disabilities, Public housing, Reporting and recordkeeping requirements. Accordingly, for the reasons described in the preamble, under the authority 12 U.S.C. 1701u; 42 U.S.C. 3535(d), HUD amends 24 CFR parts 5, 14, 75, 91, 92, 93, 135, 266, 570, 576, 578, 905, 964, 983, and 1000 as follows: PART 5—GENERAL HUD PROGRAM REQUIREMENTS; WAIVERS 1. The authority for part 5 is revised to read as follows: ■ Authority: 12 U.S.C. 1701u and 1701x; 42 U.S.C. 1437a, 1437c, 1437d, 1437f, 1437n, 3535(d); Sec. 327, Pub. L. 109–115, 119 Stat. 2936; Sec. 607, Pub. L. 109–115, 119 Stat. E:\FR\FM\29SER4.SGM 29SER4 61562 Federal Register / Vol. 85, No. 189 / Tuesday, September 29, 2020 / Rules and Regulations 3051 (42 U.S.C. 14043e et seq.); E.O. 13279, 67 FR 77141, 3 CFR, 2002 Comp., p. 258; and E.O. 13559, 75 FR 71319, 3 CFR 2010 Comp., p. 273. § 5.105 [Amended] 2. Amend § 5.105(a) by removing ‘‘; section 3 of the Housing and Urban Development Act of 1968 (12 U.S.C. 1701u) and implementing regulations at 24 CFR part 135.’’ ■ PART 14—IMPLEMENTATION OF THE EQUAL ACCESS TO JUSTICE ACT IN ADMINISTRATIVE PROCEEDINGS 3. The authority for part 14 continues to read as follows: ■ Authority: 5 U.S.C. 504(c)(1); 42 U.S.C. 3535(d). § 14.115 [Amended] 4. Amend § 14.115 by removing and reserving paragraph (a)(5). ■ 5. Add part 75 to read as follows: ■ PART 75—ECONOMIC OPPORTUNITIES FOR LOW- AND VERY LOW-INCOME PERSONS Subpart A—General Provisions Sec. 75.1 Purpose. 75.3 Applicability. 75.5 Definitions. 75.7 Requirements applicable to HUD NOFAs for Section 3 covered programs. Subpart B—Additional Provisions for Public Housing Financial Assistance 75.9 Requirements. 75.11 Targeted Section 3 worker for public housing financial assistance. 75.13 Section 3 safe harbor. 75.15 Reporting. 75.17 Contract provisions. Subpart C—Additional Provisions for Housing and Community Development Financial Assistance 75.19 Requirements. 75.21 Targeted Section 3 worker for housing and community development financial assistance. 75.23 Section 3 safe harbor. 75.25 Reporting. 75.27 Contract provisions. Subpart D—Provisions for Multiple Funding Sources, Recordkeeping and Compliance 75.29 Multiple funding sources. 75.31 Recordkeeping. 75.33 Compliance. jbell on DSKJLSW7X2PROD with RULES4 Authority: 12 U.S.C. 1701u; 42 U.S.C. 3535(d). Subpart A—General Provisions § 75.1 Purpose. This part establishes the requirements to be followed to ensure the objectives of Section 3 of the Housing and Urban Development Act of 1968 (12 U.S.C. VerDate Sep<11>2014 20:48 Sep 28, 2020 Jkt 250001 1701u) (Section 3) are met. The purpose of Section 3 is to ensure that economic opportunities, most importantly employment, generated by certain HUD financial assistance shall be directed to low- and very low-income persons, particularly those who are recipients of government assistance for housing or residents of the community in which the Federal assistance is spent. § 75.3 Applicability. (a) General applicability. Section 3 applies to public housing financial assistance and Section 3 projects, as follows: (1) Public housing financial assistance. Public housing financial assistance means: (i) Development assistance provided pursuant to section 5 of the United States Housing Act of 1937 (the 1937 Act); (ii) Operations and management assistance provided pursuant to section 9(e) of the 1937 Act; (iii) Development, modernization, and management assistance provided pursuant to section 9(d) of the 1937 Act; and (iv) The entirety of a mixed-finance development project as described in 24 CFR 905.604, regardless of whether the project is fully or partially assisted with public housing financial assistance as defined in paragraphs (a)(1)(i) through (iii) of this section. (2) Section 3 projects. (i) Section 3 projects means housing rehabilitation, housing construction, and other public construction projects assisted under HUD programs that provide housing and community development financial assistance when the total amount of assistance to the project exceeds a threshold of $200,000. The threshold is $100,000 where the assistance is from the Lead Hazard Control and Healthy Homes programs, as authorized by Sections 501 or 502 of the Housing and Urban Development Act of 1970 (12 U.S.C. 1701z–1 or 1701z–2), the LeadBased Paint Poisoning Prevention Act (42 U.S.C 4801 et seq.); and the Residential Lead-Based Paint Hazard Reduction Act of 1992 (42 U.S.C. 4851 et seq.). The project is the site or sites together with any building(s) and improvements located on the site(s) that are under common ownership, management, and financing. (ii) The Secretary must update the thresholds provided in paragraph (a)(2)(i) of this section not less than once every 5 years based on a national construction cost inflation factor through Federal Register notice not subject to public comment. When the Secretary finds it is warranted to ensure PO 00000 Frm 00040 Fmt 4701 Sfmt 4700 compliance with Section 3, the Secretary may adjust, regardless of the national construction cost factor, such thresholds through Federal Register notice, subject to public comment. (iii) The requirements in this part apply to an entire Section 3 project, regardless of whether the project is fully or partially assisted under HUD programs that provide housing and community development financial assistance. (b) Contracts for materials. Section 3 requirements do not apply to material supply contracts. (c) Indian and Tribal preferences. Contracts, subcontracts, grants, or subgrants subject to Section 7(b) of the Indian Self-Determination and Education Assistance Act (25 U.S.C. 5307(b)) or subject to tribal preference requirements as authorized under 101(k) of the Native American Housing Assistance and Self-Determination Act (25 U.S.C. 4111(k)) must provide preferences in employment, training, and business opportunities to Indians and Indian organizations, and are therefore not subject to the requirements of this part. (d) Other HUD assistance and other Federal assistance. Recipients that are not subject to Section 3 are encouraged to consider ways to support the purpose of Section 3. § 75.5 Definitions. The terms HUD, Public housing, and Public Housing Agency (PHA) are defined in 24 CFR part 5. The following definitions also apply to this part: 1937 Act means the United States Housing Act of 1937, 42 U.S.C. 1437 et seq. Contractor means any entity entering into a contract with: (1) A recipient to perform work in connection with the expenditure of public housing financial assistance or for work in connection with a Section 3 project; or (2) A subrecipient for work in connection with a Section 3 project. Labor hours means the number of paid hours worked by persons on a Section 3 project or by persons employed with funds that include public housing financial assistance. Low-income person means a person as defined in Section 3(b)(2) of the 1937 Act. Material supply contracts means contracts for the purchase of products and materials, including, but not limited to, lumber, drywall, wiring, concrete, pipes, toilets, sinks, carpets, and office supplies. Professional services means nonconstruction services that require an E:\FR\FM\29SER4.SGM 29SER4 jbell on DSKJLSW7X2PROD with RULES4 Federal Register / Vol. 85, No. 189 / Tuesday, September 29, 2020 / Rules and Regulations advanced degree or professional licensing, including, but not limited to, contracts for legal services, financial consulting, accounting services, environmental assessment, architectural services, and civil engineering services. Public housing financial assistance means assistance as defined in § 75.3(a)(1). Public housing project is defined in 24 CFR 905.108. Recipient means any entity that receives directly from HUD public housing financial assistance or housing and community development assistance that funds Section 3 projects, including, but not limited to, any State, local government, instrumentality, PHA, or other public agency, public or private nonprofit organization. Section 3 means Section 3 of the Housing and Urban Development Act of 1968, as amended (12 U.S.C. 1701u). Section 3 business concern means: (1) A business concern meeting at least one of the following criteria, documented within the last six-month period: (i) It is at least 51 percent owned and controlled by low- or very low-income persons; (ii) Over 75 percent of the labor hours performed for the business over the prior three-month period are performed by Section 3 workers; or (iii) It is a business at least 51 percent owned and controlled by current public housing residents or residents who currently live in Section 8-assisted housing. (2) The status of a Section 3 business concern shall not be negatively affected by a prior arrest or conviction of its owner(s) or employees. (3) Nothing in this part shall be construed to require the contracting or subcontracting of a Section 3 business concern. Section 3 business concerns are not exempt from meeting the specifications of the contract. Section 3 project means a project defined in § 75.3(a)(2). Section 3 worker means: (1) Any worker who currently fits or when hired within the past five years fit at least one of the following categories, as documented: (i) The worker’s income for the previous or annualized calendar year is below the income limit established by HUD. (ii) The worker is employed by a Section 3 business concern. (iii) The worker is a YouthBuild participant. (2) The status of a Section 3 worker shall not be negatively affected by a prior arrest or conviction. (3) Nothing in this part shall be construed to require the employment of VerDate Sep<11>2014 20:48 Sep 28, 2020 Jkt 250001 someone who meets this definition of a Section 3 worker. Section 3 workers are not exempt from meeting the qualifications of the position to be filled. Section 8-assisted housing refers to housing receiving project-based rental assistance or tenant-based assistance under Section 8 of the 1937 Act. Service area or the neighborhood of the project means an area within one mile of the Section 3 project or, if fewer than 5,000 people live within one mile of a Section 3 project, within a circle centered on the Section 3 project that is sufficient to encompass a population of 5,000 people according to the most recent U.S. Census. Small PHA means a public housing authority that manages or operates fewer than 250 public housing units. Subcontractor means any entity that has a contract with a contractor to undertake a portion of the contractor’s obligation to perform work in connection with the expenditure of public housing financial assistance or for a Section 3 project. Subrecipient has the meaning provided in the applicable program regulations or in 2 CFR 200.93. Targeted Section 3 worker has the meanings provided in §§ 75.11, 75.21, or 75.29, and does not exclude an individual that has a prior arrest or conviction. Very low-income person means the definition for this term set forth in section 3(b)(2) of the 1937 Act. YouthBuild programs refers to YouthBuild programs receiving assistance under the Workforce Innovation and Opportunity Act (29 U.S.C. 3226). § 75.7 Requirements applicable to HUD NOFAs for Section 3 covered programs. All notices of funding availability (NOFAs) issued by HUD that announce the availability of funding covered by § 75.3 will include notice that this part is applicable to the funding and may include, as appropriate for the specific NOFA, points or bonus points for the quality of Section 3 plans. Subpart B—Additional Provisions for Public Housing Financial Assistance § 75.9 Requirements. (a) Employment and training. (1) Consistent with existing Federal, state, and local laws and regulations, PHAs or other recipients receiving public housing financial assistance, and their contractors and subcontractors, must make their best efforts to provide employment and training opportunities generated by the public housing PO 00000 Frm 00041 Fmt 4701 Sfmt 4700 61563 financial assistance to Section 3 workers. (2) PHAs or other recipients, and their contractors and subcontractors, must make their best efforts described in paragraph (a)(1) of this section in the following order of priority: (i) To residents of the public housing projects for which the public housing financial assistance is expended; (ii) To residents of other public housing projects managed by the PHA that is providing the assistance or for residents of Section 8-assisted housing managed by the PHA; (iii) To participants in YouthBuild programs; and (iv) To low- and very low-income persons residing within the metropolitan area (or nonmetropolitan county) in which the assistance is expended. (b) Contracting. (1) Consistent with existing Federal, state, and local laws and regulations, PHAs and other recipients of public housing financial assistance, and their contractors and subcontractors, must make their best efforts to award contracts and subcontracts to business concerns that provide economic opportunities to Section 3 workers. (2) PHAs and other recipients, and their contractors and subcontractors, must make their best efforts described in paragraph (b)(1) of this section in the following order of priority: (i) To Section 3 business concerns that provide economic opportunities for residents of the public housing projects for which the assistance is provided; (ii) To Section 3 business concerns that provide economic opportunities for residents of other public housing projects or Section-8 assisted housing managed by the PHA that is providing the assistance; (iii) To YouthBuild programs; and (iv) To Section 3 business concerns that provide economic opportunities to Section 3 workers residing within the metropolitan area (or nonmetropolitan county) in which the assistance is provided. § 75.11 Targeted Section 3 worker for public housing financial assistance. (a) Targeted Section 3 worker. A Targeted Section 3 worker for public housing financial assistance means a Section 3 worker who is: (1) A worker employed by a Section 3 business concern; or (2) A worker who currently fits or when hired fit at least one of the following categories, as documented within the past five years: (i) A resident of public housing or Section 8-assisted housing; E:\FR\FM\29SER4.SGM 29SER4 61564 Federal Register / Vol. 85, No. 189 / Tuesday, September 29, 2020 / Rules and Regulations (ii) A resident of other public housing projects or Section 8-assisted housing managed by the PHA that is providing the assistance; or (iii) A YouthBuild participant. (b) [Reserved] jbell on DSKJLSW7X2PROD with RULES4 § 75.13 Section 3 safe harbor. (a) General. PHAs and other recipients will be considered to have complied with requirements in this part, in the absence of evidence to the contrary, if they: (1) Certify that they have followed the prioritization of effort in § 75.9; and (2) Meet or exceed the applicable Section 3 benchmarks as described in paragraph (b) of this section. (b) Establishing benchmarks. (1) HUD will establish Section 3 benchmarks for Section 3 workers or Targeted Section 3 workers or both through a document published in the Federal Register. HUD may establish a single nationwide benchmark for Section 3 workers and a single nationwide benchmark for Targeted Section 3 workers, or may establish multiple benchmarks based on geography, the type of public housing financial assistance, or other variables. HUD will update the benchmarks through a document published in the Federal Register, subject to public comment, not less frequently than once every 3 years. Such notice shall include aggregate data on labor hours and the proportion of PHAs and other recipients meeting benchmarks, as well as other metrics reported pursuant to § 75.15 as deemed appropriate by HUD, for the 3 most recent reporting years. (2) In establishing the Section 3 benchmarks, HUD may consider the industry averages for labor hours worked by specific categories of workers or in different localities or regions; averages for labor hours worked by Section 3 workers and Targeted Section 3 workers as reported by recipients pursuant to this section; and any other factors HUD deems important. In establishing the Section 3 benchmarks, HUD will exclude professional services from the total number of labor hours as such hours are excluded from the total number of labor hours to be reported per § 75.15(a)(4). (3) Section 3 benchmarks will consist of the following two ratios: (i) The number of labor hours worked by Section 3 workers divided by the total number of labor hours worked by all workers funded by public housing financial assistance in the PHA’s or other recipient’s fiscal year. (ii) The number of labor hours worked by Targeted Section 3 workers, as defined in § 75.11(a), divided by the total number of labor hours worked by VerDate Sep<11>2014 20:48 Sep 28, 2020 Jkt 250001 all workers funded by public housing financial assistance in the PHA’s or other recipient’s fiscal year. § 75.15 Reporting. (a) Reporting of labor hours. (1) For public housing financial assistance, PHAs and other recipients must report in a manner prescribed by HUD: (i) The total number of labor hours worked; (ii) The total number of labor hours worked by Section 3 workers; and (iii) The total number of labor hours worked by Targeted Section 3 workers. (2) Section 3 workers’ and Targeted Section 3 workers’ labor hours may be counted for five years from when their status as a Section 3 worker or Targeted Section 3 worker is established pursuant to § 75.31. (3) The labor hours reported under paragraph (a)(1) of this section must include the total number of labor hours worked with public housing financial assistance in the fiscal year of the PHA or other recipient, including labor hours worked by any contractors and subcontractors that the PHA or other recipient is required, or elects pursuant to paragraph (a)(4) of this section, to report. (4) PHAs and other recipients reporting under this section, as well as contractors and subcontractors who report to PHAs and recipients, may report labor hours by Section 3 workers, under paragraph (a)(1)(ii) of this section, and labor hours by Targeted Section 3 workers, under paragraph (a)(1)(iii) of this section, from professional services without including labor hours from professional services in the total number of labor hours worked under paragraph (a)(1)(i) of this section. If a contract covers both professional services and other work and the PHA, other recipient, contractor, or subcontractor chooses not to report labor hours from professional services, the labor hours under the contract that are not from professional services must still be reported. (5) PHAs and other recipients may report on the labor hours of the PHA, the recipient, a contractor, or a subcontractor based on the employer’s good faith assessment of the labor hours of a full-time or part-time employee informed by the employer’s existing salary or time and attendance based payroll systems, unless the project or activity is otherwise subject to requirements specifying time and attendance reporting. (b) Additional reporting if Section 3 benchmarks are not met. If the PHA’s or other recipient’s reporting under paragraph (a) of this section indicates PO 00000 Frm 00042 Fmt 4701 Sfmt 4700 that the PHA or other recipient has not met the Section 3 benchmarks described in § 75.13, the PHA or other recipient must report in a form prescribed by HUD on the qualitative nature of its Section 3 compliance activities and those of its contractors and subcontractors. Such qualitative efforts may, for example, include but are not limited to the following: (1) Engaged in outreach efforts to generate job applicants who are Targeted Section 3 workers. (2) Provided training or apprenticeship opportunities. (3) Provided technical assistance to help Section 3 workers compete for jobs (e.g., resume assistance, coaching). (4) Provided or connected Section 3 workers with assistance in seeking employment including: drafting resumes, preparing for interviews, and finding job opportunities connecting residents to job placement services. (5) Held one or more job fairs. (6) Provided or referred Section 3 workers to services supporting work readiness and retention (e.g., work readiness activities, interview clothing, test fees, transportation, child care). (7) Provided assistance to apply for/or attend community college, a four-year educational institution, or vocational/ technical training. (8) Assisted Section 3 workers to obtain financial literacy training and/or coaching. (9) Engaged in outreach efforts to identify and secure bids from Section 3 business concerns. (10) Provided technical assistance to help Section 3 business concerns understand and bid on contracts. (11) Divided contracts into smaller jobs to facilitate participation by Section 3 business concerns. (12) Provided bonding assistance, guaranties, or other efforts to support viable bids from Section 3 business concerns. (13) Promoted use of business registries designed to create opportunities for disadvantaged and small businesses. (14) Outreach, engagement, or referrals with the state one-stop system as defined in Section 121(e)(2) of the Workforce Innovation and Opportunity Act. (c) Reporting frequency. Unless otherwise provided, PHAs or other recipients must report annually to HUD under paragraph (a) of this section, and, where required, under paragraph (b) of this section, in a manner consistent with reporting requirements for the applicable HUD program. (d) Reporting by Small PHAs. Small PHAs may elect not to report under E:\FR\FM\29SER4.SGM 29SER4 Federal Register / Vol. 85, No. 189 / Tuesday, September 29, 2020 / Rules and Regulations paragraph (a) of this section. Small PHAs that make such election are required to report on their qualitative efforts, as described in paragraph (b) of this section, in a manner consistent with reporting requirements for the applicable HUD program. § 75.17 Contract provisions. (a) PHAs or other recipients must include language in any agreement or contract to apply Section 3 to contractors. (b) PHAs or other recipients must require contractors to include language in any contract or agreement to apply Section 3 to subcontractors. (c) PHAs or other recipients must require all contractors and subcontractors to meet the requirements of § 75.9, regardless of whether Section 3 language is included in contracts. Subpart C—Additional Provisions for Housing and Community Development Financial Assistance jbell on DSKJLSW7X2PROD with RULES4 § 75.19 Requirements. (a) Employment and training. (1) To the greatest extent feasible, and consistent with existing Federal, state, and local laws and regulations, recipients covered by this subpart shall ensure that employment and training opportunities arising in connection with Section 3 projects are provided to Section 3 workers within the metropolitan area (or nonmetropolitan county) in which the project is located. (2) Where feasible, priority for opportunities and training described in paragraph (a)(1) of this section should be given to: (i) Section 3 workers residing within the service area or the neighborhood of the project, and (ii) Participants in YouthBuild programs. (b) Contracting. (1) To the greatest extent feasible, and consistent with existing Federal, state, and local laws and regulations, recipients covered by this subpart shall ensure contracts for work awarded in connection with Section 3 projects are provided to business concerns that provide economic opportunities to Section 3 workers residing within the metropolitan area (or nonmetropolitan county) in which the project is located. (2) Where feasible, priority for contracting opportunities described in paragraph (b)(1) of this section should be given to: (i) Section 3 business concerns that provide economic opportunities to Section 3 workers residing within the service area or the neighborhood of the project, and VerDate Sep<11>2014 20:48 Sep 28, 2020 Jkt 250001 (ii) YouthBuild programs. § 75.21 Targeted Section 3 worker for housing and community development financial assistance. (a) Targeted Section 3 worker. A Targeted Section 3 worker for housing and community development financial assistance means a Section 3 worker who is: (1) A worker employed by a Section 3 business concern; or (2) A worker who currently fits or when hired fit at least one of the following categories, as documented within the past five years: (i) Living within the service area or the neighborhood of the project, as defined in § 75.5; or (ii) A YouthBuild participant. (b) [Reserved] § 75.23 Section 3 safe harbor. (a) General. Recipients will be considered to have complied with requirements in this part, in the absence of evidence to the contrary if they: (1) Certify that they have followed the prioritization of effort in § 75.19; and (2) Meet or exceed the applicable Section 3 benchmark as described in paragraph (b) of this section. (b) Establishing benchmarks. (1) HUD will establish Section 3 benchmarks for Section 3 workers or Targeted Section 3 workers or both through a document published in the Federal Register. HUD may establish a single nationwide benchmark for Section 3 workers and a single nationwide benchmark for Targeted Section 3 workers, or may establish multiple benchmarks based on geography, the nature of the Section 3 project, or other variables. HUD will update the benchmarks through a document published in the Federal Register, subject to public comment, not less frequently than once every 3 years. Such notice shall include aggregate data on labor hours and the proportion of recipients meeting benchmarks, as well as other metrics reported pursuant to § 75.25 as deemed appropriate by HUD, for the 3 most recent reporting years. (2) In establishing the Section 3 benchmarks, HUD may consider the industry averages for labor hours worked by specific categories of workers or in different localities or regions; averages for labor hours worked by Section 3 workers and Targeted Section 3 workers as reported by recipients pursuant to this section; and any other factors HUD deems important. In establishing the Section 3 benchmarks, HUD will exclude professional services from the total number of labor hours as such hours are excluded from the total number of labor hours to be reported per § 75.25(a)(4). PO 00000 Frm 00043 Fmt 4701 Sfmt 4700 61565 (3) Section 3 benchmarks will consist of the following two ratios: (i) The number of labor hours worked by Section 3 workers divided by the total number of labor hours worked by all workers on a Section 3 project in the recipient’s program year. (ii) The number of labor hours worked by Targeted Section 3 workers as defined in § 75.21(a), divided by the total number of labor hours worked by all workers on a Section 3 project in the recipient’s program year. § 75.25 Reporting. (a) Reporting of labor hours. (1) For Section 3 projects, recipients must report in a manner prescribed by HUD: (i) The total number of labor hours worked; (ii) The total number of labor hours worked by Section 3 workers; and (iii) The total number of labor hours worked by Targeted Section 3 workers. (2) Section 3 workers’ and Targeted Section 3 workers’ labor hours may be counted for five years from when their status as a Section 3 worker or Targeted Section 3 worker is established pursuant to § 75.31. (3) The labor hours reported under paragraph (a)(1) of this section must include the total number of labor hours worked on a Section 3 project, including labor hours worked by any subrecipients, contractors and subcontractors that the recipient is required, or elects pursuant to paragraph (a)(4) of this section, to report. (4) Recipients reporting under this section, as well as subrecipients, contractors and subcontractors who report to recipients, may report labor hours by Section 3 workers, under paragraph (a)(1)(ii) of this section, and labor hours by Targeted Section 3 workers, under paragraph (a)(1)(iii) of this section, from professional services without including labor hours from professional services in the total number of labor hours worked under paragraph (a)(1)(i) of this section. If a contract covers both professional services and other work and the recipient or contractor or subcontractor chooses not to report labor hours from professional services, the labor hours under the contract that are not from professional services must still be reported. (5) Recipients may report their own labor hours or that of a subrecipient, contractor, or subcontractor based on the employer’s good faith assessment of the labor hours of a full-time or parttime employee informed by the employer’s existing salary or time and attendance based payroll systems, unless the project or activity is E:\FR\FM\29SER4.SGM 29SER4 jbell on DSKJLSW7X2PROD with RULES4 61566 Federal Register / Vol. 85, No. 189 / Tuesday, September 29, 2020 / Rules and Regulations otherwise subject to requirements specifying time and attendance reporting. (b) Additional reporting if Section 3 benchmarks are not met. If the recipient’s reporting under paragraph (a) of this section indicates that the recipient has not met the Section 3 benchmarks described in § 75.23, the recipient must report in a form prescribed by HUD on the qualitative nature of its activities and those its contractors and subcontractors pursued. Such qualitative efforts may, for example, include but are not limited to the following: (1) Engaged in outreach efforts to generate job applicants who are Targeted Section 3 workers. (2) Provided training or apprenticeship opportunities. (3) Provided technical assistance to help Section 3 workers compete for jobs (e.g., resume assistance, coaching). (4) Provided or connected Section 3 workers with assistance in seeking employment including: drafting resumes, preparing for interviews, and finding job opportunities connecting residents to job placement services. (5) Held one or more job fairs. (6) Provided or referred Section 3 workers to services supporting work readiness and retention (e.g., work readiness activities, interview clothing, test fees, transportation, child care). (7) Provided assistance to apply for/or attend community college, a four-year educational institution, or vocational/ technical training. (8) Assisted Section 3 workers to obtain financial literacy training and/or coaching. (9) Engaged in outreach efforts to identify and secure bids from Section 3 business concerns. (10) Provided technical assistance to help Section 3 business concerns understand and bid on contracts. (11) Divided contracts into smaller jobs to facilitate participation by Section 3 business concerns. (12) Provided bonding assistance, guaranties, or other efforts to support viable bids from Section 3 business concerns. (13) Promoted use of business registries designed to create opportunities for disadvantaged and small businesses. (14) Outreach, engagement, or referrals with the state one-stop system as defined in Section 121(e)(2) of the Workforce Innovation and Opportunity Act. (c) Reporting frequency. Unless otherwise provided, recipients must report annually to HUD under paragraph (a) of this section, and, where VerDate Sep<11>2014 20:48 Sep 28, 2020 Jkt 250001 required, under paragraph (b) of this section, on all projects completed within the reporting year in a manner consistent with reporting requirements for the applicable HUD program. § 75.27 Contract provisions. (a) Recipients must include language applying Section 3 requirements in any subrecipient agreement or contract for a Section 3 project. (b) Recipients of Section 3 funding must require subrecipients, contractors, and subcontractors to meet the requirements of § 75.19, regardless of whether Section 3 language is included in recipient or subrecipient agreements, program regulatory agreements, or contracts. Subpart D—Provisions for Multiple Funding Sources, Recordkeeping, and Compliance § 75.29 Multiple funding sources. (a) If a housing rehabilitation, housing construction or other public construction project is subject to Section 3 pursuant to § 75.3(a)(1) and (2), the recipient must follow subpart B of this part for the public housing financial assistance and may follow either subpart B or C of this part for the housing and community development financial assistance. For such a project, the following applies: (1) For housing and community development financial assistance, a Targeted Section 3 worker is any worker who meets the definition of a Targeted Section 3 worker in either subpart B or C of this part; and (2) The recipients of both sources of funding shall report on the housing rehabilitation, housing construction, or other public construction project as a whole and shall identify the multiple associated recipients. PHAs and other recipients must report the following information: (i) The total number of labor hours worked on the project; (ii) The total number of labor hours worked by Section 3 workers on the project; and (iii) The total number of labor hours worked by Targeted Section 3 workers on the project. (b) If a housing rehabilitation, housing construction, or other public construction project is subject to Section 3 because the project is assisted with funding from multiple sources of housing and community development assistance that exceed the thresholds in § 75.3(a)(2), the recipient or recipients must follow subpart C of this part, and must report to the applicable HUD program office, as prescribed by HUD. PO 00000 Frm 00044 Fmt 4701 Sfmt 4700 § 75.31 Recordkeeping. (a) HUD shall have access to all records, reports, and other documents or items of the recipient that are maintained to demonstrate compliance with the requirements of this part, or that are maintained in accordance with the regulations governing the specific HUD program by which the Section 3 project is governed, or the public housing financial assistance is provided or otherwise made available to the recipient, subrecipient, contractor, or subcontractor. (b) Recipients must maintain documentation, or ensure that a subrecipient, contractor, or subcontractor that employs the worker maintains documentation, to ensure that workers meet the definition of a Section 3 worker or Targeted Section 3 worker, at the time of hire or the first reporting period, as follows: (1) For a worker to qualify as a Section 3 worker, one of the following must be maintained: (i) A worker’s self-certification that their income is below the income limit from the prior calendar year; (ii) A worker’s self-certification of participation in a means-tested program such as public housing or Section 8assisted housing; (iii) Certification from a PHA, or the owner or property manager of projectbased Section 8-assisted housing, or the administrator of tenant-based Section 8assisted housing that the worker is a participant in one of their programs; (iv) An employer’s certification that the worker’s income from that employer is below the income limit when based on an employer’s calculation of what the worker’s wage rate would translate to if annualized on a full-time basis; or (v) An employer’s certification that the worker is employed by a Section 3 business concern. (2) For a worker to qualify as a Targeted Section 3 worker, one of the following must be maintained: (i) For a worker to qualify as a Targeted Section 3 worker under subpart B of this part: (A) A worker’s self-certification of participation in public housing or Section 8-assisted housing programs; (B) Certification from a PHA, or the owner or property manager of projectbased Section 8-assisted housing, or the administrator of tenant-based Section 8assisted housing that the worker is a participant in one of their programs; (C) An employer’s certification that the worker is employed by a Section 3 business concern; or (D) A worker’s certification that the worker is a YouthBuild participant. E:\FR\FM\29SER4.SGM 29SER4 Federal Register / Vol. 85, No. 189 / Tuesday, September 29, 2020 / Rules and Regulations (ii) For a worker to qualify as a Targeted Section 3 worker under subpart C of this part: (A) An employer’s confirmation that a worker’s residence is within one mile of the work site or, if fewer than 5,000 people live within one mile of a work site, within a circle centered on the work site that is sufficient to encompass a population of 5,000 people according to the most recent U.S. Census; (B) An employer’s certification that the worker is employed by a Section 3 business concern; or (C) A worker’s self-certification that the worker is a YouthBuild participant. (c) The documentation described in paragraph (b) of this section must be maintained for the time period required for record retentions in accordance with applicable program regulations or, in the absence of applicable program regulations, in accordance with 2 CFR part 200. (d) A PHA or recipient may report on Section 3 workers and Targeted Section 3 workers for five years from when their certification as a Section 3 worker or Targeted Section 3 worker is established. § 75.33 Compliance. (a) Records of compliance. Each recipient shall maintain adequate records demonstrating compliance with this part, consistent with other recordkeeping requirements in 2 CFR part 200. (b) Complaints. Complaints alleging failure of compliance with this part may be reported to the HUD program office responsible for the public housing financial assistance or the Section 3 project, or to the local HUD field office. (c) Monitoring. HUD will monitor compliance with the requirements of this part. The applicable HUD program office will determine appropriate methods by which to oversee Section 3 compliance. HUD may impose appropriate remedies and sanctions in accordance with the laws and regulations for the program under which the violation was found. PART 91—CONSOLIDATED SUBMISSIONS FOR COMMUNITY PLANNING AND DEVELOPMENT PROGRAMS jbell on DSKJLSW7X2PROD with RULES4 Authority: 42 U.S.C. 3535(d), 3601–3619, 5301–5315, 11331–11388, 12701–12711, 12741–12756, and 12901–12912. [Amended] 7. Amend § 91.215(j) by removing ‘‘24 CFR part 135’’ and adding, in its place ‘‘24 CFR part 75’’. VerDate Sep<11>2014 20:48 Sep 28, 2020 Jkt 250001 CHAPTER I—OFFICE OF ASSISTANT SECRETARY FOR EQUAL OPPORTUNITY, DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT [AMENDED] 15. Under the authority of 42 U.S.C. 3535(d), in chapter I, remove designated subchapter headings A and B. ■ § 91.325 [Amended] 9. Amend § 91.325(a)(7) by removing ‘‘24 CFR part 135’’ and adding, in its place ‘‘24 CFR part 75’’. ■ § 91.425 [Amended] PART 92—HOME INVESTMENT PARTNERSHIPS PROGRAM 11. The authority citation for part 92 continues to read as follows: ■ Authority: 42 U.S.C. 3535(d), 12 U.S.C. 1701x and 4568. 12. Amend § 92.508 as follows: a. Remove paragraph (a)(7)(i)(B); b. Redesignate paragraph (a)(7)(i)(C) as (a)(7)(i)(B); and ■ c. Add paragraph (a)(7)(xi). The addition reads as follows: ■ ■ ■ § 92.508 PART 135 —[REMOVED] ■ 10. Amend § 91.425(a)(1)(vii) by removing ‘‘24 CFR part 135’’ and adding, in its place ‘‘24 CFR part 75’’. ■ Recordkeeping. (a) * * * (7) * * * (xi) Documentation of actions undertaken to meet the requirements of 24 CFR part 75 which implements section 3 of the Housing Development Act of 1968, as amended (12 U.S.C. 1701u). * * * * * PART 93—HOUSING TRUST FUND 13. The authority citation for part 93 continues to read as follows: ■ Authority: 42 U.S.C. 3535(d), 12 U.S.C. 4568. 14. Amend § 93.407 as follows: a. Redesignate paragraphs (a)(5)(ii) through (ix) as paragraphs (a)(5)(iii) through (x); ■ b. Remove paragraph (a)(5)(i)(B); ■ c. Redesignate paragraph (a)(5)(i)(A) as paragraph (a)(5)(ii); ■ d. In newly redesignated paragraph (a)(5)(iv), remove ‘‘24 part 35’’ and add in its place ‘‘24 CFR part 35’’; and ■ e. Add paragraph (a)(5)(xi). The addition reads as follows: ■ ■ § 93.407 6. The authority citation for part 91 continues to read as follows: ■ [Amended] 8. Amend § 91.225(a)(7) by removing ‘‘24 CFR part 135’’ and adding, in its place ‘‘24 CFR part 75’’. ■ 16. Remove part 135. PART 266—HOUSING FINANCE AGENCY RISK-SHARING PROGRAM FOR INSURED AFFORDABLE MULTIFAMILY PROJECT LOANS 17. The authority citation for part 266 continues to read as follows: ■ Authority: 12 U.S.C. 1707; 42 U.S.C. 3535(d). § 266.220 [Amended] 18. Amend § 266.220(c) by removing ‘‘; section 3 of the Housing and Urban Development Act of 1968 (12 U.S.C. 1701u), as implemented by 24 CFR part 135’’. ■ PART 570—COMMUNITY DEVELOPMENT BLOCK GRANTS 19. The authority citation for part 570 continues to read as follows: ■ Authority: 12 U.S.C. 1701x, 1701 x–1; 42 U.S.C. 3535(d) and 5301–5320. § 570.487 [Amended] 20. Amend § 570.487(d) by removing ‘‘24 CFR part 135’’ and adding in its place ‘‘24 CFR part 75’’. ■ § 570.607 [Amended] 21. Amend § 570.607(b) by removing ‘‘24 CFR part 135’’ and adding in its place ‘‘24 CFR part 75’’. ■ PART 574—HOUSING OPPORTUNITIES FOR PERSONS WITH AIDS 22. The authority citation for part 574 continues to read as follows: ■ Authority: 12 U.S.C. 1701x, 1701 x–1; 42 U.S.C. 3535(d) and 5301–5320. § 574.600 [Amended] 23. Amend § 574.600 by adding ‘‘and part 75’’ after the phrase ‘‘24 CFR part 5’’. ■ ■ § 91.215 § 91.225 61567 Recordkeeping. (a) * * * (5) * * * (xi) Documentation of actions undertaken to meet the requirements of 24 CFR part 75, which implements section 3 of the Housing and Urban Development Act of 1968, as amended (12 U.S.C. 1701u). * * * * * PO 00000 Frm 00045 Fmt 4701 Sfmt 4700 PART 576—EMERGENCY SOLUTIONS GRANTS PROGRAM 24. The authority citation for part 576 continues to read as follows: ■ Authority: 12 U.S.C. 1701x, 1701 x–1; 42 U.S.C. 11371 et seq., 42 U.S.C. 3535(d). E:\FR\FM\29SER4.SGM 29SER4 61568 § 576.407 Federal Register / Vol. 85, No. 189 / Tuesday, September 29, 2020 / Rules and Regulations Authority: 42 U.S.C. 1437d, 1437g, 1437r, 3535(d). [Amended] 25. Amend § 576.407(a) by removing ‘‘24 CFR part 135’’ and adding in its place ‘‘24 CFR part 75’’. ■ 31. Revise § 964.320 to read as follows: ■ PART 578—CONTINUUM OF CARE PROGRAM 26. The authority citation for part 578 continues to read as follows: ■ ■ In accordance with Section 3 of the Housing and Urban Development Act of 1968 and the implementing regulations at 24 CFR part 75, PHAs, their contractors and subcontractors shall make best efforts, consistent with existing Federal, State, and local laws and regulations, to give low and very low-income persons the training and employment opportunities generated by Section 3 covered assistance (as this term is defined in 24 CFR 75.3) and to give Section 3 business concerns the contracting opportunities generated by Section 3 covered assistance. Authority: 42 U.S.C. 1437g, 42 U.S.C. 1437z–2, 42 U.S.C. 1437z–7, and 3535(d). PART 983—PROJECT-BASED VOUCHER (PBV) PROGRAM § 905.308 ■ Authority: 12 U.S.C. 1701x, 1701 x–1; 42 U.S.C. 11381 et seq., 42 U.S.C. 3535(d). § 578.99 [Amended] 27. Amend § 578.99 by removing ‘‘federal’’ in the section heading and adding in its place ‘‘Federal’’ and removing ‘‘24 CFR part 135’’ in paragraph (i) and adding in its place ‘‘24 CFR part 75’’. ■ PART 905—THE PUBLIC HOUSING CAPITAL FUND PROGRAM 28. The authority citation for part 905 continues to read as follows: [Amended] 29. Amend § 905.308(b)(10) by removing ‘‘24 CFR part 135’’ and adding in its place ‘‘24 CFR part 75’’. ■ PART 964—TENANT PARTICIPATION AND TENANT OPPORTUNITIES IN PUBLIC HOUSING 30. The authority citation for part 964 continues to read as follows: ■ jbell on DSKJLSW7X2PROD with RULES4 § 964.320 HUD Policy on training, employment, contracting and subcontracting of public housing residents. VerDate Sep<11>2014 20:48 Sep 28, 2020 Jkt 250001 32. The authority citation for part 983 continues to read as follows: Authority: 42 U.S.C. 1437f and 3535(d). § 983.4 [Amended] § 983.154 [Amended] 34. Amend § 983.154 by removing (c) introductory text and paragraph (c)(1) and redesignating paragraph (c)(2) as paragraph (c). ■ PART 1000—NATIVE AMERICAN HOUSING ACTIVITIES 35. The authority citation for part 1000 continues to read as follows: ■ Authority: 25 U.S.C. 4101 et seq.; 42 U.S.C. 3535(d). 36. Revise § 1000.42 to read as follows: ■ § 1000.42 Are the requirements of Section 3 of the Housing and Urban Development Act of 1968 applicable? No. Recipients shall comply with Indian preference requirements of Section 7(b) of the Indian SelfDetermination and Education Assistance Act (25 U.S.C. 5307(b)), or employment and contract preference laws adopted by the recipient’s tribe in accordance with Section 101(k) of NAHASDA. Benjamin S. Carson, Sr., Secretary. [FR Doc. 2020–19185 Filed 9–28–20; 8:45 am] 33. Amend § 983.4 by removing the definition of ‘‘Section 3—Training, employment and contracting opportunities in development’’. ■ PO 00000 Frm 00046 Fmt 4701 Sfmt 9990 BILLING CODE 4210–67–P E:\FR\FM\29SER4.SGM 29SER4

Agencies

[Federal Register Volume 85, Number 189 (Tuesday, September 29, 2020)]
[Rules and Regulations]
[Pages 61524-61568]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-19185]



[[Page 61523]]

Vol. 85

Tuesday,

No. 189

September 29, 2020

Part VI





Department of Housing and Urban Development





-----------------------------------------------------------------------





24 CFR Parts 5, 14, 75, et al.





Enhancing and Streamlining the Implementation of Section 3 Requirements 
for Creating Economic Opportunities for Low- and Very Low-Income 
Persons and Eligible Businesses; Final Rule

Federal Register / Vol. 85 , No. 189 / Tuesday, September 29, 2020 / 
Rules and Regulations

[[Page 61524]]


-----------------------------------------------------------------------

DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

24 CFR Parts 5, 14, 75, 91, 92, 93, 135, 266, 570, 574, 576, 578, 
905, 964, 983, and 1000

[Docket No. FR-6085-F-03]
RIN 2501-AD87


Enhancing and Streamlining the Implementation of Section 3 
Requirements for Creating Economic Opportunities for Low- and Very Low-
Income Persons and Eligible Businesses

AGENCY: Office of the Secretary, HUD.

ACTION: Final rule.

-----------------------------------------------------------------------

SUMMARY: Section 3 of the Housing and Urban Development Act of 1968, as 
amended by the Housing and Community Development Act of 1992 (Section 
3), contributes to the establishment of stronger, more sustainable 
communities by ensuring that employment and other economic 
opportunities generated by Federal financial assistance for housing and 
community development programs are, to the greatest extent feasible, 
directed toward low- and very low-income persons, particularly those 
who receive government assistance for housing. In accordance with 
statutory authority, HUD is charged with the responsibility to 
implement and enforce Section 3. HUD's regulations implementing the 
requirements of Section 3 have not been updated since 1994 and are not 
as effective as HUD believes they could be. This final rule updates 
HUD's Section 3 regulations to create more effective incentives for 
employers to retain and invest in their low- and very low-income 
workers, streamline reporting requirements by aligning them with 
typical business practices, provide for program-specific oversight, and 
clarify the obligations of entities that are covered by Section 3. 
These changes will increase Section 3's impact for low- and very low-
income persons, increase compliance with Section 3 requirements, and 
reduce regulatory burden.

DATES: Effective Date: November 30, 2020.
    Compliance Dates: Public housing financial assistance recipients 
must implement their Section 3 activities pursuant to these regulations 
and comply with the reporting requirements starting with the 
recipient's first full fiscal year after July 1, 2021. These 
regulations are applicable to Section 3 projects for which assistance 
or funds are committed on or after July 1, 2021.

FOR FURTHER INFORMATION CONTACT: For questions, please contact the 
following people (the phone numbers are not toll-free):
    For Public Housing Financial Assistance: Merrie Nichols-Dixon, 
Director, Office of Policy Program and Legislation, Office of Public 
and Indian Housing, Department of Housing and Urban Development, 451 
7th Street SW, Room 3178, Washington, DC 20410; telephone 202-402-4673 
(not a toll-free number).
    For Community Development Block Grant (CDBG)/CDBG Disaster 
Recovery/Section 108 Loan Guarantee Program: Jessie Handforth Kome, 
Director, Office of Block Grant Assistance, Office of Community 
Planning and Development, Department of Housing and Urban Development, 
451 7th Street SW, Room 7282, Washington, DC 20410; telephone 202-708-
3587 (voice/TDD) (not a toll-free numbers).
    For HOME or Housing Trust Fund Section 3 projects: Virginia 
Sardone, Director, Office of Affordable Housing Programs, Office of 
Community Planning and Development, Department of Housing and Urban 
Development, 451 7th Street SW, Room 10168, Washington, DC 20410; 
telephone 202-402-4606 (not a toll-free number).
    For Office of Housing programs: Thomas R. Davis, Director, Office 
of Recapitalization, Office of Housing, Department of Housing and Urban 
Development, 451 7th Street SW, Room 6230, Washington, DC 20410; 
telephone 202-402-7549 (voice/TDD) (these are not toll-free numbers).
    Persons with hearing or speech impairments may access this number 
through TTY by calling the Federal Relay Service, at toll-free, 800-
877-8339. General email inquiries regarding Section 3 may be sent to: 
[email protected].

SUPPLEMENTARY INFORMATION:

I. Background

    Section 3 of the Housing and Urban Development Act of 1968 (Pub. L. 
90-448, approved August 1, 1968) (Section 3) was enacted to bring 
economic opportunities generated by certain HUD financial assistance 
expenditures, 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 Federal funds expended in low- and very 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 economic opportunities. By directing HUD-
funded economic opportunities to residents and businesses in the 
community where the funds are expended, the expenditure can have the 
dual benefit of creating new or rehabilitated housing and other 
facilities while providing opportunities for employment and training 
for the residents of these communities.
    The Section 3 statute establishes priorities for employment and 
contracting for public housing programs and for other programs that 
provide housing and community development assistance. For example, the 
prioritization as it relates to public housing assistance places an 
emphasis on public housing residents, in contrast to the prioritization 
as it relates to housing and community development assistance, which 
places more emphasis on residents of the neighborhood or service area 
in which the investment is being made.
    In the 25 years since HUD promulgated the current Section 3 
regulations, significant legislation has been enacted that affects 
Section 3.\1\ In addition, HUD has also heard from the public that 
there is a need for regulatory changes to clarify and simplify the 
existing requirements. HUD's experience in administering Section 3 over 
time has also provided insight as to how HUD could improve its Section 
3 regulations. HUD, thus, concluded that regulatory changes were 
necessary to streamline Section 3 and more effectively benefit low- and 
very low-income persons through HUD financial assistance to achieve the 
Section 3 statute's purposes.
---------------------------------------------------------------------------

    \1\ This legislation includes, but is not limited to, the 
following: Reforms made to HUD's Indian housing programs by the 
Native American Housing Assistance and Self-Determination Act of 
1996 (NAHASDA) (Pub. L. 104-330, approved October 26, 1996); public 
housing reforms made by the Quality Housing and Work Responsibility 
Act of 1998 (QHWRA) (Pub. L. 105-276, approved October 21, 1998); 
reforms made to HUD's supportive housing programs by the Section 202 
Supportive Housing for the Elderly Act of 2010 (Pub. L. 111-372, 
approved January 4, 2011); and the Frank Melville Supportive Housing 
Investment Act of 2010 (Pub. L. 111-347, approved January 4, 2011).
---------------------------------------------------------------------------

II. The Proposed Rule

    HUD issued a proposed rule on April 4, 2019 (84 FR 13177) to update 
the existing regulations and streamline the Section 3 program.

Promote Sustained Employment and Career Development

    The proposed rule included multiple elements designed to increase 
Section 3's impact in directing employment opportunities and sustaining 
employment for the people served by

[[Page 61525]]

HUD financial assistance programs. The rule proposed tracking and 
reporting labor hours instead of new hires. While the previous new hire 
framework was valuable for measuring entry into employment, the new 
hire framework did not capture the extent to which new hiring 
opportunities are created relative to the total work performed, nor 
whether those opportunities are sustained over time. The proposed 
rule's focus on labor hours sought to measure total actual employment 
and the proportion of the total employment performed by low- and very 
low-income workers. In addition, the change to labor hours emphasized 
continued employment. For example, the prior exclusive focus on 
counting new hires regarded five new hires for one-month opportunities 
as a more valued outcome than one 12-month opportunity, and it did not 
distinguish between full- and part-time employment. A full-time job 
sustained over a long period allows a low- or very low-income worker to 
gain skills and is a strong indicator of progress towards self-
sufficiency. The new focus on labor hours would ensure that longer-
term, full-time opportunities are appropriately recognized.
    HUD's proposed rule also sought comment on maintaining the new hire 
framework for only Public Housing Agencies (PHAs). HUD held a number of 
listening sessions and heard from some PHAs that they would prefer to 
keep reporting new hires rather than switch to reporting labor hours. 
Therefore, while HUD believes tracking labor hours is the best option 
and would simplify reporting, HUD did seek comment on the alternative 
option of maintaining the new hires framework for PHAs.

Align Section 3 Reporting With Standard Business Practices

    HUD also proposed tracking labor hours rather than new hires 
because it would be more consistent with business practices. Most 
construction contractors working on HUD assisted projects already track 
labor hours in their payroll systems because they pay their employees 
based on an hourly wage. In some cases, they are also subject to 
prevailing wage requirements.\2\ HUD believes a consistent labor-hour 
tracking mechanism makes compliance with Section 3 easier not only for 
recipients of HUD assistance, but also for contractors and 
subcontractors. The proposed rule provided that for employers who do 
not track labor hours in detail through a time-and-attendance system, 
such employers could provide a good faith assessment of the labor hours 
for a full- or part-time employee. However, if a time-and-attendance 
system is later implemented, the accurate labor hour accounting would 
be required.
---------------------------------------------------------------------------

    \2\ See 42 U.S.C. 1437j(a), 24 CFR 905.308(b)(3)(ii), 24 CFR 
965.101, 25 U.S.C. 4225(b)(1)(A), and 24 CFR 1006.345(b).
---------------------------------------------------------------------------

Applicability and Thresholds

    The Section 3 statute applies to both: (1) HUD's Public Housing 
Program, and (2) Other HUD programs that provide housing and community 
development assistance. For ease in administration for recipients using 
one or both of these HUD funding streams, the proposed rule provided 
definitions for these types of funding and specified Section 3 
requirements for each type. The proposed rule included the following 
definitions for the scope of such financial assistance:
    (1) Public housing financial assistance covers:
    (a) Development assistance provided pursuant to Section 5 of the 
United States Housing Act of 1937 (the 1937 Act),
    (b) operations and management assistance provided pursuant to 
Section 9(e) of the 1937 Act (Operating Fund), and
    (c) development, modernization, and management assistance provided 
pursuant to Section 9(d) of the 1937 Act (Capital Fund); and
    (2) Section 3 projects cover HUD program assistance used for 
housing rehabilitation, housing construction and other public 
construction projects that generally exceed a $200,000 project 
threshold or any Section 3 project funding from HUD's Lead Hazard 
Control and Healthy Homes programs.
    The proposed definitions defined the scope of programs subject to 
Section 3 requirements but did not expand such coverage beyond the 
compliance requirements of HUD's prior regulations. HUD proposed the 
$200,000 threshold for housing rehabilitation, housing construction and 
other public construction projects because work below that amount would 
likely not trigger long-term employment opportunities for which the 
recipient could show measurable labor hours. The proposed rule also 
clarified that contracts, subcontracts, grants, or subgrants subject to 
Section 7(b) of the Indian Self-Determination and Education Assistance 
Act (25 U.S.C. 5307(b)) or subject to tribal preference requirements as 
authorized under Section 101(k) of the Native American Housing 
Assistance and Self-Determination Act (25 U.S.C. 4111(k)) must provide 
preferences in employment, training, and business opportunities to 
Indians and Indian organizations.

Reporting and Targeted Section 3 Workers

    The proposed rule aimed to align Section 3 reporting requirements 
more closely to the statutory priorities; HUD's previous regulation 
tracked only public housing residents or low- or very low-income 
persons who lived in the metropolitan area or nonmetropolitan county of 
the project, rather than whether the statutory priorities were met. The 
rule proposed a new definition of ``Section 3 worker'' as any worker or 
who meets at least one of the following criteria: Low- or very low-
income, as established by HUD's income limits; living in a Qualified 
Census Tract (QCT); or employed by a Section 3 business concern.\3\
---------------------------------------------------------------------------

    \3\ Section 3 business concern means: (1) A business concern 
that meets one of the following criteria: (i) It is at least 51 
percent owned by low- or very low-income persons; (ii) Over 75 
percent of the labor hours performed for the business are performed 
by low- or very low-income persons; or (iii) It is a business at 
least 25 percent owned by current public housing residents or 
residents who currently live in Section 8-assisted housing. (2) The 
status of a Section 3 business concern shall not be negatively 
affected by a prior arrest or conviction of its owner(s) or 
employees. (3) Nothing in this part shall be construed to require 
the contracting or subcontracting of a Section 3 business concern. 
Section 3 business concerns are not exempt from meeting the 
specifications of the contract.
---------------------------------------------------------------------------

    The proposed rule also included a new ``Targeted Section 3 worker'' 
definition so that HUD could track, and recipients could target, the 
hiring of Section 3 workers in selected categories. The Section 3 
statute requires certain financial assistance recipients to prioritize 
their efforts to direct employment and economic opportunities to 
specific groups of low- and very low-income individuals. The ``Targeted 
Section 3 worker'' reflects both statutory and policy priorities that 
HUD wishes to specifically track. For public housing financial 
assistance, the proposed definition of a Targeted Section 3 worker was 
a Section 3 worker who is also:
    (1) A worker employed by a Section 3 business concern; or
    (2) A worker who is currently or who was when hired by the worker's 
current employer, a resident in a public housing project or Section 8-
assisted housing; or
    (3) A resident of other projects managed by the PHA that is 
expending assistance; or
    (4) A current YouthBuild participant.
    For other HUD assistance programs, the proposed priorities were:
    (1) Residents within the service area or the neighborhood of the 
project, and
    (2) YouthBuild participants.

[[Page 61526]]

    There is also a statutory contracting priority for businesses that 
provide economic opportunities for low- and very low-income workers. 
Therefore, HUD proposed including labor hours worked by the Section 3 
business concern employees for both Section 3 workers and Targeted 
Section 3 workers. HUD also proposed a new Section 3 business concern 
definition that reflected the change to labor hours and increased the 
threshold of work performed by a business by low- and very low-income 
workers given the proposed rule's inclusion of all Section 3 business 
concerns' labor hours in the definition of both Section 3 workers and 
Targeted Section 3 workers.
    The proposed rule created the following construct for measuring 
workers:
[GRAPHIC] [TIFF OMITTED] TR29SE20.076

Benchmarks

    The proposed rule provided that a new Section 3 benchmark 
measurement would serve as a safe harbor for those recipients that meet 
the new benchmark. The primary objective of the proposed rule was to 
reflect and monitor grantees' abilities to direct job opportunities 
that are generated by HUD financial assistance to Section 3 workers and 
Targeted Section 3 workers. The proposal included using benchmarks 
based on ratios of Section 3 workers and Targeted Section 3 workers in 
comparison to all workers. HUD proposed that the benchmarks would be 
set by Federal Register Notice and amended periodically to provide for 
updating of the benchmarks to align with the reporting data HUD 
received. As HUD gathers more data under the new rule, HUD could 
increase or decrease benchmark figures over time, or tailor different 
benchmarks for different geographies and different funding types. If a 
recipient certifies compliance with the statutory priorities and meets 
the outcome benchmarks, HUD will presume the recipient is complying 
with Section 3 requirements, absent evidence to the contrary. 
Recipients are still required to report their outcomes, and HUD will 
monitor them accordingly through the data reporting methods used to 
oversee all other program requirements in each applicable program area. 
Otherwise, recipients would be required to submit qualitative reports 
on their efforts, as they are required to do under HUD's previous rule 
when they do not meet the safe harbor, and HUD may conduct monitoring 
to review the recipient's compliance, again consistent with practices 
used to monitor program participants' compliance with other program 
requirements.
    The proposed rule also provided a burden relieving measure for PHAs 
with fewer than 250 units. For these PHAs, they would only be required 
to report on Section 3 qualitative efforts and would not need to track 
labor hours for Section 3 workers and Targeted Section 3 workers.

Multiple Funding Sources

    The proposed rule created a new section for housing rehabilitation, 
housing construction, or other public construction projects assisted 
with funds from more than one HUD program. Specifically, the proposed 
rule provided that when a Section 3 project is funded by public housing 
financial assistance, the public housing financial assistance must be 
tracked and reported consistent with the public housing financial 
assistance requirements in subpart B, while the community development 
financial assistance may follow the requirements in subpart B or 
subpart C. The proposed rule directed that when a Section 3 project 
receives housing and community development assistance from two 
different HUD programs, HUD would designate guidance through a single 
reporting office.

Integrate Section 3 Into Program Enforcement

    Since HUD program office staff are regularly in touch with HUD's 
funding recipients on other compliance requirements, HUD proposed that 
program offices incorporate Section 3 compliance and oversight into 
regular program oversight and make Section 3 an integral part of the 
program's oversight work. The proposed rule also streamlined the 
complaint and compliance process to make Section 3 compliance 
consistent with existing practices for other requirements. The proposed 
rule shifted the delegation of authority for Section 3 enforcement and 
compliance responsibilities from the Assistant Secretary for Fair 
Housing and Equal Opportunity to reside with each of the applicable HUD 
program offices.

III. Changes Made at the Final Rule Stage

    After review and consideration of the public comments and upon 
HUD's further consideration of Section 3 and the issues raised in the 
proposed rule, HUD has adopted the proposed rule as final with a few 
changes in this final rule. HUD also made minor edits to clarify the 
rule's language. The following highlights the substantive changes made 
by HUD in this final rule from the proposed rule.
    Removing Alternative 2 for New Hires

[[Page 61527]]

    After considering the data, Section 3's statutory goals, and the 
public comments, HUD is not retaining the tracking of new hires for 
PHAs, but instead requiring tracking of labor hours for all Section 3 
outcomes. HUD agrees with commenters that it is in the best interest of 
the communities served by HUD to implement a more impactful Section 3 
standard across all HUD-funded programs. Using different metrics for 
different programs would unnecessarily further complicate Section 3 
reporting. Tracking labor hours is meant to ensure that Section 3 
workers have sustained employment and career opportunities. HUD 
believes that the use of new hires provides an incomplete measure of 
the employment and local contracting opportunities available to low- 
and very low-income persons envisioned by the Section 3 statute. HUD 
expects the labor hour data to present a more accurate assessment of 
Section 3's impact. The focus on labor hours will measure total actual 
employment and the proportion of the total employment performed by low- 
and very low-income workers, which will mitigate contractors' ability 
to manipulate their Section 3 outcomes.

Section 3 Project Threshold

    HUD received many public comments on proposed changes to the 
Section 3 Project threshold. HUD still considers the $200,000 threshold 
for Section 3 projects appropriate given the percentage of projects 
that will continue to be covered and are likely to result in 
opportunities for employment of low- and very low-income workers when 
expended on construction-related activities. However, in response to 
public comments, HUD is providing that in this final rule, the 
Secretary may adjust the threshold, through a Federal Register Notice 
subject to public comment, in order to ensure Section 3 compliance. 
HUD's proposed rule already provided for the Secretary to update the 
threshold not less than once every five years based on a national 
construction cost inflation factor; the final rule now provides that 
the Secretary updates the benchmarks not less frequently than once 
every three years. HUD believes adding this flexibility is responsive 
to the comments received by the public. HUD will continue to work with 
program participants to adjust the thresholds accordingly, if 
necessary, based on the updated data provided under this final rule.

Setting a Project Threshold for Lead Hazard Control Grants

    HUD also received comments regarding the exclusion of projects 
under HUD's Lead Hazard Control and Healthy Homes program from the 
$200,000 project threshold. Lead hazard control projects are generally 
smaller, so many commenters suggested a lower threshold for such 
projects. On the other hand, other commenters noted that not including 
a threshold for lead hazard control grants altogether may incidentally 
include small grants that should not be subject to Section 3. For 
example, some Lead and Healthy Homes Technical Studies grants study the 
health effects of installed housing components in projects typically 
smaller than $100,000. As expected, they did not result in 
opportunities for employment of Section 3 workers under the previous 
regulations. At the final rule stage, HUD is therefore adopting a 
$100,000 project threshold for all projects that receive funding from 
HUD's Lead Hazard Control and Healthy Homes programs. HUD adopted this 
number to match the contract threshold in the previous regulations (see 
previous 24 CFR 135.3(a)(3)).

Removing the Qualified Census Tract Definition

    After considering Section 3's statutory goals and the public 
comments, HUD is removing the QCT definition from this final rule. The 
addition of this criteria was to encourage hiring in the QCT and to 
make targeted hiring easier, but HUD recognizes that the inclusion of 
workers in these areas could inadvertently include individuals who are 
not low- or very low-income. Rather than the broad QCT definition, HUD 
is limiting the Section 3 worker definition to be more consistent with 
the statute, which requires prioritization of low- and very low-income 
workers and YouthBuild participants. This should also alleviate any 
potential burden on participants associated with the QCT designation.

Changing the Section 3 Business Concern Definition

    In adopting the proposed definition of Section 3 business concern 
in this final rule, HUD is maintaining the over 75 percent of the labor 
hours performed for the business on construction are performed by low- 
or very low-income persons standard, but adding in that such 
performance must be over the last three-month period to help businesses 
determine whether or not they meet the criteria. HUD is also 
maintaining a separate criterion for businesses owned and controlled by 
current public housing residents or residents who currently live in 
Section 8-assisted housing, but increasing the required percentage of 
owned and controlled to 51%. This change is in response to public 
comments and to maintain consistency with HUD's public housing 
regulations on contracting with resident-owned businesses at 24 CFR 
part 963. HUD also added a change to the documentation timing in 
paragraph (1) of the Section 3 business concern definition to allow a 
six-month grace period. HUD understands that businesses need time when 
bidding on contracts and prior to the contract's execution to assemble 
materials and to assess labor hours. This change is responsive to 
commenters who expressed concerns about Section 3 status retention, 
since labor hours can be dependent on the number of contracts on which 
a business bids and receives.

Changing the Professional Services Definition

    In this final rule, HUD is amending the professional services 
definition to clarify that only non-construction services that require 
an advanced degree or professional licensing, rather than all non-
construction services, are excluded from Section 3. HUD wants to ensure 
this final rule's emphasis encapsulates the statutory requirement to 
prioritize low- and very low-income workers, and provides this category 
of exempted workers from reporting given the challenge to hire low- and 
very low-income workers in jobs that require such degrees and 
licensing.

Counting Labor Hours for 5 Years

    HUD's proposed rule provided that labor hours for Section 3 workers 
and Targeted Section 3 workers could be counted as long as the worker 
met the definition of a Section 3 worker or Targeted Section 3 worker 
at the time of hire. Based on public comments and further 
consideration, HUD agrees that a worker whose income has risen should 
only be counted for Section 3 purposes for a limited time period. HUD 
wants to ensure employers are invested in keeping Section 3 workers 
employed, and that there is enough opportunity to build skills and 
experience so that Section 3 workers may develop self-sufficiency and 
compete for other jobs in the future. Therefore, HUD provides that for 
purposes of reporting the labor hours for Section 3 workers and 
Targeted Section 3 workers, an employer may choose whether the workers 
are defined as Section 3 workers for a five-year period at the time of 
the workers' hire, or when the

[[Page 61528]]

workers are first certified as meeting the Section 3 worker definition.

Delayed Effective Date

    The rule provides for a delayed transition to labor hours and the 
associated recordkeeping requirements. HUD recognizes that employers 
and grantees will need time to transition their systems and reporting 
practices as a result of this final rule. HUD is mindful of the need to 
update policies and procedures for planning purposes, and the 
importance of implementing the rule such that employers will be able to 
comply. Therefore, HUD has provided for a transition period through at 
least July 1, 2021. During this transition period, HUD expects that 
employers and grantees will begin following this final rule's 
requirements for new grants, commitments, and contracts. The exact date 
on which any particular recipient of HUD funding will be able to 
implement the conversion to the new requirements will vary during this 
transition period, but the transition must be complete by July 1, 2021. 
The reporting requirements and labor hours tracking will not begin 
until the dates for each entity specified in the ``Compliance Date'' 
section above.

IV. Discussion of Public Comments and HUD's Responses

    The public comment period on the proposed rule closed on June 3, 
2019, and HUD received 163 public comments. The comments came from 
state and city government agencies and housing administrations, housing 
authorities, non-profits, independent consultants, private citizens, 
housing authority directors, small businesses, the construction 
industry, and housing authority associations. The following presents 
the significant issues and questions related to the proposed rule 
raised by the commenters, and HUD's responses to these issues and 
questions. HUD would like to thank all the commenters for their 
thoughtful responses.

``Best Efforts'' and ``Greatest Extent Feasible''

    In the proposed rule, HUD included a specific question for public 
comment regarding these statutory terms. Some commenters suggested the 
terms are interchangeable. One commenter suggested that HUD use the 
term ``reasonable best efforts'' for CDBG and HOME recipients and 
remove the term ``greatest extent feasible'' from the Section 3 
regulations or use only ``best efforts.'' Other commenters argued that 
these words are key to the intent of the statute, which is to provide 
recipients leeway when constraints outside their control impede 
implementation, and recommended that HUD provide guidance materials on 
how to show best efforts when organizations do not meet their Section 3 
goals, such as data collection forms which would indicate best efforts 
or non-exclusive lists of examples of ``best efforts'' and ``greatest 
extent feasible.''
    In contrast, some commenters suggested that these terms are not 
interchangeable. One commenter said that ``best efforts'' should be 
measured by tracking outreach and outcomes of outreach and ``greatest 
extent feasible'' is the result of ``best efforts.'' Another commenter 
argued that ``best efforts'' can be more clearly defined than 
``greatest extent feasible,'' as specific actions can demonstrate 
efforts, while feasibility is a more passive analysis of what is 
possible. One commenter argued that the ``greatest extent feasible'' is 
a much more rigid and prescriptive standard than the ``best efforts'' 
standard and noted that courts have found that the ``best efforts'' 
requirement ``specifically avoids creating a mandatory obligation on 
the part of the agencies the statute affects.'' This ``best efforts'' 
standard likewise ``does not call for perfect compliance.'' This 
commenter encouraged HUD to allow PHAs to retain greater discretion 
over the development of their own Section 3 programs.
    A commenter suggested that Subpart B participants should continue 
to use ``best efforts'' while Subpart C participants should use 
``greatest extent feasible,'' and agencies receiving funding that 
triggers compliance under Subparts B and C should use the ``best 
efforts'' standard. One commenter suggested using the term ``best 
efforts'' to comply with employment, contracting and training 
opportunities.
    Commenters also urged HUD to enforce the terms ``best efforts'' and 
``greatest extent possible,'' suggesting that whatever the standard, if 
an activity by a recipient, contractor or subcontractor does not 
adequately serve to hire, train, and retain a Section 3 worker, then it 
should not meet the standard. These commenters provided an example of a 
PHA's best effort. Commenters noted that while the recipient or 
contractor appears to meet the Section 3 goal, or at least made ``best 
efforts'' to reach the goal, in practicality such effort is not 
workable.
    One commenter wrote that the terms without any definition are too 
broad and should be defined to assist in compliance with Section 3. 
Another commenter proposed that HUD should define the terms by how they 
will be measured; for instance, that ``best efforts'' could be 
determined by a specific set of metrics around recruitment efforts and 
the percentage of Section 3 workers in the area. One commenter 
suggested a way to draft the rule using dollars spent to track 
compliance such that these terms would not be necessary.
    Other commenters requested that HUD not define these terms or 
should not restrictively define these terms because HUD should trust 
the judgment and common sense of its professional field staff to 
determine compliance, because documenting compliance according to 
specific definitions could create additional administrative burden, 
because there are constraints outside the grantee's control, and 
because guidelines may stifle innovation.
    HUD Response: HUD appreciates commenters' responses to the specific 
question regarding ``best efforts'' and ``greatest extent feasible'' in 
the proposed rule. ``Best efforts'' and ``greatest extent feasible'' 
are statutory terms, used in the statute in different contexts. As 
such, HUD will continue to use both terms to track compliance. HUD 
agrees with commenters that there are many ways to interpret the 
language. Traditionally, HUD has used the terms interchangeably, as 
referenced in the statute, and will continue to be consistent with the 
statutory language. See 12 U.S.C. 1701u(b)-(d). HUD also agrees with 
commenters who noted these terms are integral to the statutory intent 
and provide flexibility, rather than administrative burden, to grantees 
or recipients.
    HUD notes that some perceive ``best efforts'' to be the more 
rigorous standard, while others perceive ``greatest extent feasible'' 
to be the more rigorous standard. HUD has determined not to define the 
difference between these two terms, but rather to increase the emphasis 
on outcomes as a result of these efforts. A recipient's reported 
results will be compared to the outcome metrics defined in the 
benchmark Notice. HUD program staff will evaluate the level of effort 
expended by those recipients that fail to meet the benchmark safe 
harbor, and thus will ensure that the statutory terms are being 
properly enforced. HUD included a list of examples in the regulation at 
Sec. Sec.  75.15 and 75.25, including engagement in outreach efforts to 
generate job applicants who are Targeted Section 3 workers, providing 
training or apprenticeship opportunities, and providing technical 
assistance to help Section 3 workers compete for jobs (e.g., resume 
assistance, coaching).

[[Page 61529]]

Move to Labor Hours

Support for Using ``Labor Hours''

    Many commenters supported the shift to labor hours and, 
notwithstanding the alternatives presented in the proposed rule for 
PHAs, encouraged HUD to do the same for public housing construction, 
modernization, and similar work. These commenters stated that the ``new 
hire'' loophole should be eliminated for both housing and community 
development and public housing projects. Commenters stated that, in 
practice, contractors have only brought on new hires for short periods 
of time; the shift to labor hours will promote longer term employment. 
Commenters also stated that the shift to labor hours would solve the 
problem of contractors using dishonest practices to meet benchmarks, 
such as hiring Section 3 residents to fill the 30% benchmark only to 
lay them off shortly thereafter, or employing Section 3 hires for less 
than 20 hours a week. Commenters stated that allowing PHAs and their 
contractors to use ``new hires'' could provide a loophole to PHAs, 
allowing them to hire Section 3 workers for a limited or short time 
frame in order to comply with the regulation. Short-term employment 
does not allow residents to obtain technical skills, knowledge, or 
adequate savings. PHAs should be required to use labor hours worked 
because they can evade Section 3 compliance through manipulative hiring 
practices.
    Commenters stated that the ``labor hours'' standard is far more 
effective, less susceptible to manipulation and administratively easier 
to verify. Commenters stated that the new hire standard is vulnerable 
to manipulation, because any contractor or subcontractor that performs 
work on more than one project at a time can easily avoid Section 3 
hiring responsibilities by placing their new hires on non-Section 3 
covered projects. Commenters asserted the new hire standard may be the 
single greatest barrier to achieving the employment potential of 
Section 3.
    HUD Response: HUD agrees that counting new hires can be problematic 
and that collecting labor hours can be a more effective measure. As 
stated in the proposed rule, HUD believes that counting labor hours is 
consistent with the statute and mitigates contractors' ability to 
manipulate their Section 3 outcomes. HUD has adopted the suggestion by 
the commenters and in the final rule applies the labor hour 
requirements to both housing and community development and public 
housing projects.

Support for Using New Hires

    Many commenters supported retaining the new hires metrics. 
Commenters stated that tracking by labor hours is burdensome, will 
increase administrative costs, and will not streamline the Section 3 
reporting requirements. One commenter refuted HUD's hypothesis 
articulated in the proposed rule and stated that a labor hours metric 
is unlikely to capture the data on sustained employment opportunities 
that HUD is seeking. Another commenter stated that the proposed labor 
hours metric would decrease the number of firms willing to bid on 
contracts, increase the cost of public contracting for both the PHA and 
contractors, and provide no appreciable increase in Section 3 workers. 
Commenters stated that HUD should continue to track compliance by new 
hires for both Subparts B and C.
    One commenter stated that labor hours should only apply to projects 
that already require the collection of certified payrolls as part of 
Davis Bacon compliance. Another commenter recommended HUD look to 
existing programs such as the Department of Transportation's 
Disadvantaged Business Enterprises for guidance to make substantive 
changes to Section 3.
    Commenters stated that the changes will generate additional 
administrative burdens. Commenters especially emphasized the potential 
impact on the Housing Trust Fund (HTF) program and state CDBG and HOME 
program implementation because states, particularly small and rural 
community sub-grantees, have limited capacity. Commenters recommended 
HUD give State CDBG programs a similar alternative to the one offered 
to PHAs in Sec.  75.15(d). Another commenter proposed HUD allow State 
CDBG programs to use a good faith assessment of hours, stating that 
Sec.  75.25(a)(4) will help but will not eliminate the difficulty for 
State CDBG programs. Another commenter specifically referenced HOME 
funding and the HTF regulations, noting that stated HTF regulations do 
not trigger Davis-Bacon and it is rare for a HOME-funded project to 
trigger Davis-Bacon and prevailing wage requirements.
    Commenters stated that HUD's assumption that labor hours are 
already tracked by most contractors and subcontractors to comply with 
the prevailing wage requirement is false. Commenters specifically noted 
that not all CDBG programs are subject to such requirements. One 
commenter wrote that even a small maintenance contract could result in 
6 extra work hours for staff charged with ensuring correct payroll 
entries and compliance, stating that a current contract that does not 
track labor hours would have an increase of approximately $606,000 of 
federal funding required to administer the contracts, an additional 5% 
of costs. Another commenter stated that the proposed shift to labor 
hours will create an estimated 110 hours of additional administrative 
effort for the commenter per construction project, and will not impact 
the duration of Section 3 worker employment or allow HUD to better 
determine if long-term employment opportunities are generated. One 
commenter stated that tracking labor hours would require city 
contractors and subcontractors to track project labor hours using 
LCPtracker as the city does, necessitating increased administrative 
staff and resulting in higher contract amounts. One commenter stated 
that payrolls required for Davis-Bacon compliance are often submitted 
in hard copy, so compliance with the shift to labor hours would require 
manual data entry, a significant added labor-intensive task. Commenters 
also stated that many contractors are small business owners who do not 
have payroll software and many housing authorities do not have 
sufficient staff to track hours worked on all projects. Commenters also 
noted that many medium and smaller sized PHAs do not use LCPtracker and 
instead rely on contractor payrolls to monitor Davis-Bacon and Section 
3. Other commenters stated that tracking hours could be more burdensome 
than tracking new hires, because new hires are only reported once. 
Tracking the workers' hours necessitates verifying each Section 3 
employee each week for the duration of their employment.
    HUD Response: HUD carefully considered the diverse public comments 
on the use of labor hours versus retaining new hires as the measurement 
for assessing compliance with Section 3 requirements. HUD believes that 
the use of new hires provides an incomplete measure of the economic 
opportunities available to low and very low-income persons envisioned 
by the Section 3 statute. HUD believes that moving to the labor hours 
metric provides a more robust measure of how Section 3 is intended to 
work and mitigates contractors' ability to manipulate Section 3 
outcomes. HUD concluded the benefits of the labor hours approach 
outweighs the marginal cost that would result from this shift. HUD has 
determined that, while public commenters have concerns about possible 
burdens that result from the

[[Page 61530]]

proposed transition to recording labor hours instead of new hires, it 
is in the best interest of the communities served by HUD to implement a 
more impactful Section 3 standard across all HUD-funded programs. The 
use of labor hours is intended to ensure that recipients of these 
program funds are fully in compliance with the intent of Section 3--
maximizing the economic opportunities arising from Federally funded 
activities that are available to low- and very low-income persons, 
including those who reside in public housing.
    HUD also notes that the comments revealed a diversity of 
understanding with respect to HUD's record-keeping expectations in 
measuring the labor hours metric. HUD does not anticipate the level of 
detail in record-keeping that is required under the Davis-Bacon 
prevailing wage framework for purposes of Section 3. The proposed rule 
does not require prevailing-wage-style payroll reports. HUD does 
anticipate that either employers have some form of time and attendance 
system, particularly where employment uses an hourly wage structure, or 
that employers have salaried staff. The final rule does not require any 
change in these systems, nor necessitate any software approach to 
tracking payroll. Those employers that use a time and attendance system 
to track hourly wages may rely on that data, while the final rule 
provides a good faith reporting exception which applies to all entities 
that do not have an existing time and attendance system. The final rule 
has been modified in an effort to clarify that the good faith exemption 
applies to all Section 3 reporting entities (not only contractors and 
subcontractors) and that data from any existing salary-based or time-
and-attendance-based payroll records can be used in good faith 
reporting under Section 3. HUD is mindful of the need to update 
policies and procedures for planning purposes, and the importance of 
implementing the rule such that employers will be able to comply. 
Therefore, HUD has provided for a transition period and a bifurcated 
compliance date. Public housing financial assistance recipients must 
comply with the reporting requirements starting with the recipient's 
first full fiscal year after this final rule's effective date. Section 
3 project recipients must comply with the reporting requirements 
starting with the recipient's first full program year for projects 
committed or awarded after this final rule's effective date.

Many Section 3 Positions Are Short-Term in Nature

    One commenter stated that many of the jobs made available under 
Section 3 requirements are short term positions specific to the needs 
of the individual project and/or worksite. These positions provide 
opportunities for the target population of low-skilled workers to build 
work experience (leading to possible economic advancement) while 
helping ensure project costs remain reasonable. Another commenter 
stated that the Section 3 goal leading to long-term employment and 
career advancement is unrealistic, as most opportunities generated by 
Section 3 projects are construction-related and therefore seasonal or 
project-based; it would be burdensome and complicated to track via 
labor hours long-term employment that results from a Section 3 worker 
being hired on a subsequent Section 3 project by a different 
contractor. Contractors do not keep pools of long-term general laborers 
on hand for consecutive projects as a means of employing Section 3 
workers. Other commenters stated that nothing in the statute states 
that long-term employment through public housing or other housing and 
community development funding is the goal of Section 3; the statutory 
intent is to provide employment and training opportunities to residents 
of low-income communities where Federal housing and community 
development dollars are being spent, and tracking new hires better 
meets this intent.
    Similarly, commenters stated Section 3 workers are more likely to 
assist in temporary work for PHAs. Using new hires better fits with 
this economic reality. One commenter stated that contractors do not 
reduce the number of part-time employees so they can provide full-time, 
long-term employment to fewer Section 3 workers. Other commenters 
stated that the nature of the construction industry is episodic; 
workers are not employed by one company for long periods of time, but 
from project to project, and workers often move from one company to 
another. The number of hours that a specific person works is generally 
based on what is required for the project and the type of work they are 
doing. Commenters asserted it is unreasonable to think that hours for 
lower-skilled employees will dramatically be increased for a specific 
construction project by moving to a ``labor hours'' standard.
    Commenters also stated that the move to labor hours will confuse 
contractors and create more complexity. Another commenter anticipated 
pushback from contractors declining to bid, which can lead to an 
increase in the cost of developing affordable housing. Commenters 
stated that tracking labor hours could provide contractors with an 
incentive to hire fewer low-income residents by employing those hired 
for a greater number of hours. This would have a negative effect on the 
number of low-income residents hired overall.
    HUD Response: HUD recognizes that many Section 3 opportunities are 
short-term employment opportunities. The shift from measuring new hires 
to measuring labor hours continues to value these short-term 
opportunities as creating significant economic opportunities for low- 
and very-low-income workers, and these short-term opportunities will 
likely remain a primary source of Section 3 opportunities. At the same 
time, the shift in metrics more accurately reflects the nature and 
extent of these employment opportunities and places greater relative 
weight on those opportunities which do provide long-term career ladders 
and sustained employment opportunities.
    There is no obligation on a reporting employer to track an 
employee's work beyond the immediate short-term seasonal or project-
based employment. The opportunity to track an employee over time is 
solely an opportunity which can be seized by those reporting employers 
who have invested the extra time and effort to nurture an employee over 
time. That extra effort to develop a career track is not recognized by 
the previous new hire metrics but is recognized in the labor hour 
metrics. It should be noted, however, that the use of the labor hour 
metric to reward retention applies only to the relationship with the 
current employer. (See Sec.  75.11(a)(2) ``A worker who currently fits 
or when hired fit at least one of the following categories, as 
documented within the past five years . . .'') This provides an option 
for employers to look back to the worker's status at the time of 
original employment but does not require that an employer do so if the 
employer only wants to reference the employee's current status. 
Contrary to the concept referenced in the comments, there is no ability 
to claim long-term employment when hired on a subsequent Section 3 
project by a different contractor.
    This rule updates HUD's Section 3 regulations to create more 
effective incentives for employers to retain and invest in low- and 
very low-income workers. It is HUD's opinion that the change from new 
hires to labor hours, in combination with the opportunity to

[[Page 61531]]

provide good faith assessments, is consistent with businesses' existing 
payroll systems. Finally, HUD is of the opinion that this change will 
better advance the goal of sustained employment and career 
opportunities for low- and very low-income workers.

Alternatives

    Several commenters suggested alternative frameworks for measuring 
Section 3 results, in some cases using the labor hours metric and/or 
the new hire metric already articulated in the current and proposed 
rules and in some cases proposing new alternative metrics entirely.
    Some commenters recommended including definitions for both 
Alternative 1 and Alternative 2 so that agencies may exercise whichever 
option best suits their local circumstances. One commenter recommended 
using the $200,000 project threshold or $400,000 recipient threshold to 
determine whether labor hours or new hires should be the appropriate 
reporting metric, as larger projects have greater potential to create 
long term employment opportunities. One commenter focused on the safe 
harbor benchmark, stating PHAs should have the choice of labor hours at 
10% or new hires at 30%. A commenter stated that if labor hours is 
adopted, all recipients and subrecipients should have the same 
flexibility allowed to PHAs.
    Another commenter stated that ``labor hours worked'' should be used 
in conjunction with ``30% new hires.'' The commenter wrote that many 
PHAs do not track the generated new hires metric making the current 30% 
of new hires mandate irrelevant--some PHAs allow contractors and 
subcontractors to select how many hires they will take onto a project 
despite it coming short of the 30% benchmark. The commenter wrote that 
tracking both ``labor hours worked'' along with the ``30% new hires'' 
provides further assurance that a recipient's contractors and 
subcontractors do not avoid their responsibilities to pay the 
prevailing wage in accordance with the Davis Bacon Act.
    Other commenters argued neither labor hours worked, nor number of 
new hires are accurate metrics for Section 3 compliance and impact, 
where the goal of Section 3 is sustained economic independence and 
economic enhancement for Section 3 workers in and around HUD's 
investment areas. Commenters suggested compliance should instead be 
measured by: (1) Payroll dollars paid to Section 3 employees; (2) 
training dollars spent training Section 3 workers; and (3) contract 
dollars paid to Section 3 contractors. Commenters further asserted 
tracking employment status would be unnecessary if all Section 3 
employment payroll dollars were captured as a percentage of gross 
payroll dollars instead. Another commenter stated that an alternate 
suggestion would be to delineate Section 3 workers as full-time or 
part-time, and that tracking hours by using these two categories would 
be effective while still giving HUD information about the hours being 
completed by each worker. One commenter recommended Alternative 2, 
which continues to track new hires with the addition of Targeted 
Section 3 workers.
    One commenter stated that transparency is needed, and the new 
revisions of Section 3 should include that contractors and 
subcontractors must make public the total amount of workers expected to 
complete a construction project.
    Commenters proposed a third alternative to the two proposed, which 
is to stay with the current existing Section 3 goals, for both new 
hires (30% of new hires) and for contracting with Section 3 business 
concerns (10% of construction dollars and 3% of other dollars). Changes 
to what is already understood by contractors will be administratively 
burdensome and will require additional education and training for 
contractors and subcontractors.
    HUD Response: HUD appreciates the alternatives suggested and has 
considered the various comments regarding the alternatives presented in 
the proposed rule and the modifications to those alternatives presented 
in the comments. HUD has concluded that both the use of Alternative 2 
(New Hires) and the use of a hybrid drawing from both Alternative 1 and 
Alternative 2 provide an incomplete measure of employment opportunities 
generated through Section 3. Therefore, HUD decided not to retain the 
new hire standard. Rather than apply new hires recordkeeping to some 
programs and labor hours to others, HUD believes it is more efficient 
and effective for purposes of HUD's objectives with respect to Section 
3 to apply the same standard across the board. HUD has determined to 
align Section 3 reporting requirements with typical payroll business 
practices by tracking labor hours (whether based on prevailing wage 
data, non-prevailing wage time-and-attendance system data, good faith 
assessments of hourly workers not tracked through a data system, or 
good faith assessments of salaried employees). While commenters varied 
on whether tracking Section 3 outcomes through labor hours will be 
easier for recipients of HUD funding, HUD has concluded that the 
consistent labor hours metric more accurately reflects the impact of 
Section 3 and the economic development opportunities created. With 
respect to the alternatives regarding aggregate payroll tracking or 
tracking full-time and part-time positions, HUD believes that tracking 
of labor hours will adequately show hours worked. HUD has determined 
that tracking of training will be done qualitatively when appropriate.

Process for Tracking Labor Hours

    Commenters stated that while they appreciated the idea of 
streamlining the metric, tracking new hires vs. hours may be a 
disincentive to developers if the tracking is more onerous or 
complicated than the current method. If tracking labor hours is a goal 
similar to Davis Bacon, then the process should be fully integrated 
with the Davis Bacon procedure including the duration of tracking (only 
until project completion), reporting requirements, and procedures. 
Commenters stated that ascertaining whether an employer has any new 
hires is not a simple task; it involves (1) reviewing pre-award payroll 
records to determine who was on the employee's payroll at the time of 
contract award and (2) reviewing ongoing payroll records for the 
duration of the contract to determine whether any new employees have 
been hired. Commenters also stated that it makes no sense to apply the 
``labor hours'' standard to only one type of construction and 
rehabilitation project but not to another, based solely on the type of 
HUD funds involved. If a contractor employs no Section 3 workers, there 
should be no requirement to provide the data.
    Commenters stated inexpensive software is available that enables 
contractors to submit electronic payroll reports and allows PHAs and 
other Section 3 funding recipients to easily determine the hours worked 
on the project, in each trade, by all workers and by Section 3 
residents. Commenters noted such software is available to recipients of 
housing and community development assistance and also to PHAs and other 
public housing financial assistance recipients. Commenters stated that 
commonly used Contract Management and Payroll systems such as 
LCPtracker and B2GNow have features that align with compliance 
practices and make monitoring more effective. One commenter stated that 
HUD could provide appropriate software to all

[[Page 61532]]

agencies to assist them in tracking and reporting labor hours. A 
commenter noted that its city has a Federal labor standard software 
tracker which only 21% of contracts use, and this rule would require 
100% of contractors to use the software, resulting in increased 
administrative work, contract costs, and system management.
    One commenter noted that it would be easier to track labor hours 
with LCPtracker software if the reporting were more aligned with Davis-
Bacon reporting. Commenters also saw potential in the hourly tracking 
if there were a way to eliminate double paperwork by adding Section 3 
reporting to the existing Davis[hyphen]Bacon worksheets. On the other 
hand, when Davis[hyphen]Bacon does not apply to a Section 3 project, 
some commenters felt the administrative burden of tracking hours could 
be higher. More information would be needed about how the reporting 
requirements would be implemented before it could be definitively 
agreed that tracking hours is less burdensome than tracking new hires.
    HUD Response: HUD recognizes the diversity of views on whether 
tracking labor hours would be less burdensome for organizations 
obligated to report Section 3 results. Based on the comments, HUD has 
concluded that it is likely to be less burdensome to track labor hours 
in many circumstances, and HUD has clarified the applicability of the 
good faith exemption to mitigate any potential burden for those who do 
not have payroll systems which would align to a labor-hours reporting 
metric. For those efforts subject to Davis Bacon requirements, which 
includes many HUD-funded construction endeavors, tracking labor hours 
consistent with existing tracking for prevailing wage requirements 
would almost certainly reduce burden on recipients. HUD is aware that 
there are existing software options that have the potential for 
capturing total labor hours and labor hours contributed by Section 3 
workers. HUD also is exploring whether and how to operationalize and 
integrate HUD's Section 3 Performance Evaluation and Registry System 
(SPEARS) with outside software vendors. The SPEARS system already has 
optional data fields to capture the Aggregate Number of Staff Hours 
Worked and Total Staff Hours Worked by Section 3 Employees, and the 
system will be modified to align with the final rule. Underlying these 
considerations, however, is HUD's belief, as described above, that 
tracking labor hours will better allow HUD to determine if long-term 
employment opportunities are being generated, and that the metric 
should be consistent without regard to the identity of the recipient of 
HUD funds. Unlike a labor hours measure, the new hire measure does not 
consider the share of actual work done by low- and very low-income 
workers, and new Section 3 hires may not be given the opportunity to 
work a substantial number of hours.

Labor Hours Based on Good Faith Assessment

    One commenter stated that the proposed new rule allows for 
recipients to rely on a contractor's ``good faith assessment'' of labor 
hours (rather than payroll reports) if the contractor is not subject to 
other requirements specifying time and attendance reporting. Since a 
large proportion of housing rehabilitation and construction projects do 
not meet the unit thresholds that trigger Federal labor standards (i.e. 
eight units for CDBG, 12 units for HOME), grant administrators will 
regularly have to report labor hours based on a contractor's ``good 
faith assessment.'' Use of this approach will introduce an unknown 
error margin into the calculation of labor hour benchmarks. This lack 
of data integrity calls into question the meaning of the proposed 
benchmarks and the soundness of using ``labor hours'' as a unit of 
measurement. Commenters stated that Section 3 businesses who report 
labor hours in ``good faith'' need to have specific recording 
requirements (i.e., software) to avoid manipulation; it is more 
efficient to rely on tracking systems instead of contractors' good 
faith submissions. Commenters stated that not all HUD construction 
projects are subject to Davis-Bacon compliance and even a good faith 
assessment of labor hours will require significant PHA resources to 
monitor, review, and compile. One commenter stated that while the 
proposed rule states that HUD will permit ``a good faith assessment of 
the labor hours'' for certain employers, recipients could still be 
required to establish new compliance procedures, including determining 
how to protect the privacy of Section 3 workers and businesses when 
supplied with labor hours supporting documentation.
    HUD Response: The final rule is explicit that employers are not 
required to acquire a time-and-attendance system in order to comply 
with the Section 3 rule. The ``good faith assessment'' is a limited 
exception to be used by employers who do not have systems in place to 
track labor hours. This rule was put in place to avoid increased 
administrative burdens. HUD is aware of the margin of error represented 
in the good faith assessments, but has concluded that even with this 
margin of error, the labor hours metric provides a more accurate 
reflection of the economic opportunities created in connection with 
HUD-funded activities than the new hires metric. The exception does not 
apply if the employer is subject to other time-specific requirements.

Section 3 Applicability Threshold, HUD's Lead Hazard Control and 
Healthy Homes Programs and All Section 8 Programs

Total Funds Threshold or per Project Threshold Versus an Increased 
Threshold

    The proposed rule set the Section 3 applicability threshold for 
Section 3 projects to projects where the amount of assistance exceeds 
$200,000. HUD received comments both in favor of maintaining the 
current $200,000 threshold and in favor of the new proposed threshold. 
Commenters also addressed the use of a project versus a total funding 
threshold. In addition, other commenters provided a range of 
alternative frameworks for setting the threshold amount--different 
numbers and the inclusion or exclusion of different kinds of funding in 
the threshold calculations.
    Some commenters recommended that the $200,000 threshold be based on 
the total amount of funding received within the fiscal year because it 
is a more simplified and streamlined process. Commenters stated the 
change to a per project threshold would result in many housing 
production projects that are mainly small and resource constrained 
having to comply with Section 3 requirements for the first time, noting 
that a per project threshold can become complicated and burdensome when 
a recipient handles a large volume of contracts that are funded by 
multiple sources. Commenters went on to state that a per project 
threshold would reduce the number of economic opportunities directed to 
low-income persons and recommended continuing to subject Project Based 
Voucher programs to Section 3 requirements to ensure those 
opportunities are directed toward low-income persons and businesses 
that employ them. Commenters in this line of thought noted that the 
$200,000 per project threshold would potentially exempt projects where 
the HUD funding is less than $200,000, even though the combined total 
project funding is much higher. Commenters stated this could lead to a 
decrease in the number of projects subject to Section 3 and an

[[Page 61533]]

overall reduction in Section 3 program impact.
    Other commenters supported the per project threshold generally 
without commenting on the amount or supported the $200,000 per project 
threshold and saw it as an improvement. Some of these commenters noted 
that while $200,000 is an improvement over the current threshold, it 
does not relieve underlying concerns that contractors may break up 
activities into small contracts of less than $200,000 each to avoid 
accountability. Several commenters agreed that a $200,000 per project 
threshold would still allow contractors awarded significant funding to 
avoid Section 3 requirements by carrying out small discreet activities 
even though they cumulatively spend more than the threshold amount. A 
commenter suggested that the final rule include a prohibition on such 
activity, so that HUD has authority to pursue enforcement measures if 
HUD determines a recipient is ``gaming the system'' to avoid Section 3 
obligations.
    Other commenters provided alternative threshold amounts at a range 
of figures up to $1 million. Some commenters stated the $200,000 per 
project threshold will not necessarily result in employment 
opportunities for low-income people, arguing a higher project amount 
does not inevitably translate to the need for new employees or a 
benefit to Section 3 business concerns. Commenters suggested an 
alternative $250,000 threshold which would coincide with the Office of 
Management and Budget simplified acquisition threshold and could 
automatically change when that amount is updated. Other commenters 
supported using the $250,000 threshold for all projects to include 
PHAs. Some large PHAs with Section 3 experience recommended raising the 
threshold to $350,000 on a per project basis and making this threshold 
consistent across all programs and funding sources. Commenters in 
agreement with this notion also noted that HUD has determined that 
employment opportunities in CDBG funded projects under $350,000 are 
very minimal, and these commenters argued that the same is also true of 
public housing projects. Commenters also recommended $400,000 or higher 
to increase the number of program recipients exempted from Section 3 
requirements from less than 4 percent to 20 percent, greatly reducing 
the compliance burden for smaller grantees. Still other commenters 
recommended a higher threshold of $750,000, tied to the single audit 
threshold, noting that smaller grants generally will not involve 
sufficient hiring opportunities to warrant the increased administrative 
burden. Other commenters recommended that a $1 million threshold would 
be a better measure of a project of a scale that would have the 
potential to drive the hiring of Section 3 workers and justify the 
additional administrative burden on recipients, subrecipients, and 
contractors to implement the program, particularly state CDBG programs 
that primarily fund public infrastructure. Another commenter 
recommended exempting grantees that receive $1 million or less annually 
in CDBG or HOME funds because such grantees focus on a finite set of 
activities that involve small projects.
    Commenters stated that a low threshold will create an undue 
compliance burden for small projects. Commenters suggested that 
adopting a higher per project threshold would still ensure the majority 
of CPD grants are covered but would likely offer significant regulatory 
relief for smaller grantees, builders, developers, contractors, and 
subcontractors who are disproportionately burdened by regulatory 
obligations. Some commenters who advocated for a higher threshold 
linked their reasoning to the effect of the threshold amount on 
contractors and subcontractors, noting that Section 3 obligations apply 
to recipients, their sub-recipients and so on. Commenters described 
cases in which builders forgo using covered funds to avoid the 
liability and compliance burdens of Section 3, and situations where 
developers experience costly delays on projects while searching for 
qualified subcontractors who are not deterred by the Section 3 
paperwork and certifications.
    Commenters also suggested that both a recipient threshold at 
$400,000 and a project threshold of $200,000, applicable across all 
programs, would be most appropriate to reduce reporting burdens with a 
limited impact on the dollar amounts of funding covered. Another 
recommendation was to apply Section 3 obligations to any entity that 
receives at least $200,000 during a program year for a specific program 
activity. Other commenters suggested either the threshold for contracts 
should remain $100,000 in HUD assistance; or a ``total contract value'' 
threshold should be defined that will trigger Section 3 on HUD-funded 
contracts, regardless of the dollar amount of the HUD funding. Other 
commenters offered an alternative threshold of 10 percent of 
construction costs per project. Commenters also reiterated that some 
CDBG grant awards are very small, ranging from $50,000 to $200,000, so 
units of general local government have difficulty finding contractors 
to bid on the projects, let alone finding a contractor that is a 
Section 3 business concern and is willing to work on a small project. 
Finally, commenters suggested limiting activities that trigger the 
threshold to only construction and rehabilitation, as defined within 
the Section 3 statute for CDBG, HOME and other CPD programs.
    HUD Response: HUD acknowledges the considerations raised by all the 
commenters in their responses. HUD found that the portion of Section 3 
expenditures excluded by the $200,000 per project threshold generate 
relatively few Section 3 jobs. After weighing the various 
considerations, this final rule maintains the $200,000 per project 
threshold in general but makes changes to the Lead Hazard Control & 
Healthy Homes Programs threshold. HUD believes that project funding 
levels help accurately define thresholds because the amount of funding 
spent on a project is directly related to the economic opportunities 
generated by the project. HUD acknowledges the potential disadvantages 
mentioned by commenters to using a per project threshold but reiterates 
the per project threshold will help provide opportunities for those who 
are recipients of Federal financial assistance for housing or residents 
of the community in which the Federal financial assistance is spent. In 
addition, HUD remains open to adjusting thresholds in the future based 
on updated data analysis. The final rule clarifies that HUD may change 
the thresholds and benchmarks at a later date via Federal Register 
notice, subject to public comment, based on updated data input and 
accounting for inflation. HUD also notes that not every contractor, 
subcontractor or sub-recipient must use Section 3 workers. A funds 
recipient could meet its Section 3 benchmarks with one contract to a 
Section 3 business concern where the number of labor hours worked is 
25% or more of all the labor hours worked by all workers on a Section 3 
project while not using Section 3 workers for other work. The recipient 
has flexibility in determining how to meet its benchmarks.

Lead Hazard Control & Healthy Homes Programs Inclusion

    Commenters who advocated for a single consistent per project 
threshold across all programs stated that the Lead Hazard Control and 
Healthy Homes programs should also be subject to the same threshold. 
Other commenters

[[Page 61534]]

agreed that Lead Hazard Control and Healthy Homes projects should be 
exempted from administrative and compliance burdens based on a 
threshold of $200,000 or greater, stating these projects are unlikely 
to generate many employment opportunities because they are small and 
Lead Hazard Control abatement and interim controls is to be done by 
trained and certified workers.
    Some commenters agreed that including Lead Hazard Control projects 
with no threshold would increase the administrative burden without a 
benefit, and while the exclusion is understandable, HUD should pursue a 
standardized threshold to avoid complicating Section 3 by creating a 
different scope for Lead Hazard Control and Healthy Homes programs. 
Commenters generally supported higher thresholds for Lead Hazard 
Control and Healthy Homes programs. A commenter suggested it may be 
appropriate to use the community development assistance threshold for 
simplicity. Alternatively, commenters suggested a more modest reporting 
threshold of not less than $50,000 for Lead Hazard Control and Healthy 
Homes projects, stating that for grantees working on multifamily 
projects in high cost cities, projects where the contract is less than 
$50,000 tend to be awarded to smaller contractors. A $50,000 threshold 
would meet HUD's admirable intention of ensuring greater Section 3 
participation from Lead Hazard Control and Healthy Homes grantees 
without imposing hardship on such small contractors.
    HUD Response: HUD agrees that the $200,000 threshold should not 
apply to Lead Hazard Control and Healthy Homes programs since those 
projects are generally smaller dollar amounts. However, in keeping with 
Section 3's statutory priorities and applicability, HUD is choosing to 
adopt a $100,000 project threshold regarding application of Section 3 
to Lead Hazard Control and Healthy Homes programs.

Section 8 Programs Exclusion

    Many commenters supported the exclusion of Section 8 programs in 
the proposed rule, as Section 8 programs are not included in the 
statute. Commenters went on to note that because Section 3 programs are 
development subsidy sources and Section 8 programs provide operating 
subsidies, Section 8 assistance recipients should not be subject to 
Section 3 regulatory responsibilities. Commenters noted that the 
primary purpose of Section 8 programs is to provide a rental subsidy 
that covers the difference between the contract rent and 30 percent of 
the tenant's income, stating these programs are ``affordability tools, 
not construction tools,'' and agreed HUD should not increase regulatory 
burdens on housing providers by expanding the scope of Section 3 to 
programs not covered in the statute.
    Some commenters urged that for Subpart B, HUD should retain an 
option for PHAs to report on Section 3 requirements for Section 8 
funded programs, noting that these programs generate significant 
employment and training opportunities for Section 3 workers. Commenters 
suggested HUD format Section 3 reporting so that Section 8 funded 
placements can be captured as part of a PHA's overall efforts. 
Commenters also suggested the current reporting system be updated to 
allow for the reporting of other placements that might be excluded with 
the new proposed rule, such as placements under professional service 
contracts.
    HUD Response: Section 8 programs are not covered under the Section 
3 statute. Therefore, HUD in this final rule maintains the 
clarification in the proposed rule that Section 8 programs are excluded 
from Section 3 requirements.

Section 3 Project Definition

    Commenters recommended that HUD more clearly define ``project'' for 
the purpose of Section 3, and asked how HUD would view a job order 
contract of more than $200,000 that may work on various locality-owned 
sites (e.g., all of a locality's schools or homeless shelters). These 
commenters also asked, if several unrelated HUD-funded activities are 
taking place at the same location and have a combined value of more 
than $200,000 constitutes a project. Lastly, the commenters asked 
whether the per-project threshold is based solely on construction-
related activities, and whether the level of Federal assistance to a 
project must exceed the $200,000 threshold to trigger Section 3.
    Another commenter recommended that HUD define ``project'' as 
follows: Project means a site or sites together with any building or 
multiple buildings located on the site(s) that are under common 
ownership, management, and financing and are to be assisted with 
Section 3 covered funds as a single undertaking. A program that funds 
multiple buildings under separate ownership, management and financing 
is not a project.
    HUD Response: HUD supports the Section 3 Project definition within 
the proposed rule and believes it is consistent with the statutory 
requirements of HUD programs. HUD also intends to provide sub-
regulatory guidance and technical assistance on a program-by-program 
basis to assist recipients with Section 3 implementation.

Section 3 Worker

Rule Rewards Creating Opportunities for Persons Who Are Not Low-Income

    Commenters stated that the rule, particularly the definitions of 
Section 3 worker, rewards creating opportunities for persons who are 
not low-income, which would be counterproductive to the intent of the 
Section 3 program. A commenter stated that the proposed definition 
could inadvertently include individuals who are not low-income because 
categories (ii) and (iii) are not income-based.
    Specifically, some commenters objected to category (ii) which 
allowed workers who live in a Qualified Census Tract (QCT) to be 
included in the definition of ``Section 3 worker'' because these 
individuals will not necessarily be low-income. One commenter noted 
this is especially true in large metropolitan cities with mixed income 
communities and gentrifying areas. Another commenter stated that 
researching employee residence as of the date of hire to determine 
census tract qualification will be difficult or impossible for long-
term employees who may have moved multiple times. Commenters warned 
that the QCT designation would create a risk of potential abuse by 
recipients. Some commenters suggested removing the QCT criteria 
altogether since the definition already includes a low- or very low-
income person.
    Other commenters objected to category (iii) which included all 
Section 3 business concern employees as Section 3 workers. These 
commenters stated that someone working at a Section 3 business concern 
is not necessarily a resident of HUD-assisted housing, nor is it likely 
that a business owned by 51% low-income people would hire only public 
housing or HUD-assisted residents. For this reason, commenters 
recommended that HUD should exclude ``a worker employed by a Section 3 
business'' from its definition and benchmarks and the definition of 
Section 3 worker and Targeted Section 3 worker. One commenter noted the 
phrase ``worker is employed by a Section 3 business'' is included in 
both the Section 3 worker and Targeted Section 3 worker definitions and 
recommended including this term in the Targeted Section 3 worker 
definition

[[Page 61535]]

only and not the Section 3 worker definition.
    HUD Response: HUD agrees that paragraph (1)(ii) could inadvertently 
include individuals who are not low-income. This final rule removes 
paragraph (1)(ii) regarding the QCT from the definition of ``Section 3 
worker'' from this final rule. However, HUD disagrees that the category 
of Section 3 business concerns should be removed from the Section 3 
worker and Targeted Section 3 worker definitions. The Section 3 statute 
states that HUD must prioritize Section 3 business concerns. If HUD did 
not include Section 3 business concerns in the definitions that are 
used for the benchmarks, PHAs and other HUD funded entities would have 
no incentive to hire Section 3 businesses. Including all Section 3 
business concern employees in the definition of Section 3 worker and 
Targeted Section 3 worker creates an incentive to contract with a 
Section 3 business while maintaining a single reporting metric. The 
final rule maintains that all hours worked on the project by the 
Section 3 business counts towards the benchmarks. HUD believes these 
changes are consistent with the statute.

Prior Conviction

    One commenter wrote that convictions for certain categories of 
crimes may have a direct bearing on the worker's suitability for 
particular jobs. Previous theft convictions, for example, may be 
relevant for a worker who will be involved in procurement and 
distribution of materials. Other commenters supported this language, 
stating that ``there is no evidence that hiring an individual with a 
criminal history will have a negative impact on employee success.'' The 
commenters also noted that the language is consistent with other HUD 
guidance on the use of background reports in housing decisions. 
However, one commenter suggested a minor revision to clarify the 
regulation: ``A recipient, contractor, or subcontractor shall not 
refuse to hire a Section 3 worker on the basis of a prior arrest or 
conviction, unless otherwise required by Federal, state, or local 
law.''
    HUD Response: HUD agrees with the commenters that convictions for 
certain crimes, such as fraud or theft, might affect a worker's 
qualifications for a particular position, and that ``there is no 
evidence that hiring an individual with a criminal history will have a 
negative impact on employee success.'' HUD notes that the Section 3 
worker definition provides that an individual's prior arrest or 
conviction shall not negatively impact their Section 3 worker status, 
but the definition maintains the requirement that the individual is 
qualified for the job. Job qualifications may include the worker's 
arrest or conviction history. The rule does not require a Section 3 
worker with a criminal history to be hired. HUD has considered the 
suggestions and has chosen to keep the regulatory language in Sec.  
75.5. See Section 3 business concern, Sec.  75.5 (``The status of a 
Section 3 business concern shall not be negatively affected by a prior 
arrest or conviction of its owner(s) or employees.''); Section 3 
worker, Sec.  75.5 (``The status of a Section 3 worker shall not be 
negatively affected by a prior arrest or conviction.''); Targeted 
Section 3 worker, Sec.  75.5 (``does not exclude an individual that has 
a prior arrest or conviction.'')

Additional Categories

    One commenter stated that the proposed rule no longer explicitly 
lists a public housing resident as a ``Section 3 resident'' and does 
not provide for the employer to continue counting that worker in the 
future. Another commenter suggested that staff hired by a PHA should be 
counted toward Section 3 requirements. Commenters suggested additional 
categories and expansion of existing categories, and requested HUD 
explicitly list the following: people immediately prior to hiring are 
public housing, Section 8, Section 811, Section 202 residents or other 
low-income people, and women. Commenters recommended that a ``Section 3 
worker'' should be a worker whose income is below the limit set by HUD, 
or a resident of public or HUD-assisted housing.
    One commenter supported the change to using an individual's status 
as low-income versus household income, which will increase the pool of 
persons that can be counted as a Section 3 worker and make meeting the 
benchmarks more attainable. Commenters requested clarification on 
whether the HUD-defined low-income level will be based on individual or 
family income and one commenter recommended the use of only an 
individual's income.
    HUD Response: HUD wants to clarify that, while the definition of 
Section 3 worker does not include public housing residents, it does 
include all workers whose income is below the income limit established 
by HUD, which is the same limit that would qualify someone for public 
housing. Therefore, public housing residents would be considered 
Section 3 workers. HUD does not believe that all staff hired by a PHA 
should be counted as Section 3 workers. Those staff that meet the 
qualification of a low or very low-income person, as defined by HUD's 
income limit, would already qualify, and HUD does not think it is 
appropriate to include all PHA staff. As for expanding the categories 
further, the Section 3 statute is specific as to the priorities that 
HUD should be providing with employment and other economic 
opportunities generated by Federal financial assistance. Therefore, HUD 
is not expanding the scope of Section 3 workers beyond those listed in 
the statute. HUD changed the Section 3 worker definition to include a 
worker whose income is below the income limit established by HUD in 
place of the family income and appreciates the comments in support of 
the change.

Setting Time Limits

    Commenters recommended that HUD should keep the existing standard 
of a three-year period for counting workers in order to account for 
staff turnover and to generate more accurate metrics. Other commenters 
recommended HUD limit someone counting as a Section 3 person to 5 
years. Another commenter stated that because many contractors and 
subcontractors report no new hires for specific projects, a Section 3 
worker should be defined as one who ``at the time of hire'' was low- or 
very low-income. One commenter asked HUD to be more specific in 
defining a Section 3 worker rather than stating low-income is a ``limit 
established by HUD.''
    HUD Response: HUD agrees with the commenters that a worker whose 
income has risen should only be counted for Section 3 purposes for five 
years. HUD wants to ensure employers are invested in keeping Section 3 
workers employed, and that there is enough opportunity to build skills 
and experience so that Section 3 workers may develop self-sufficiency 
and compete for other jobs in the future. An employer may choose 
whether the workers are defined as Section 3 workers for that five-year 
period at the time of the workers' hire, or the date from which the 
workers are certified as meeting the Section 3 worker definition.

Guidance

    Commenters requested that HUD provide more specific guidance 
regarding how to calculate labor hours for the purpose of determining 
Section 3 status. For example, is there a set timeline for 
consideration, such as during the past year or several years? Or is it 
based on the business' last 1-2 payrolls to capture the most recent 
picture of employment? Commenters stated that it is unclear over what 
time period labor hours are to be measured.

[[Page 61536]]

One commenter stated that it is unclear whether the ``labor hours'' 
standard relies on the labor hours on the Section 3 project, or in 
general.
    HUD Response: HUD will provide additional guidance to assist PHAs 
and grantees in how to calculate labor hours. Generally, labor hours 
will be calculated based on the labor performed on a Section 3 project 
for housing and community development financial assistance or on all 
labor hours performed within the fiscal year for public housing 
assistance.

Subrecipient

    One commenter stated that using the applicable definition of 
subrecipient in the HOME program would mean that multifamily owners 
contracting directly with the State may not have to comply with Section 
3 requirements because they are not included in that definition for the 
HOME program in 24 CFR 92.2. This commenter also noted that multifamily 
owners are also not often contractors (under the proposed definition), 
because they do not enter into a contract with a recipient to perform 
the work. This commenter suggested inclusion of owners in the HOME 
program and changing the definition of subrecipient to say ``has the 
meaning provided in the applicable program regulations, and in 2 CFR 
200.93'' or suggested HUD amend the definition of contractor to further 
define the phrase by adding ``work in conjunction with a Section 3 
project,'' to more clearly identify that it includes an owner in the 
HOME program that contracts with general contractors.
    HUD Response: HUD appreciates the comment. However, subrecipient 
has different meanings in different programs, which is why HUD defined 
it as either the meaning as is applied in the specific program or 2 CFR 
200.93.

Targeted Section 3 Worker Definition

    Some commenters supported the new ``Targeted Section 3 worker'' 
definition and eliminating tracking Section 3 business concern types 
separately. Some commenters stated that the Targeted Section 3 worker 
concept is consistent with the goal of expanding employment 
opportunities for individuals that receive Federal assistance for 
housing. Another commenter agreed with HUD's efforts to track and 
target certain high priority Section 3 workers separately and efforts 
to fold Section 3 business concern engagement into other benchmarks.
    Other commenters opposed the ``Targeted Section 3 worker'' 
definition, stating that it is duplicative with worker categories 
already given preference under Sec.  75.9. Commenters stated a separate 
reporting category for ``Targeted Section 3 worker'' merely complicates 
reporting requirements for recipients, contractors, and subcontractors, 
and recommended HUD keep the existing definition and the existing 
priority preference order. Other commenters noted that tracking 
additional information to determine Section 3 compliance would be 
burdensome.
    A commenter recommended that hours worked by Section 3 business 
employees be categorized as regular Section 3 worker hours and Targeted 
Section 3 worker hours depending on the employee's status to avoid 
inflated reporting of hours worked by targeted Section 3 workers. Other 
commenters suggested that a worker employed by a Section 3 business 
only be included in the ``Targeted Section 3 worker'' definition 
because it was created to better align the regulation with the law.
    Commenters stated that counting all Section 3 business concern 
employees as Targeted Section 3 workers is problematic and risks 
questionable data. HUD should exclude ``a worker employed by a Section 
3 business'' from the definition of Targeted Section 3 worker and 
Section 3 worker. Including ``a worker employed by a Section 3 
business'' in the definition of ``Targeted Section 3 worker'' dilutes 
the purpose of creating a Targeted worker designation. It also 
frustrates the purpose of the statute, which is to give priority to 
public housing and other HUD-assisted residents in employment and 
training opportunities, along with low-income families near the Section 
3 project location.
    Commenters also suggested that HUD include public and HUD-assisted 
housing residents in the Targeted Section 3 worker definition for 
Section 3 projects, not just PHA projects. The proposed definition of 
Targeted Section 3 worker for PHA projects more accurately interprets 
the statutory priority of Section 3 to employ public housing and other 
Federally assisted residents than the definition for CPD recipients. 
One commenter recommended that HUD include the word priority in the 
definition of ``Targeted Section 3 worker'' to clarify the requirements 
and add objective criteria or guidance by which to monitor or measure 
success or satisfactory performance.
    HUD Response: HUD appreciates the commenters' recommendation to 
target public and HUD-assisted housing residents in both funding types. 
However, the statute specifies priority categories differently for 
recipients of public housing financial assistance and housing and 
community development financial assistance. The Targeted Section 3 
worker is a concept designed to serve as a proxy for the highest 
priority categories, allowing HUD to collect data through standardized 
reporting regarding the funding recipients' efforts with respect to the 
priority categories. HUD believes that the definitions of Targeted 
Section 3 worker for both public housing financial assistance and other 
housing and community development financial assistance funds provide 
good reporting proxies for the statutory priorities and should remain 
as proposed. As Targeted Section 3 workers are a proxy for the priority 
categories solely for reporting purposes, and do not replace the 
prioritization that funding recipients must apply in their efforts 
under Section 3, the use of the word ``priority'' in the definition 
would be inappropriate.

Sec.  75.11 Targeted Section 3 Worker for Public Housing Financial 
Assistance

    Commenters stated that HUD should combine 75.11(a)(2)(i) and (ii) 
into a single category, ``residents of public and HUD-assisted 
housing'' to more clearly include residents of all HUD-assisted housing 
programs and conversion projects. Commenters supported the addition of 
Section 8 assisted households. This change mirrors the Section 3 
statute, which broadly emphasizes employment and training opportunities 
for ``recipients of government assistance for housing.'' Some 
commenters recommended deleting paragraph Sec.  75.11(a)(1), because it 
is redundant with Sec.  75.5. Commenters also asked HUD to clarify what 
``residents of other projects managed by the PHA'' covers. One 
commenter suggested HUD add ``administered by the PHA'' when describing 
Section 8 assisted housing.
    HUD Response: HUD appreciates the support for the categories in 
Sec.  75.11 and recommendations to make changes to include additional 
HUD programs. HUD believes that consistent with the statute, the 
Targeted Section 3 worker definition for public housing financial 
assistance should focus on the categories as listed. To be inclusive of 
residents in other housing assisted by the PHA and residents of housing 
in the property management portfolio of the PHA, both categories have 
been included in the regulation in place of the vaguer term ``managed 
by the PHA.'' Those residents would also count as Section 3 workers for 
purposes of Targeted Section 3 workers for public housing financial 
assistance. The rule's current ``resident

[[Page 61537]]

of other projects managed by the PHA'' has been replaced, which should 
address the commenter's concerns.

Sec.  75.21 Targeted Section 3 Worker for Housing and Community 
Development Financial Assistance

    One commenter wrote that limiting the definition to a geographic 
area eliminates large sectors of nearby Section 3 workers and business. 
Another commenter noted some State CDBG programs do not operate in 
areas where public housing residents or YouthBuild participants 
typically live. Commenters also stated that the proposed definition 
gives broader opportunity to identify low-income construction employees 
for Section 3 projects but requires wage calculations and census tract 
verification from contractors already burdened by paperwork and will 
remove the focus from employing eligible persons living within a 
neighborhood.
    HUD Response: HUD retained the proposed Targeted Section 3 worker 
definition in the final rule. The rule creates the ``Targeted Section 3 
worker'' concept so that HUD can track, and recipients can target, the 
hiring of Section 3 workers in selected categories based on the 
statute's hiring priorities. The Targeted Section 3 worker category 
also incorporates the statutory requirements of contracting with 
business concerns employing low- and very low-income persons. For other 
HUD housing and community development financial assistance programs, 
such as the State CDBG program or HOME Investment Partnerships 
programs, Targeted Section 3 workers would be low- or very low-income 
workers residing within a one-mile radius of the Section 3 project. If 
fewer than 5,000 people live within that one-mile radius, the circle 
may be expanded outward until that population is reached.
    The requirement that contractors verify whether workers are low or 
very low-income for tracking purposes is not new. Contractors were 
already required to verify new hires as qualifying for Section 3 
status, and the statute requires that employment and other economic 
opportunities generated by work in connection with housing 
rehabilitation, housing construction or other public construction 
projects receiving housing and community development assistance be 
directed to low- and very low-income persons in the local community. 
HUD's proposal to use Targeted Section 3 workers for housing and 
community development programs that fall within a defined service area 
should reduce burden because HUD's mapping tool will identify the 
jurisdiction the contractor should target.

Sec.  75.5: Section 3 Business Concern Definition

Previous Rule's ``Dollar Value'' Method

    Commenters stated that the previous ``dollar value'' method of 
reporting contracts awarded to Section 3 business concerns should be 
kept, as it gives recipients and general contractors a clear benchmark 
to achieve when selecting subcontractors and aligns with methods many 
are already using to report on minority-, women-, and veteran-owned 
businesses. Commenters noted Section 3 is designed to promote wealth-
building in addition to employment opportunities and the ``dollar 
value'' method is a better measure of economic opportunities provided 
to low-income owners of Section 3 business concerns than the labor 
hours worked by their employees. Without having a metric tied to the 
number of contracts awarded to Section 3 business concerns, commenters 
anticipated a reduction in the number of contract awards, and a 
reduction in employment opportunities. One commenter stated that both 
definitions will likely continue to be a challenging means of 
qualifying for eligibility and may prove difficult to document.
    HUD Response: HUD found the Section 3 business concern definition 
to be consistent with both the previous regulation and with the 
statute, although HUD notes that the final rule's definition does 
impose more rigorous criteria for qualifying as a Section 3 business 
concern with respect to the percentage of workers who must be Section 3 
workers. This additional rigor in the criteria ensures that, if 
qualifying on the basis that the firm employs Section 3 workers, a high 
percentage of workers are in fact Section 3 workers, and ensures that, 
if qualifying on the basis that the owner is a low-income individual, 
the owner is in operational control and will benefit from the wealth 
creation opportunities. The changes to the Section 3 business concern 
definition do not depend on the change in reporting to a labor hours 
metric.
    HUD recognizes that some in the industry have found the ``dollar 
value'' method to be workable, and that the dollar value metric does 
provide a measure of the extent of contracting to Section 3 business 
concerns. However, HUD believes there is value in having a unitary 
reporting metric--labor hours--and has designed the metric to measure 
both direct employment and to reflect prioritization of contracting 
with Section 3 business concerns. HUD believes that this new method 
will be effective, will encourage wealth creation opportunities for the 
owners of Section 3 business concerns, and will provide the opportunity 
for recipients of HUD financial assistance to determine which projects 
use Section 3 businesses in a way that is not administratively 
burdensome.

Rule Rewards Creating Opportunities for Persons Who Are Not Low-Income

    One commenter stated that the focus on hours worked is appropriate 
in light of the statute's focus on providing economic opportunities to 
low-income residents, but aggregating hours poses a risk that non-low-
income people at Section 3 business concerns may report hours, though 
this risk is mitigated by the Section 3 business concern definition. 
Another commenter stated that the 51% owned and 75% labor hours 
requirements allow Section 3 business concerns to employ persons who 
are not low-income or very low-income.
    Another commenter supported replacing the aggregate dollars spent 
metric, but stated that including all Section 3 business concerns' 
employee hours will lead to the misleading inclusion of non-low-income 
worker hours in the data; only the hours worked by the low- and very 
low-income employees of a Section 3 business concern should be reported 
as Section 3 hours worked.
    HUD Response: According to the Section 3 statute, HUD must 
prioritize businesses that provide economic opportunities for low- and 
very-low-income persons. The statute does not require that HUD 
prioritize business that only provide economic opportunities for such 
persons. If HUD were to include only the Section 3 workers in the 
reporting metrics, the regulation would not effectuate the statutory 
requirement to also place an emphasis on Section 3 business concerns. 
The Section 3 statute states that HUD must prioritize Section 3 
business concerns in the awarding of contracts. By collecting labor 
hour data on all employees of Section 3 business concerns, HUD is 
creating an incentive to contract with a Section 3 business concern 
while maintaining a unitary reporting metric for Section 3 performance. 
The final rule maintains the provision of the proposed rule that all 
hours worked on the project by the Section 3 business concern counts 
towards the benchmarks, with the awareness that this reporting 
framework will collect labor hour data for workers who are not low-
income. This serves as the incentive to contract with Section 3

[[Page 61538]]

business concerns. HUD believes these changes are consistent with the 
statute.

Verification

    A commenter stated that nothing addresses processes for 
verification of Section 3 business concern eligibility, and that HUD 
should enhance the Section 3 business concern registry to include 
confirmation of eligibility or work with Equal Employment Opportunity 
Commission to assist jurisdictions with certification programs. One 
commenter noted that using the Section 3 business concern registry to 
project availability of Section 3 workers is unreliable because the 
registry is a self-reporting structure with no mechanism to verify the 
business on the list, it assumes such businesses are able to work in 
any geographic area, and many PHAs in rural and suburban areas have 
reported that there are no Section 3 business concerns in their areas.
    Another commenter raised the issue that verifying Census tract 
designations would create an additional burden, especially Census tract 
data that changes over time, which will result in fewer contractors 
participating in Section 3 projects.
    One commenter stated apprehension about this part of the definition 
because accurately tracking and reporting labor hours will be much more 
challenging than tracking and reporting full-time employees. The 
proposed definition also makes it difficult for Section 3 business 
concerns and the entities that contract with them to predict with 
confidence that they will retain their Section 3 status, as labor hours 
can be dependent on the number of contracts a business bids for and 
receives.
    Another commenter requested clarification regarding how long a 
business retains the Section 3 business concern status once it is 
certified as a Section 3 business concern. Commenters suggested HUD or 
the local government should bear the responsibility for verifying the 
eligibility of a Section 3 business concern, rather than shunting that 
responsibility to the builder, general contractor, or subcontractors. 
HUD's online Section 3 Business Registry \4\ was a positive first step, 
but HUD does not verify the self[hyphen]certifications submitted by the 
business concerns, and it cautions database users to perform due 
diligence before awarding contracts.
---------------------------------------------------------------------------

    \4\ HUD, What is the Section 3 Business Registry?, Hud.gov, 
https://portalapps.hud.gov/Sec3BusReg/BRegistry/What.
---------------------------------------------------------------------------

    HUD Response: HUD plans to continue the use of the Section 3 
Business Registry as an available public tool. While HUD appreciates 
the suggestion that HUD or the local government make determinations of 
eligibility for Section 3 business concerns, HUD believes that, 
consistent with other paperwork requirements, it is appropriate that 
the entity receiving HUD financial assistance ensure compliance with 
Section 3 requirements, which includes confirming that both Section 3 
workers and Section 3 Business concerns qualify as such under this 
regulation. HUD addressed commenters' concerns about Census tract 
designations by removing that language from the rule, and concerns 
about labor hours are addressed in previous comment responses. Once a 
business is certified as a Section 3 business concern, it will retain 
that status as long as it continues to meet the definition. Status is 
determined at the time of hiring for each contract and is no different 
from any other definition. Currently, business concerns self-certify, 
and verification is done by HUD. The timing is on a project by project 
basis.

(1)(i) ``At least 51 percent owned by low- or very low-income persons''

    One commenter stated that this part of the definition follows the 
statute's intent. Another commenter stated that 51 percent ownership by 
low- or very low-income persons is unrealistic without training 
programs on business management.
    HUD Response: HUD appreciates the feedback from commenters and is 
keeping this part of the Section 3 business concern definition as it 
is. HUD has found this definition to be consistent with both the 
previous regulation and with the statute. HUD notes that the definition 
also includes other methods by which a business concern may be defined 
as a Section 3 business concern. See 24 CFR 135.5; 12 U.S.C. 1701u 
(e)(2).

(1)(ii) ``Over 75 percent of the labor hours. . . performed by low- or 
very low-income persons''

    Commenters supported changes to definitions of Section 3 business 
concerns, Section 3 workers, and Targeted Section 3 workers under the 
new hire approach. One commenter stated that the decision to focus on 
percentage of hours worked by Section 3 individuals will result in a 
decrease of self-identified Section 3 business concerns. The commenter 
asserted that although it is a better metric for proving actual 
commitment to long-term employment of Section 3 individuals, gathering 
the data will be overly burdensome. One commenter stated that this 
option will present undue hardship to small businesses and should be 
omitted. Another commenter stated that this requirement will negatively 
affect HOME and CDBG funded projects.
    Some commenters supported tracking Section 3 hiring separately from 
Section 3 business concern tracking. Section 3 business concerns are 
already encouraged to retain existing employees to meet the previous 
Section 3 business concern definition. Counting existing employees to 
meet both the contract and hiring goals may result in decreased new 
hiring in connection with Section 3 covered assistance. Commenters 
recommended only tracking new Section 3 hires employed by Section 3 
business concerns relative to a contractor's hiring goals.
    One commenter also stated that even though the proposed rule 
provides a mechanism for PHAs to continue documenting compliance 
through a ``new hire'' metric, this proposed definition would still 
require PHAs to analyze a business's labor hours in order to determine 
whether a business could qualify as a Section 3 business concern.
    One commenter noted the new burden would affect businesses who may 
not meet the new markers and might reevaluate the benefits of working 
with PHAs given the increased work to track labor hours. The commenter 
noted in an environment where getting bids is already difficult this 
would further dissuade them from doing business with PHAs. Other 
commenters suggested focusing on long-term employment goals for 
employees, developing benchmarks for growth of Section 3 business 
concerns, providing micro-business support, and targeting capital 
construction projects for mentorship and sub-contracting with Section 3 
business concerns.
    Some commenters stated that the definition of a Section 3 business 
concern should remain defined in part as a business where at least 30% 
of the permanent, full-time workforce are currently Section 3 
residents, or were Section 3 residents within three years of the date 
of first employment at the business concern.
    Commenters stated that this proposed amendment would render most 
Section 3 business concern owners in the commenter's city ineligible, 
as over 50% qualified by meeting the existing standard for the makeup 
of their workforce (30% full time permanent employees who are Section 3 
residents). The result will be fewer Section 3 business concerns 
maintaining and/or seeking certification and will further compound the 
challenges of helping low-income workers access jobs. Most Section 3 
business concerns do not

[[Page 61539]]

possess the infrastructure to support tracking this information. A 
commenter stated that 75 percent of labor hours is too high as a 
standard for determining Section 3 business concern eligibility. A 
smaller percentage would be more appropriate, or perhaps HUD could 
allow businesses to qualify either by labor hours or percentage of 
staff. Commenters stated that the 75 percent criterion would defeat 
important purposes of the Section 3 program which include encouraging 
business creation and increasing contract opportunities for businesses 
that employ a substantial number of low-income residents.
    One commenter stated that it would significantly increase 
compliance costs, and that HUD appears to assume that every project 
will be tracking employee hours worked due to the applicability of 
federal prevailing wage requirements, but this is not the case. This 
commenter's program includes projects that are not subject to 
prevailing wage requirements, but that are subject to Section 3. 
Another commenter stated that the new definitions could pose 
significant challenges to businesses as they will have to first 
determine which employees are considered low- and very low-income 
persons, and then have to calculate if their labor hours are over 75 
percent.
    One commenter agreed that reporting on business concerns should not 
be an aggregate of dollars spent. The commenter recommended that HUD 
keep the self-certification tool and website resource and incentivize 
Section 3 contractors to register to make this resource as useful as 
possible. The commenter observed a review of the website shows that 
some states do not have any Section 3 contractors listed.
    Commenters stated that the change from 30 percent of full-time 
employees to 75 percent of labor hours performed will limit Section 3 
business concerns only to those lower-skilled businesses (cleaning 
companies, moving companies, perhaps landscaping or painting companies) 
that hire an overwhelming majority of their workers as low-income.
    One commenter stated that the proposal will not have the intended 
impact of increasing access to opportunity. This change would look 
backwards rather than measuring opportunities provided as a direct 
result of the contract award. In practice, this change would 
significantly impact administrative efforts, would adversely affect 
other qualified Section 3 business concerns, and potentially limit 
employment opportunities available to the targeted population.
    One commenter stated that the rule should keep the threshold at 30% 
but change it to hours worked rather than new hires and retain other 
elements of the current definition. The commenter recommended that HUD 
only count the hours worked by Section 3 residents toward the 
percentage goals of hours worked by Section 3 residents (not all 
employees of the Section 3 business concern). The commenter believes 
the 30% benchmark creates an incentive for established businesses to 
create a professional development component to their project approach, 
while 75% is much too high for most businesses to pursue.
    One commenter recommended the definition be modified to include 
more than 75 percent of the labor hours worked at the business are 
performed by public housing, Section 8, Section 811, or Section 202 
residents or persons who, immediately prior to the date of hire, were 
low-or very low-income, particularly women. Commenters suggested 
removing the 75 percent labor hour portion all together. If HUD 
proceeds with this definition, it should consider a transition period 
so existing Section 3 business concerns can adjust to the new 
definition.
    HUD Response: HUD believes that the refined definition continues to 
reflect the language and intent of the Section 3 statute, defining 
Section 3 business concerns in a way that furthers economic 
opportunities for low- and very low-income persons. HUD recognizes that 
75% is a higher number than the prior new hire standard but believes 
that Section 3 business concerns should be either majority owned by low 
or very low-income persons or should primarily employ such individuals. 
HUD believes that the prior 30% standard does not ensure that a 
sufficiently substantial number of low- or very-low-income persons 
benefit from the priority contracting status that the Section 3 statute 
and regulation provide. Section 3 business concern employees are 
counted as Targeted Section 3 workers, giving HUD funding recipients 
and Section 3 projects an incentive to hire them to meet their Targeted 
Section 3 Benchmark numbers. HUD acknowledges that the revised 
definition of Section 3 business concerns may result in a decrease in 
firms qualifying for the designation, but the benefits of qualification 
will be more directly targeted to low- and very-low-income persons. HUD 
notes that the safe harbor benchmarks can be adjusted by notice 
periodically, which is intended to allow HUD to modify the benchmarks 
to accommodate geographies where the initially proposed benchmarks 
cannot be met due to the unavailability of Section 3 workers and 
Section 3 business concerns. HUD amended this provision to clarify that 
the 75% of labor hours should be determined based on looking back over 
the last 3 months of work performed for the business. The determination 
as a Section 3 business concern is made at the time the contract or 
subcontract is executed, so that the program participants have 
certainty in their Section 3 strategies. However, the final rule also 
provides flexibility to establish Section 3 business concern status 
during the Section 3 covered activity, to provide further incentive to 
employ Section 3 workers. If the business performed multiple projects, 
all of the hours on the projects over the prior three-month period 
should be considered for making the determination.
    HUD notes the comment that observed a Section 3 business concern 
might need to track labor hours to be qualified, even if the federal 
funding recipient is reporting new hires. By eliminating the new hire 
alternative reporting metric, HUD anticipates that this dimension of 
documenting qualification as a Section 3 business concern will be 
mitigated. HUD further notes that businesses do not need to track labor 
hours precisely. HUD is not presuming the applicability of prevailing 
wage requirements, but rather is presuming that all employers paying an 
hourly wage will have some method to tabulate the number of hours 
worked, and for those that do not have a tracking mechanism in place, 
the final rule permits them to rely on a good faith assessment. An 
objective of Section 3 is to provide employment opportunities for 
public housing and low-income residents, which can lead to a focus on 
long-term employment goals. Other activities identified by the 
commenters are better suited for business development and therefore are 
outside the scope of this rule.
    As for the concern that the definition will limit wage growth or 
promotion or result in Section 3 business concerns where all employees 
have low-income wages, HUD provides that the qualification of a Section 
3 worker takes place at either the date of the Section 3 covered 
activity or the date of initial hire by the employer, not more than 
five years previously. Labor hours of an employee who is low- or very 
low-income at hire will continue to count for 5 years even if that 
person grows into a new, more advanced position. HUD anticipates that 
the employee with 5 years of experience with that same employer would 
be moving up in the business and would eventually need to

[[Page 61540]]

be replaced by a new, presumably low- or very-low-income entry-level 
employee. The definition has been modified to clarify this framework 
and to reduce the potential incentive to maintain workers at lower 
salaries simply to qualify as a Section 3 business concern. HUD also 
acknowledges that many entry-level opportunities for low-wage workers 
are in businesses and industries with a high percentage of low-wage 
employment possibilities. HUD determined not to implement a transition 
period, although contracts with Section 3 business concerns entered 
into under the regulations in place prior to the final rule's 
compliance date will continue to be considered Section 3 business 
concerns.

(1)(iii) at least 25 percent owned by current public housing residents 
or Section 8 residents

    One commenter stated that the revised definition of at least 25 
percent owned by current public housing residents, or residents who 
currently live in Section 8 assisted housing, will be easier to justify 
than evidence of a commitment to subcontract 25 percent or more of the 
dollar amount to all subcontracts. Other commenters stated that the 
third option for defining ``Section 3 business concern'' should be 
modified to require that the business have 51% ownership by public 
housing or Section 8 residents. These commenters warned that unless 
residents have majority control there is a danger of the business being 
a front for owners who might not represent residents' interests.
    Further, the statute defines a Section 3 business concern as one 
with Section 3 residents having a controlling interest, or the business 
employs a substantial number of Section 3 residents. The commenter does 
not believe that this new proposed criterion is appropriate. Commenters 
also thought it would be inconsistent with the Congressional statutory 
intent that economic opportunities be provided to business concerns 
that are majority owned and controlled by low- and very low-income 
people and/or residents of government assisted housing. (12 U.S.C. 
1701u(b)). Commenters further argued reducing the required ownership 
percentage would also be inconsistent with HUD's public housing 
regulations at 24 CFR part 963, which defines resident-owned business 
as one ``(1) which is at least 51% owned by one or more public housing 
residents and, (2) whose management and daily business operations are 
controlled by one or more such individuals.'' Commenters felt reducing 
the required ownership percentage would invite manipulation and abuse, 
the prevention of which would require a significant administrative 
burden. Commenters recommended the Section 3 regulations should be 
designed to encourage entrepreneurial development, not a passive 
ownership interest.
    HUD Response: HUD agrees with commenters that the 25% ownership 
language may create the risk of unscrupulous business practices. 
Therefore, HUD revised the final rule to require a Section 3 business 
concern seeking to meet this third test be 51% owned and controlled by 
PHA residents and Section 8 residents, in place of the 25% test 
contained in the proposed rule. This number is also more consistent 
with HUD's current contracting provision for PHA resident owned 
businesses in 24 CFR part 963.

Wages

    Commenters stated that businesses should not be rewarded for paying 
low wages; businesses should not receive a contracting preference by 
virtue of the fact that they pay their employees low wages. The 
commenters asserted Section 3 regulations should be designed to reward 
businesses that provide economic opportunities to low-income persons so 
that they have a chance to work their way out of poverty, and the 
income determination must be made immediately prior to the date of 
hire. According to the commenters, HUD's regulations should also reward 
employers who provide decent-paying jobs so that their employees no 
longer need to depend on HUD assistance to make ends meet. Commenters 
observed that by determining the low-income status of employees at the 
time of contract award (the labor hours ``are performed by low- or very 
low-income persons'') the definition inadvertently restricts 
eligibility to businesses whose employees are currently low-income. For 
these reasons, the commenters proposed that the definition of ``Section 
3 business concern'' be changed to ``Over 75 percent of the labor hours 
performed for the business are performed by persons who were low- or 
very low-income immediately prior to the date of hire and whose current 
wage is equal to or greater than 80 percent of the area median 
income.''
    HUD Response: The Section 3 regulations are designed to provide 
jobs for low-income persons. As these individuals gain experience, HUD 
anticipates wages will increase, and the individuals should be able to 
work their way out of poverty. The definition has been modified to 
clarify this framework by including a three-month documentation period 
and to reduce the potential incentive to maintain workers at lower 
salaries simply to qualify as a Section 3 business concern.

Contract Requirement

    One commenter expressed concern over the elimination of Section 3 
business concern contracting requirements because the commenter's 
agency spends a lot of resources on outreach, but recognized many 
housing authorities lack the resources or diverse vendor marketplaces 
to do the same.
    HUD Response: HUD recognizes that not all PHAs will have the same 
resources to outreach to Section 3 business concerns. HUD believes, 
however, that counting the Section 3 business concern employees as 
Targeted Section 3 workers will incentivize PHAs to target Section 3 
business concerns to help meet their Targeted Section 3 worker 
benchmark. HUD will continue to have a Section 3 business concern 
directory as well to make it easy for PHAs and other entities to 
identify Section 3 business concerns in their jurisdiction. HUD also 
believes that making the definition consistent with the PHA resident-
owned businesses definition in 24 CFR part 963 will also provide 
another avenue for finding Section 3 business concerns.

Alternative Suggestions for the Definition of Section 3 Business 
Concern

    One commenter recommended that HUD extend Section 3 business 
concern status to businesses funded through the Opportunity Zone 
program.\5\ Commenters suggested defining a Section 3 business concern 
as meeting one of the following categories, in the following priority 
order: (1) Businesses owned 100% by Section 3 persons; (2) businesses 
owned and operated at a minimum 51% by Section 3 Persons; (3) 
Businesses whose total employees consist of a minimum of 75% Section 3 
persons who reside within the project area; (4) Businesses whose total 
contract specific staffing (not back office administration unless the 
opportunity created is a back office position) has more than 50% 
Section 3 persons residing in the project area; (5) businesses owned by 
persons providing a negotiated employment level greater than 30% of 
total project staffing to Section 3 persons; (6) businesses who commit 
to directly conduct or to sub-contract professional employment 
readiness and employment trade skills training related to the project 
work or other in-demand employment

[[Page 61541]]

disciplines, at a minimum of 10% of their total contract award, plus or 
minus change orders, to Section 3 persons. Under (1), (2), (5), and 
(6), there is a priority order for the Section 3 persons as well: (A) 
Public housing assisted persons at the property where the work is being 
executed. When a contract is issued for service work covering multiple 
properties of the PHA, any public housing person from that PHA's 
portfolio shall compete equally for any opportunities created as a 
direct result of the expenditure. (B) When the service contract only 
covers one public housing property, the persons from that property will 
receive first priority for opportunities and then persons from other 
properties of the PHA's public housing portfolio will be secondly 
considered. (C) Housing Choice Voucher holders of that specific housing 
authority that administers that voucher will be third priority. (D) 
Persons residing in any project-based Section 8 property owned in whole 
or in part by that PHA. (E) Current YouthBuild participants. (F) All 
other low- and very low-income persons within the legal boundaries of 
the service area of the project.
---------------------------------------------------------------------------

    \5\ See HUD, Opportunity Now, Hud.gov, https://opportunityzones.hud.gov/.
---------------------------------------------------------------------------

    HUD Response: HUD appreciates all the different options provided by 
commenters. However, HUD believes the final Section 3 business concern 
definition provided in this final rule provides a balance that is 
consistent with the statute and ensures that most Section 3 business 
concerns are in fact aimed at employing low- and very low-income 
persons. See responses above for additional discussion of the Section 3 
business concern definition.

Small PHA Reporting

Support

    Some commenters supported reporting flexibility for small PHAs, and 
especially the removal of the non-construction contract goal of 3 
percent of all covered contracts to Section 3 business concerns, which 
they said is challenging to meet due to the amount of professional 
service contracts. One commenter suggested that for consistency and 
clarity, the final rule should exclude all PHAs with 250 or fewer units 
from reporting on benchmarks, regardless of procurement cost. The 
commenter also suggested that since the proposed rule exempts Section 8 
funding from having to meet Section 3 requirements, the final rule 
should clarify the definition of a small agency for the purposes of 
Section 3 reporting to mean an agency with 250 or fewer public housing 
units. Another commenter recommended defining ``small PHA'' in a way 
that alleviates regulatory burdens for as many agencies as possible and 
suggested defining small PHA as those having 550 or fewer combined 
public housing and Section 8 units; or, as Section 8 funding is not 
covered by Section 3, utilize a 250 unit threshold.
    Another commenter supported the small PHA reporting exemption 
suggesting that HUD should define a small PHA in a way that would 
maximize the number of agencies exempted from detailed reporting, 
recommending 550 combined units (consistent with the Economic Growth, 
Regulatory Relief, and Consumer Protection Act of 2018 and the Housing 
and Economic Recovery Act of 2008) or 250 public housing units (as 
Section 8 assistance is not covered by Section 3).
    HUD Response: HUD continues to support the Small PHA reporting 
provision in the proposed rule. Small PHAs with less than 250 public 
housing units will not be required to report the number of labor hours 
and instead will be required to report their qualitative efforts. The 
final rule does not require a commitment to award at least 3 percent of 
the total dollar amount of all other Section 3 covered contracts to 
Section 3 business concerns. HUD currently is also not changing the 
number of public housing units for determining the Small PHA exception.

All PHAs Should Report for Data Collection and Compliance

    Some commenters recommended that all PHAs, regardless of size, 
should be required to report for data collection and compliance. Other 
commenters specifically objected to the labor hours reporting exemption 
for PHAs with fewer than 250 housing units, because inexpensive 
software is available for PHAs to track and report labor hours. Other 
commenters suggested removing all exceptions for PHAs. Additional 
commenters elaborated that reporting requirements should be the same 
for all entities with no exceptions, noting that every recipient and 
every dollar should be included in order to guarantee that 
opportunities reach the poorest and smallest communities.
    Commenters noted that small PHAs should not be exempt because they 
could have significant contractor and subcontractor activity in any 
given year. Specifically, one commenter noted that the $200,000 
threshold should apply to small PHAs because they have the same 
opportunity to create jobs as other entities. Another commenter noted 
that not requiring small PHAs to report creates a loophole that hinders 
opportunity.
    HUD Response: HUD has heard from small PHAs that they do not 
receive enough funding or have sufficient pools of Section 3 workers to 
support annual new hire or labor hour reporting. Close to one-half of 
small PHAs with less than 250 public housing units receive less than 
the $200,000 project threshold applicable to Section 3 projects that 
receive other HUD assistance such as CDBG and HOME funding. Due to 
Operating Fund shortfalls, small PHAs can take advantage of the 
authority under section 9(g)(2) of the United States Housing Act of 
1937 to use its Operating and Capital Funds flexibly to fund any 
eligible activities under either funding stream. Some small PHAs 
compensate by promoting economic opportunities through referrals of 
residents to employers and job fairs, providing training facilities and 
offerings, and other local efforts. To recognize these other activities 
and the generally low amount of funds available or used for capital 
projects, small PHAs will report qualitatively on their efforts.
No Good Faith Assessment for Small PHAs
    Some commenters objected to allowing small PHAs to supply a ``good 
faith'' assessment of hours worked because doing so would invite those 
entities to bypass important tracking requirements, suggesting that HUD 
should require quarterly, instead of annual reporting.
    HUD Response: The small carve out for good faith assessment is not 
limited to small PHAs. As stated in the proposed rule, it is a limited 
exception where PHAs and other recipients of public housing financial 
assistance could use the reporting of a good faith assessment of the 
labor hours of a full-time or part-time employee from contractors and 
subcontractors that have not been subject to requirements specifying 
time and attendance reporting, and do not have systems already in place 
to track labor hours. This is to address employers that do not already 
track labor hours without making changes in time and attendance or 
payroll. It is not a permanent exception and if in the future the 
contractor or subcontractor is required to track labor hours under some 
other authority, or begins to voluntarily track labor hours, the 
exception would no longer apply.

Qualitative Reporting

    Another commenter noted that the rule lacks information on what 
qualitative reporting will be required of small PHAs to substantiate 
the claim that such reporting will be less

[[Page 61542]]

burdensome and recommended that small PHAs have the option to track 
labor hours or do qualitative reporting.
    HUD Response: The rule seeks not to be too prescriptive on 
qualitative reporting to provide small PHAs with the flexibility to 
report on a range of activities. HUD is considering some of the 
following to signify qualitative efforts: Outreach efforts to generate 
job applicants who are Targeted Section 3 workers; direct on-the-job 
training (including apprenticeships); indirect training such as 
arranging for, contracting for, or paying tuition for, off-site 
training technical assistance to help Section 3 workers; and outreach 
efforts to identify and secure bids from Section 3 business concerns. 
HUD plans to create a form for tracking and reporting qualitative 
efforts, to ease burden on recipients. HUD agrees that small PHAs 
should have the option of conforming to the more quantitative reporting 
standards and has modified the text to permit such option.

Dollar Threshold for Small PHAs

    A few commenters also recommended use of a dollar threshold for 
public housing assistance similar to that used for other HUD assistance 
as a means to reduce reporting burdens on small agencies. One commenter 
suggested that using a dollar threshold, rather than a threshold based 
on number of public housing units, is a more practical and effective 
means of identifying those smaller projects that are less likely to 
generate significant Section 3 employment opportunities. Another 
commenter further suggested that thresholds established in the proposed 
rule for Community Planning and Development (CPD) should be applied 
across the board to all programs and noted that using a per-project or 
per-recipient threshold would more accurately exclude or include small 
PHAs based on funding. This commenter also suggested establishing a 
threshold for work-able non-working residents below which small PHAs 
would not have to report.
    HUD Response: HUD continues to maintain that a dollar threshold for 
public housing financial assistance is not consistent with the statute. 
Section 3 applies to public housing operating, development, 
modernization, and management assistance, which covers virtually all 
housing authority projects and activities. HUD believes that the 
statute's expansive coverage of public housing projects and activities 
indicates that any attempt to diminish the coverage would be 
inconsistent with the statute.

Subcontractors

    Several commenters noted that Section 3 requirements should not 
apply to subcontractors. Commenters stated that extending reporting 
requirements to subcontractors would discourage participation in PHA 
contracting opportunities, adversely impacting competition in the 
market, driving up construction costs and limiting economic 
opportunities. Other commenters added that HUD should consider ways to 
reduce administrative requirements on subcontractors wherever possible, 
echoing concerns that regulatory burdens which do not acknowledge 
subcontractor's practical limitations will discourage private sector 
partners from working with PHAs.
    The commenters also suggested that regulatory relief for 
subcontractors could be achieved in a number of different ways, which 
range from exempting small subcontractors, excluding subcontractors 
from Section 3 obligations if their contracts are below a certain 
dollar threshold or below a percentage of the total covered funding on 
the Section 3 project. Commenters also suggested HUD consider limiting 
Section 3 obligations to the recipient, general contractor and 
immediate subcontractor(s), noting that relieving some or all Section 3 
obligations on subcontractors may attract more high[hyphen]quality 
tradespeople to affordable housing construction projects and possibly 
also lower the construction costs on Low Income Housing Tax Credit 
(LIHTC) and other affordable housing projects with covered HOME or CDBG 
funds.
    Other commenters who expressed concerns about the reporting 
requirements for grantees and subcontractors also suggested thresholds 
for subcontractor reporting. Some commenters suggested retaining the 
existing $100,000 threshold, though one commenter recommended a reduced 
compliance level, allowing subcontractors to track Section 3 employees 
instead of labor hours, to reduce the administrative burden on small 
entities who lack the capacity to track hours. Some commenters 
suggested a reporting requirement threshold of $250,000 to align with 
the OMB procurement threshold, one of whom recommended this threshold 
also apply to contractors and offered the $10,000 micro purchase 
threshold as an alternative. Other commenters suggested a compliance 
threshold of $200,000.
    A number of commenters supported reporting requirements for both 
contractors and subcontractors. One commenter recommended excluding 
second tier and below subcontractors from requirements, noting that 
large PHAs are more likely to award or fund multimillion-dollar 
projects that have more than 25 first-tier subcontractors. Two 
commenters mentioned the role of contractors simplifying the reporting 
mechanism for subcontractors and encouraging subcontractors to comply 
with requirements. One commenter also suggested that the funding 
recipient should be allowed to decide the extent of the Section 3 
reporting requirements for subcontractors.
    One commenter requested clarification as to how Section 3 
requirements ``flow down'' to contractors and subcontractors for 
housing and community development financial assistance, noting the 
current regulation includes references to recipients as well as 
contractors and subcontractors when describing numerical goals and 
hiring/contracting preferences. The commenter went on to state that 
Subpart C of the Proposed Rule references only the recipient when 
describing the employment, training and contracting requirements and 
safe harbors, and removes the $100,000 contractor and subcontractor 
threshold in the current regulation for triggering Section 3 
requirements. The commenter noted that while the Proposed Rule does 
mandate that each recipient ``require subrecipients, contractors, and 
subcontractors'' to meet the hiring/contracting requirements, they 
would propose a clarification on the extent to which contractors, 
subcontractors and subrecipients on Section 3 projects are bound by the 
requirements.
    HUD Response: HUD is sensitive to the potential burden that Section 
3 compliance may impose and has focused on outcomes, allowing the 
recipient to direct where the recipient's efforts, and its contractors' 
and subcontractors' efforts, will have maximum effect.
    In the statute, the sections addressing public housing programs 
specifically include ``contractors and subcontractors'' in Section 3 
requirements. In contrast, the statute does not reference 
``subcontractors'' in the sections addressing other covered housing and 
community development assistance. Section 3's applicability to 
subcontractors as set forth in this final rule closely tracks the 
statute's requirements. The reporting requirements, however, focus on 
outcomes, deferring to the recipient to focus their efforts for maximum 
impact with respect to Section 3, and aligning the contractual 
obligations the recipient imposes on contractors and

[[Page 61543]]

subcontractors accordingly. Unlike the current rule, which applies 
Section 3 compliance to all subcontractors in excess of a $100,000 
contract threshold, the final rule does not apply specific Section 3 
reporting obligations to any subcontractor and instead such 
requirements would stem from the recipient. See Sec.  
135.3(a)(3)(ii)(B). The proposal to reinstate the $100,000 contract 
size threshold or any alternative threshold would limit the recipient's 
flexibility to determine how to achieve the ``greatest extent 
feasible'' standard most effectively. Similarly, subcontractors are 
excluded from the contract language provisions in Section 75.27(a), but 
subcontractors are still required to meet Section 3 requirements in 
Section 75.19, which provides the recipient flexibility to achieve the 
goal. The rule implements the suggestion provided in the comments that 
the recipient be allowed to decide on the extent of the Section 3 
reporting requirements for subcontractors where the statute does not 
constrain HUD from providing this flexibility.

Definition for ``neighborhood'' or ``service area''

    Some commenters supported the proposed definition, stating that the 
definitions are reasonable and will simplify compliance. Other 
commenters accepted only the one-mile radius definition of ``service 
area'' or ``neighborhood,'' but suggested that HUD eliminate the 
population requirement given the impact on rural areas.
    Some commenters disagreed with the proposed definition, stating 
that metrics will be skewed based on close proximity to more affluent 
areas. Another commenter thought the definition is inconsistent with 
the statutory intent to encourage employment opportunities among low- 
and very low-income persons, noting a single definition cannot capture 
the expansive geographic areas. Another commenter noted the definition 
will actually limit mobility and the long-term success of resident 
programs because contracts will not provide opportunities to residents 
in successive projects in different neighborhoods. Some commenters 
wrote that the definition limits businesses in diverse economies and in 
high-cost cities that need more flexibility to recruit. One commenter 
wrote that this new definition would significantly reduce the labor 
pool of eligible Section 3 new hires, making it difficult to achieve 
benchmarks. Other commenters wrote that it may exclude local public 
housing or Section 8 residents. Another commenter thought that it would 
add challenges for contractors in identifying and prioritizing eligible 
workers.
    Other commenters noted that the restriction does not account for 
Section 3 covered projects in areas that are not low-income, such as 
some CDBG expenditures. In addition, commenters noted that such a 
limitation could have the unintended consequence of excluding large 
groups of people from the pool of potential employees, especially in 
cities that are combatting racial segregation. Another commenter stated 
that the requirements are too geographically limited as to whom and 
where recipients/contractors must provide opportunities. Additionally, 
it does not account for opportunities that are accessible beyond the 
prescribed radii by using mass transit and other commuting 
opportunities.
    Some commenters noted that a new definition would add unnecessary 
administrative burdens which increases the cost of program management 
and compliance. One commenter wrote that determining how to meet a 
5,000-person radius would be burdensome. Other commenters wrote that 
completing data analysis of employee home locations and certification 
would be administratively burdensome and could be covered under state 
and local data privacy laws. In addition, a commenter stated that the 
definition may limit PHAs' abilities to hire individuals in their 
communities who would otherwise qualify as a Section 3 worker and 
stated that entities receiving community development funds are better 
at determining which individuals would benefit most from Section 3 
employment.
    Several commenters suggested that HUD retain the definition of 
``service area'' as it exists in the current rule at 24 CFR 135.5. 
Another commenter supported Section 3 and encouraged the retention of 
flexible approaches to compliance, such as those outlined in 24 CFR 
135.30. Any proposed rule changes should consider geographical and 
service population differences. The commenter supported maintaining the 
rule as is, noting it provides flexibility for compliance through 
training, hiring, or contracting. Similarly, another commenter noted 
that there should be flexibility and factors other than hours worked 
and earned to provide Section 3 credit.
    HUD Response: HUD notes that the neighborhood or service area 
requirement applies to the prioritization of effort with respect to 
housing and community development financial assistance, not public 
housing funds. The hiring prioritization is different for this category 
of funding, and pursuant to the statute is focused on residents of the 
geographic area in which the work is being done, not on the rent-
assisted status of the workers. Consequently, in this context, HUD is 
not adjusting the regulatory text to acknowledge the availability of 
transit or to prioritize employment of low- and very-low-income people 
from a broader geography.
    The rule seeks not to limit the labor pool available within 
specific geographic areas, but to allow flexibility for smaller and 
more rural areas through the definition. HUD believes counting 
individuals who live within one mile of the worksite and within an 
expandable circle centered around the worksite that encompasses 5,000 
people provides a definitive means of determining who counts as a 
Targeted Section 3 worker within the service area or the project 
neighborhood. Where the one-mile radius circle centered around the 
worksite has less than 5,000 people, the radius would be expanded 
outwardly to achieve the desired population of 5,000 people. This 
expansion would address many of the commenters' concerns regarding 
smaller communities or rural areas. For the benefit of densely settled 
urban areas, HUD recognizes there may be more than 5,000 people, but 
will hold at the one-mile geographic diameter.
    HUD believes this final rule does take into consideration 
geographical and service population differences and retains flexibility 
for compliance through training, hiring, or contracting. Additionally, 
the rule is meant to streamline the Section 3 process to make it 
consistent with the statute and easier to implement. Compliance can be 
evaluated qualitatively if the labor hours benchmark cannot be met. 
Under this rule, both measurements are permissible, and the 
requirements for qualitative evaluation are laid out in the rule. In 
addition, HUD intends to create a web-based tool to support recipients, 
subrecipients, contractors, and subcontractors in determining the 
geographic area encompassing Targeted Section 3 workers.

Allow Grantees To Define ``Neighborhood'' or ``Service Area''

    Commenters recommended that grantees be given the ability to define 
``service area'' for themselves. Another commenter urged HUD to adopt 
something other than a ``one-size-fits-all'' approach so that small 
rural counties would not have difficulty utilizing federal funding. One 
commenter noted for example that in New Orleans, there are clearly 
defined

[[Page 61544]]

neighborhoods that most residents and officials understand and 
recognize, some having a larger area than a one-mile radius. The 
commenter stated that allowing for a more localized definition of 
`project area,' rather than using HUD's definition of a one-mile radius 
or 5,000 person population guideline, increases local participation in 
projects that impact those individuals and their immediate surroundings 
and makes the most sense for their community. This commenter stated 
that recipients should be able to define their geographic size for 
purposes of how they focus their priorities regarding low-income 
persons residing within the service area or neighborhood in which the 
project is located, and communicate their determination to sub-
recipients, contractors and subcontractors. Another suggestion was to 
have localities work with their local HUD office to define service area 
based on the locality's characteristics.
    Commenters suggested that HUD allow residents and businesses from 
anywhere in the state to receive priority consideration or to give 
state recipients deference in establishing areas for purposes of 
meeting Section 3 requirements. Additionally, one commenter stated that 
service area may change based on project type, some serving entire 
communities while others serve smaller sections of a community, 
rendering the one-mile radius inapplicable depending on the project's 
scope of impact.
    The commenters noted that limiting preference to a certain 
``service area'' may have the unintended consequence of excluding large 
groups of people from the pool of potential employees. The commenters 
proposed allowing localities to either target job opportunities to low-
income hires from anywhere within the locality, or work with their 
local HUD offices to define appropriate service areas based on the 
characteristics of the locality. One commenter wrote that the one-mile 
radius is too limiting and that residents within the community should 
be considered.
    Some commenters suggested that HUD define service area to be ``the 
area within or contiguous to a PHA's jurisdictional boundaries.'' Other 
commenters suggested that HUD define ``service area'' or 
``neighborhood'' in the following tiered manner: (1) PHA residents in 
project area; (2) Section 3 residents in project area; (3) extremely 
low-income or homeless individuals in project area; (3) YouthBuild in 
project area; and (5) next closest PHA in project area.
    One commenter suggested that HUD should give preference to eligible 
residents of the neighborhood surrounding the PHA before other 
residents of the metropolitan area and should utilize the language in 
Subpart C Sec.  75.19 reading ``Section 3 workers residing within the 
service area or the neighborhood of the project.'' One commenter stated 
that Section 3 Employment Priorities, as written, is very clear as to 
the order of Section 3 applicant priorities, starting with residents in 
closest proximity to the construction project, but disagreed that the 
one mile and 5,000 population radius is an appropriate geographic, 
using two PHA examples of Cayce Place and Edgehill to show that these 
metrics would be skewed based upon the close proximity to those earning 
twice the AMI and with property values in the hundreds of thousands of 
dollars.
    HUD Response: As noted above, the neighborhood or service area 
requirement applies to the prioritization of effort with respect to 
housing and community development financial assistance, not public 
housing funds, and the focus in this context is on residents of the 
geographic area in which the work is being done. HUD believes that its 
proposed framework of counting individuals who live within one mile of 
the worksite and within an expandable circle centered around the 
worksite that encompasses 5,000 people provides a definitive means of 
determining who counts as a Targeted Section 3 worker within the 
service area or the neighborhood of the project. HUD believes the 
proposed Section 3 regulation takes the varied geographical areas into 
account and provides a streamlined framework that more specifically 
determines who might benefit from employment and training opportunities 
available within the area surrounding a Section 3 project. Where the 
radius or circle centered around the worksite has less than 5,000 
people, the radius would be expanded outwardly to achieve the desired 
population of 5,000 people. All Targeted Section 3 workers identified 
by the geographic radius must also qualify as Section 3 workers, so 
this would not include higher-income workers within the neighborhood or 
service area.

Rural Areas and Contractors

    Several commenters noted concerns about the effect of the proposed 
``service area'' definition on Section 3 implementation in rural areas. 
One commenter stated it would be unrealistic and burdensome for 
employers in rural areas to administer and monitor the one-mile radius, 
and that it does not reflect the realities of construction employment 
in small rural states where the service area is the entire state. One 
commenter also stated that in areas of low population density, there 
often will not be sufficient residents or businesses that are capable 
of performing the work required for housing and community development 
projects. Other commenters wrote that, given chronic and widespread 
labor shortages, it is inadvisable to have such a small geographic 
restriction on the labor pool of Section 3 workers.
    Other commenters accepted the one-mile radius definition of 
``service area'' or ``neighborhood,'' but stated the 5,000-person 
population radius is too large for rural areas. Another commenter noted 
that the population threshold could increase the service area size 
exponentially in cities and counties where the population is less than 
5,000.
    One commenter in Utah opposed the proposed definition, arguing that 
changing the definition of ``neighborhood'' to 5,000 people would not 
work because of the state's very large rural geographic area. The 
commenter stated HUD's determination that most (77%) current CPD 
projects had a population of 5,000 people within one mile of the 
project site is not applicable in Utah, which has only 29 counties. The 
commenter detailed that 70% of Utah's population resides its 4 urban 
counties, and Utah's CDBG projects are part of the 23% that do not have 
5,000 people within a one-mile radius of a project site.
    One commenter mentioned the impact of the proposed definition on 
small contractors or those outside the immediate service area, noting 
that CBDG and HOME funds are often financing projects completed by 
small contractors who need to travel outside of a service area to 
complete work on a project. Another commenter rejected the proposed 
definition, suggesting that for small town jurisdictions, the ``service 
area'' or ``neighborhood'' should apply within the recipient's 
jurisdiction, which may be an entire county. One commenter mentioned 
that finding Section 3 contractors or businesses is already challenging 
and should not be limited by a ``service area'' or ``neighborhood'' 
definition.
    HUD Response: HUD acknowledges and has carefully considered the 
concerns of commenters representing small and rural areas regarding the 
proposed definition of neighborhood/service area. As previously stated, 
HUD supports the proposed framework of counting individuals who live 
within one mile of the worksite and within an expandable circle 
centered around the

[[Page 61545]]

worksite that encompasses 5,000 people. This concept was designed 
specifically to address the unique needs and challenges facing rural 
and small communities. The graphic provides an example on how a circle 
centered around a worksite with fewer than 5,000 people may be expanded 
until the desired population goal of 5,000 people is met or eligible 
Targeted Section 3 workers are counted.
[GRAPHIC] [TIFF OMITTED] TR29SE20.077

    The text as written will provide a definitive means of determining 
who counts as a Targeted Section 3 worker within the service area or 
the neighborhood of the project. HUD believes the proposed Section 3 
regulation takes the varied geographical areas into account and 
provides a streamlined framework that more specifically determines who 
might benefit from employment and training opportunities available 
within the area surrounding a Section 3 project. HUD also notes that 
over time, as outcome results are reported to HUD, the benchmarks may 
be tailored to certain types of projects and geographies by notice, 
with the explicit intention that it may be appropriate to set different 
benchmarks for rural areas given the availability of labor and the 
patterns of contracting work in rural areas.

Web Tool

    Some commenters noted that HUD's proposal to provide a web tool to 
aid in the process of determining a geographic service area would be 
helpful. One commenter urged HUD to provide the proposed web tool that 
will help determine the geographic area that encompasses Targeted 
Section 3 workers before it proceeds with the current definition and 
finalizes the rule. Commenters requested that HUD provide it to state 
and local recipients, sub-recipients, contractors, and subcontractors 
for testing before implementation. Though encouraged by the prospect of 
a web tool to help determine the geographic area that encompasses 
Targeted Section 3 workers, some commenters still argued for a broader 
definition and geographic areas that define Targeted Section 3 workers. 
Some commenters thought the web tool would not alleviate burden from 
the contractor that would still need to determine if a worker meets the 
requirements to be in the geographically defined area.
    HUD Response: HUD agrees with the suggestion to provide a web tool 
to aid in the process of determining a geographic neighborhood/service 
area. As stated in the proposed rule, HUD will create and provide this 
tool at the issuance of the final rule to aid recipients, 
subrecipients, contractors, and subcontractors to determine the 
geographic area that encompasses Targeted Section 3 workers under this

[[Page 61546]]

definition. HUD will also explore the option of creating a mobile tool 
to help recipients with monitoring and compliance determinations.

Exceptions

    Commenters suggested the proposed definition should not apply to 
Puerto Rico considering its geographic composition.
    HUD Response: HUD has decided to retain the proposed definition for 
all recipients, including Puerto Rico. HUD believes the proposed 
regulation takes the varied geographical areas into account and 
provides a streamlined framework that will enable eligible workers to 
benefit from employment and training opportunities available within the 
area surrounding a Section 3 project.

YouthBuild Participants

    Some commenters were in favor of or not opposed to expanding the 
definition to include previous YouthBuild workers that are under 24 
years of age and those who are still eligible to participate in 
YouthBuild but may have graduated out of the program. One commenter was 
opposed to expanding the definition on the grounds that it would 
require onerous and complex background checks and research to determine 
whether a participant meets the alternate definition. One commenter 
recommended that the definition be changed to include previous 
YouthBuild workers who successfully graduated from the program and are 
either under age 24 or are otherwise still eligible for YouthBuild 
programs. Other commenters proposed that the definition of YouthBuild 
participant should be as broad as possible, regardless of age, while 
other commenters proposed the definition to include other programs 
which teach relevant skills, such as Service and Conservation Corps 
participants and graduates, participants/graduates of ``pre-
apprenticeship'' training programs, participants/graduates of ``youth 
corps,'' VFW Local Program participants, and AmeriCorps participants.
    HUD Response: HUD appreciates the commenters' support of the 
YouthBuild program, and after careful deliberation, has decided to keep 
the definition consistent with the current regulations and current 
YouthBuild participants. See 29 U.S.C. 3226; 24 CFR 135.5. HUD 
determined that given the work required to certify current YouthBuild 
workers, that adding a longer-term duration would create an additional 
paperwork requirement on both the person claiming the status and the 
entity reporting the status. It may also cause confusion using a 
certain period of time. Additionally, a YouthBuild worker can still 
qualify for 5 years if they are employed at the end of their YouthBuild 
experience.

Applicability and Scope

    One commenter supported the rule's change to applicability. Another 
commenter supported Section 3 as an important mechanism to strengthen 
communities, reduce poverty, and increase residents' economic self-
sufficiency. One commenter proposed that these rules should apply to 
all developers, contractors, and sub-contractors; all professional, 
skilled, unskilled, technical, and consulting service contracts 
compensated partially or fully by HUD funds--no exceptions. Another 
commenter suggested these rules shall be applicable to all 
professional, skilled, unskilled, technical, and consulting service 
contracts line items.
    Other commenters suggested that HUD should clarify that owners and 
managers of HOPE VI, Choice Neighborhoods and Mixed-Financed 
Developments are subject to Section 3 Hiring and Contracting 
requirements in their own operations and should extend this requirement 
to Rental Assistance Demonstration (RAD) converted projects. One 
commenter supported HUD's separation of PHA requirements from non-PHA 
requirements because it did not make sense for non-PHAs to follow 
regulations intended for PHAs.
    A commenter supported HUD's clarification regarding Section 3 
applicability to projects receiving HUD assistance of $200,000 or 
greater. Another commenter warned that this rule states that Section 3 
will apply when the amount of HUD assistance is greater than $200,000 
on a per-project basis, which would potentially exempt projects where 
the HUD funding is less than $200,000, even though the combined total 
funding is much higher, leading to a decrease in number of projects 
subject to Section 3.
    One commenter suggested that PBV and PBRA contracts should be 
exempt from Section 3 compliance. Another commenter suggested that, 
rather than a per-project basis, it would be simpler to apply Section 3 
to individual contracts for housing and public construction funded with 
HUD assistance.
    HUD Response: HUD shares the view that Section 3 is an important 
mechanism to strengthen communities, reduce poverty, and increase 
economic self-sufficiency. HUD seeks to focus Section 3's applicability 
where it can have a real impact, and to exempt from Section 3 those 
cases where applicability imposes burdens not commensurate with 
outcomes. HUD has concluded that in certain circumstances, particularly 
professional services, there are very few opportunities for Section 3 
outcomes. The proposed definitions defined the scope of programs 
subject to Section 3 requirements but did not expand such coverage 
beyond what HUD's existing regulations already required for compliance. 
HUD proposed the $200,000 threshold for housing rehabilitation, housing 
construction and other public construction projects because work below 
that amount would likely not trigger long-term employment opportunities 
for which the recipient could show measurable labor hours. HUD 
disagrees that Section 3 should be applied to all types of work, 
without exception, and reaffirms in the final rule the exception for 
professional services. The proposed rule does, however, give credit in 
the reporting for opportunities that are created in the professional 
services context by including professional services labor hours in the 
numerator, and not in the denominator, of the reported outcome ratios. 
The final rule applies Section 3 in a manner consistent with the 
statute. HUD has determined that monthly rental assistance payments, 
such as those provided under Section 8 project-based voucher or 
project-based rental assistance housing assistance payment contracts, 
are not covered by the statute. Properties converted to Section 8 
rental assistance through the RAD are covered by the rules applicable 
to Section 8. However, the RAD governing notice does apply Section 3 
requirements to those activities occurring after the date of the RAD 
conversion which are contractually obligated as part of the RAD 
conversion.

Employment Priorities Sec.  75.9 / Sec.  75.19

    Some commenters supported separating the agencies which fund 
Section 3 projects from PHAs and mirroring the statute. Other 
commenters felt that the priorities should be the same for both Section 
3 projects and PHA financial assistance. Other commenters suggested 
that HUD give preferences to certain groups, while other commenters 
thought HUD should consider adding geographic considerations into the 
definition. One commenter suggested that the last priority level should 
be expanded to any person if the PHA can reasonably demonstrate there 
are not sufficient Section 3 residents with the requisite job skills 
within a project's geographic area. Commenters also asked HUD to 
clarify that otherwise eligible workers of PHAs, even if under private

[[Page 61547]]

management, are included in this category, as well as recipients of 
Section 8 assistance or voucher assistance residing in properties 
managed by other entities. One commenter suggested HUD change the 
regulatory language to insert the word ``priority'' in Sec.  75.19 to 
clarify the requirement and make the sections consistent with Sec.  
75.9.
    HUD Response: HUD appreciates the comments that supported the 
employment prioritizations. These prioritizations follow the statutory 
prioritizations, and HUD is including that language for clarity for 
recipients implementing the regulations. HUD has rephrased Sec.  75.19 
to include the word ``priority,'' consistent with the language of the 
statute. While HUD appreciates the alternative suggestions, these 
regulations are meant to streamline the Section 3 process to make it 
consistent with the statute and easier to implement. HUD believes that 
the existing regulatory text does that and is making no changes to this 
section. HUD, however, encourages the HUD financial assistance 
recipients to consider all the diverse suggestions provided when 
working on outreach to persons who are low- and very low-income persons 
to meet the Section 3 benchmarks including residents of PHAs under 
private management such as those residing in a mixed-finance 
development project.

Reporting Sec.  75.15 / Sec.  75.25

Consolidated Plan Regulations

    A commenter recommended that the Consolidated Plan regulations at 
24 CFR 91.520(a) be amended to specifically include Section 3 
reporting; PIH will need to develop a Section 3 reporting format.
    HUD Response: HUD will review Department-level strategies on how to 
effectively incorporate Section 3 reporting into current systems and 
data collection tools, including the Consolidated Plan. As a result, 
HUD will issue sub-regulatory guidance on reporting per program area 
and provide technical assistance to recipients for Section 3 
compliance.

Systems

    A commenter warned that HUD will need to modify IDIS to allow CDBG 
and HOME recipients to report on their Section 3 actions annually 
because CDBG and HOME recipients will report on their Section 3 actions 
in IDIS using a similar form as HUD Form 60002 that has been modified 
to capture labor hours worked. This commenter stated that this move 
will eliminate redundancy and ease the administrative burden for 
grantees.
    HUD Response: HUD agrees that the Integrated Disbursement and 
Information System (IDIS) and DRGR should be modified to ensure 
accurate Section 3 compliance reporting for CDBG and HOME recipients. 
HUD will also adjust our data collection systems as necessary to ease 
administrative burden for grantees and to eliminate redundancy.

Report Through Action Plan and/or CAPER and Effective Date

    A commenter supported HUD's effort and recommended reporting 
through the Action Plan and/or the Consolidated Annual Performance 
Evaluation Report (CAPER), only on completed projects. One commenter 
recommended that the final rule be effective for funds granted in the 
next Federal fiscal year after publication of the final rule so there 
is time for contracts/written agreements with sub-awardees to be 
amended, and in order to avoid having CAPER reporting requirements from 
annual federal years with two separate program requirements.
    HUD Response: HUD supports efficient and effective Section 3 
compliance reporting through current mechanisms, such as the Annual 
Action Plan and/or CAPER, for applicable HUD programs. As stated in the 
proposed rule, HUD believes that requiring reporting annually, but 
consistent with timeframes that PHAs and other recipients of other 
housing financial assistance are already using to submit documents to 
HUD, will relieve existing burden. HUD may also look into reporting 
into other existing systems rather than requiring PHAs and other 
recipients to log into and report under a separate system, such as the 
existing SPEARS.

Double Counting

    A commenter stated that reporting responsibilities when multiple 
government agencies provide HUD CPD funds are unclear and requested HUD 
determine whether agencies will be responsible for reporting outcomes 
for each federal investment or whether HUD will prevent double counting 
by limiting reporting to one funding agency per Section 3 project.
    HUD Response: Section 75.29(b) specifies that when there is funding 
from multiple programs that exceed the threshold in Sec.  75.3(a)(2), 
the recipient will report to the applicable HUD program office. Some 
HUD systems allow for indicating when there are multiple HUD funds so 
that reporting can be limited to one system. However, not all HUD 
systems provide for that type of designation. HUD will provide 
additional guidance to recipients that have multiple funding sources on 
the proper process for reporting Section 3 project completion.

Separate Reporting by Funding Source

    One commenter requested HUD clarify whether PHAs will still be 
required to report separately by funding source (e.g., Operating Funds 
and Capital Funds) or whether the hires report will be aggregated to 
report only on PHA total funds. This decision will impact how PHAs 
currently collect and track Section 3 hires. A commenter supported 
elimination of separate reporting on contracting with Section 3 
business concerns. Other commenters stated that the reporting and 
monitoring required to remove professional services labor hours from 
overall labor hours would add additional administrative burden to PHAs 
and could prove challenging in the overall reporting process.
    HUD Response: Under the final rule, for non-MTW agencies, reporting 
initially will remain at the grant or individual program level, but HUD 
may explore agency-level reporting where possible to streamline and 
simplify. PHAs will still be required to report by separate funding 
source or in the aggregate for MTW agencies. For ease in 
administration, the rule will provide separate definitions for these 
types of funding and separate subparts relating to: (1) Public housing 
financial assistance, which covers (a) development assistance provided 
pursuant to Section 5 of the United States Housing Act of 1937 (the 
1937 Act), (b) operations and management assistance provided pursuant 
to Section 9(e) of the 1937 Act (Operating Fund), and (c) development, 
modernization, and management assistance provided pursuant to Section 
9(d) of the 1937 Act (Capital Fund); and (2) Section 3 projects, which 
means housing rehabilitation, housing construction and other public 
construction projects assisted with HUD housing and community 
development assistance when the amount of the assistance to the project 
exceeds $200,000, or $100,000 where the assistance is from HUD's Lead 
Hazard Control and Healthy Homes programs. There are no current plans 
to aggregate the information or eliminate reporting on contracting with 
Section 3 business concerns. Small PHAs with less than 250 public 
housing units will be permitted to report qualitatively. HUD is 
exploring how best to implement qualitative reporting for small PHAs, 
and as indicated above

[[Page 61548]]

may study whether other reporting methods should be contemplated in the 
future. As stated in the final rule, HUD believes that tracking labor 
hours consistent with existing tracking for prevailing wage 
requirements would reduce burden on recipients. HUD also believes that 
tracking labor hours will better allow HUD to determine if long-term 
employment opportunities are being generated.

Exempt Commodity Purchases, Non-Construction, and Professional Services

    Commenters strongly agreed with the change to exempt both 
commodities purchases (material supply contracts) as well as 
professional services (contracts for legal, accounting, financial 
consulting, environmental assessment, A&E services and other 
professional services) from the calculation of contract dollars and new 
hires for reporting. One commenter supported exclusion of Section 3 
requirements on non-construction professional services (e.g., legal, 
accounting, and engineering) but has concerns that not all Section 3 
workers want careers in the construction field and some employment is 
generated in non-construction contracts.
    HUD Response: The final rule maintains the exemption of material 
supply contracts and maintains the structure presented in the proposed 
rule which does not require separate reporting of contracting with 
Section 3 business concerns. HUD is providing clarification on the 
exemption for professional services in the definition of ``professional 
services'' in this final rule, by defining professional as services 
that require an advanced degree or professional licensing.
    HUD acknowledges that many low-income workers seek employment in 
jobs other than construction. However, data indicate that there are 
relatively few opportunities for Section 3 hiring in professional 
services fields such as legal services and civil engineering. Many of 
the positions within these professional services fields require 
specialized degrees and in many cases the hiring is not directly 
tracked to a specific federally funded project or activity. The 
reporting structure in the rule allows a recipient to count as Section 
3 labor hours and as Targeted Section 3 labor hours any work performed 
by a Section 3 worker or a Targeted Section 3 worker (i.e., in the 
numerator of the calculation), even when the professional services as a 
whole are not counted in the baseline reporting (i.e., in the 
denominator of the calculation). The effect of this reporting structure 
is to give a recipient a bonus if they are able to report Section 3 
hires in the professional services context.

Frequency of Reporting

    Commenters stated that annual reporting does not facilitate capture 
and correcting of non-compliance. Some commenters recommended all PHAs 
should provide Section 3 reports quarterly instead of at the end of the 
fiscal year. Another commenter recommended that reporting should be 
done on a monthly basis.
    One commenter strongly supported a return to annual reporting and 
integration of reporting with other funding program reporting 
requirements. Another commenter supported annual reporting for reducing 
administrative burden of more frequent reporting. Another commenter 
supported the proposed change to annual reporting on projects completed 
within the reporting year.
    HUD Response: The reporting requirements represents a balance 
between frequent reporting, effective reporting, and administrative 
burden. Frequent reporting allows HUD to keep a closer eye on 
compliance, and early oversight can result in identification of non-
compliant actors when there is still opportunity to influence change. 
Frequent reporting also risks identifying as non-compliant those 
endeavors where the Section 3 opportunities are sequenced later in the 
effort's timeline, resulting in ineffective reporting. This is often 
the case in construction efforts that begin with heavy machinery work 
and end with trades where Section 3 opportunities are more commonly 
created. Additionally, there is an administrative burden for the 
reporting entity, and an oversight responsibility for HUD, each time 
Section 3 reports must be submitted. HUD notes the variety of opinion 
represented in the comments, with suggestions of monthly, quarterly, 
and annual reporting, as well as the project-based reporting permitted 
in the proposed rule. HUD has determined not to revise the rule. As a 
result, reporting is on an annual basis for ongoing endeavors such as 
PHA operations or multi-year infrastructure or disaster recovery 
efforts. For discrete projects such as development of a singular 
multifamily apartment building, the reporting is on a project basis, 
and reported to HUD in the recipient's annual report corresponding to 
the year of the project's completion. Acknowledging the value of early 
intervention, the final rule also shifts oversight of Section 3 from a 
centralized HUD office, which typically does not have visibility into 
whether the funding recipient is embracing and effectively implementing 
its Section 3 obligations, to the program office which is in regular 
communication with the funding recipient. Part of HUD's intention with 
respect to this shift in oversight is to integrate discussions of 
Section 3 compliance into regular oversight discussions so that there 
are opportunities to influence improvement in Section 3 performance on 
an ongoing basis.

Submission Timing

    Commenters recommended that HUD should provide further guidance on 
how and when annual reports will be submitted and stated that meeting 
the current January 10th deadline is a challenge for PHAs because end-
of-year hires may be undercounted because paperwork may still be in 
process in January. Commenters stated that if the new regulations 
require reporting consistent with the timeframes that PHAs are already 
using, it will assist PHAs in providing the most accurate and up-to-
date information. The commenters recommended that HUD refine the 
proposed reporting frequency regulations to read: ``recipients must 
report annually after the end of their reporting year to HUD . . .'' 
and HUD should provide PHAs 90 days from the end of their reporting 
year to have sufficient time to collect and aggregate data.
    Another commenter noted that MTW PHAs provide annual reports based 
on the past fiscal year and updating the system to include such Section 
3 reporting would be easier to use. This commenter also noted that it 
needs to be clarified how the reporting would deal with differing 
timelines for annual reporting versus the duration of projects with 
funds triggering Section 3 reporting.
    HUD Response: As noted above, HUD will issue sub-regulatory 
guidance on reporting by program area. HUD anticipates that it may be 
able to integrate Section 3 reporting into the funding recipients' 
other, programmatic, reporting structures, which already have existing 
time frames for submission of reports. The rule does specify that 
reporting is based on the recipient's fiscal year, which language has 
not been changed. Section 3 requirements may not be waived by MTW 
agencies. MTW only provides flexibility for requirements promulgated 
under the 1937 Act, while Section 3 is a provision of the Housing and 
Urban Development (HUD) Act of 1968. Since HUD has a specific online 
system to collect Section 3 data--SPEARS--all PHAs, including MTW 
agencies, should report into that system. HUD will consider providing

[[Page 61549]]

training specific to MTW agencies, in addition to training for a more 
general audience, on how to use the SPEARS system.

Major Construction Project Administrative Burdens

    Commenters warned that large workforces and the use of multiple 
subcontractors on major construction projects would lead to heavy 
administrative burdens which may discourage subrecipients or 
contractors from bidding. These commenters recommended contractors be 
allowed to self-certify to relieve administrative burdens.
    HUD Response: HUD appreciates the commenters' concerns but 
determined that self-certification would not provide HUD with an 
adequate compliance oversight mechanism. There is no provision in the 
rule for self-certification of meeting the benchmark requirements.

Increasing Costs

    One commenter stated that the requirements are already burdensome 
to their local governments, administrators, contractors and sub-
contractors and the proposed rule would increase the burden, leading to 
fewer contractors willing to participate in CDBG projects, driving up 
costs, and leading to smaller projects and fewer beneficiaries. One 
commenter supported keeping reporting requirements to a minimum because 
both PHAs and HUD staff have limited capacity for reporting and 
providing constructive feedback.
    One commenter stated the ability to identify workers individually 
rather than relying on the business concern to meet Section 3 
definitions provides additional opportunity to demonstrate Section 3 
compliance where there was none before, but this creates an additional 
burden to document safe harbor, particularly for Lead Hazard and 
Healthy Homes projects where a lower project dollar threshold is 
imposed. The commenter went on to suggest HUD consider providing 
additional funding for contractors to meet the financial impact of the 
paperwork burden of documenting compliance. Similarly, other commenters 
noted that under the previous rule the dollar threshold is zero, 
whereas under the proposed rule, despite the type of HUD funds 
received, every penny contracted, invested, or applied to any contract 
project, regardless of ownership, would have triggered full Section 3 
compliance.
    Commenters also expressed concern for the burden on contractors to 
meet hourly benchmarks while working through a pool of unskilled new 
hires and potential costs to the owner if a new hire fails to meet job 
requirements. One commenter stated that a significant increase in 
Federal funding would be required to fund the increased administrative 
burden of the proposed rule. Other commenters stated that due to the 
lack of resources many PHAs have, HUD should ask for increased funding 
for public housing so that PHAs can sufficiently meet Section 3's 
intended goals. Commenters suggested HUD consider creating Section 3 
technical assistance funding that can be used to build PHAs' technical 
knowledge and capacity.
    HUD Response: HUD will continue to look for ways to reduce the 
impact of Section 3 reporting requirements using existing reporting and 
compliance systems that decrease administrative burden on recipients. 
HUD believes the use of labor hours, rather than new hires, will reduce 
costs as many construction contractors already track labor hours to 
meet prevailing wage requirements. This practice is proposed to provide 
a consistent labor hour tracking mechanism that will make compliance 
with Section 3 easier not only for recipients of HUD assistance, but 
also for contractors and subcontractors. HUD anticipates a reduction in 
reporting and recordkeeping burdens equal to approximately 64,270 
hours, or $2.4 million annually. This rule will not have any impact on 
the level of funding for covered HUD programs. Funding is determined 
independently by Congressional appropriations, authorizing statutes and 
regulatory formulas that set the amounts of Federal financial 
assistance provided by HUD grants. HUD is exploring ways to build upon 
ongoing Section 3 technical assistance and capacity building activities 
for recipients.

Disaster Recovery

    A commenter warned that additional reporting requirements will be 
problematic for those managing disaster recovery and requested 
additional guidance for flexibility with the CDBG-DR program. Another 
commenter recommended HUD provide outreach and guidance on using CDBG-
DR funds for job training and hiring initiatives during rebuilding 
efforts.
    HUD Response: Reporting requirements already exist for reporting 
Section 3 compliance for CDBG-DR program activities. The proposed 
Section 3 rule will change the reporting scope, such as reporting hours 
instead of new hires. The rule, however, does not create additional 
reporting requirements. Like current practice, the size of a grant 
award and project scope will dictate the length of time it takes to 
complete reporting. Technical assistance on using CDBG-DR funds for job 
training and hiring initiatives during rebuilding efforts, as well as 
other Section 3 topics, will be provided to grantees upon request and 
as part of the ongoing grant management process.

Reporting Should Be on Projects Underway

    One commenter recommended CPD project reporting should be based on 
projects underway, not only those projects completed during the program 
year. The rule is unclear on how Safe Harbor is met for Section 3 
projects, though Reporting Sec.  75.25 states HUD requires a 
compilation of data through the recipient's fiscal year. Commenter 
recommends Section 3 compliance be measured by combining all workers 
for all Section 3 projects. If percentages of Section 3 workers and 
Targeted Section 3 workers are met, this will show intent to comply.
    HUD Response: HUD believes that CPD project reporting should be 
based on those projects completed during a program year. HUD 
anticipates that CPD programs will continue to report on Section 3 
through CPD's current data collection mechanism. At minimum, CPD 
programs are required to report annually, but many programs update 
status more frequently during a recipient's fiscal year. HUD intends to 
issue guidance on the Section 3 requirements and provide technical 
assistance on a program-by-program basis.

Special Oversight Role of States in State Programs

    One commenter recommended that the proposed Section 3 rule be 
amended to acknowledge the special oversight role of states in State 
programs. The current Section 3 regulation provides guidance on this 
point, while the proposed rule fails to include such guidance. Any 
final rule should include such guidance. See 24 CFR 135.32(f) and 24 
CFR 570.
    HUD Response: HUD supports retaining the current proposed rule's 
language. HUD believes the proposed language does fully address the 
roles and responsibilities of Section 3 recipients and provides 
adequate guidance to implement, monitor, and enforce Section 3 
requirements.

Qualitative Form

    One commenter recommended that HUD should provide the form for 
qualitative reporting required of small

[[Page 61550]]

PHAs to allow commenters to provide informed feedback.
    HUD Response: HUD will provide a form for Small PHAs and others to 
use for qualitative reporting when an entity does not meet the 
benchmark. The form will be issued consistent with Section 3507 of the 
Paperwork Reduction Act of 1995, 44 U.S.C. Chapter 35, and HUD will 
provide the opportunity for the public to provide comments on the form.

Recordkeeping (Sec.  75.31)

    One commenter recommended moving Sec.  75.31 to Subpart A where it 
would have general applicability to all recipients.
    HUD Response: Subpart A and Subpart D provisions apply across the 
board. The rule is structured so that Section 3's general requirements 
are in Subpart A. Subpart B and C only apply depending on funding 
source. Other detailed requirements that apply across the board, such 
as recordkeeping and compliance, are in Subpart D. HUD believes this 
structure makes sense and is consistent with other rule structures.

Administrative and Compliance Costs

    According to one commenter, this section implies the responsibility 
for ensuring workers meet the defined requirements in Sec.  75.5, such 
as Census tract designation and annualized wage calculations, for CDBG 
Section 3 projects will lie with contractors, which will therefore be 
costly for contractors who lack the capacity or are already burdened by 
paperwork. The commenter suggested it may be easier to have recipients 
bear this burden.
    In contrast, one commenter noted contractors would have to provide 
a personnel profile that includes, at a minimum, income, current 
address, address at time of hire, and YouthBuild status to establish 
whether an employee of a non-Section 3 business concern meets any of 
these criteria. Contractors and employees may balk at a request for 
this type of personal information, which may become public record. The 
additional administrative burden placed on otherwise qualified 
contractors may reduce contractor participation, thereby increasing 
costs and lessening the impact of Section 3 covered programs on their 
intended beneficiaries.
    HUD Response: HUD believes the rule will not impose additional 
administrative and/or compliance costs for contractors. Administrative 
and compliance costs associated with Section 3 requirements should be 
properly resourced within a contractor's bid for a project and are 
already required for confirming compliance with existing Section 3 
requirements. Contrary to the comments, contractors do not have to 
provide a personnel profile or any sort of personally identifiable 
information. HUD has never requested this detailed information and this 
rule does not change that; the data is only reported in aggregate, and 
records are maintained for verification only. Recipients may, but are 
not required to, assist contractors who lack capacity to adequately 
implement the Section 3 requirements.

Contracting Provision Sec.  75.17 and Sec.  75.27

    Commenters urged HUD to retain standard Section 3 language to be 
included in contracts because the use of consistent language makes it 
easier for contractors to be certain of their obligations, limits the 
possibility of confusion for contractors working on multiple projects, 
and decreases administrative burden for agencies. Other commenters 
expressed concern about whether the Voluntary Compliance Agreement 
clause will continue to exist in contracts and who will enforce it.
    HUD Response: HUD considered commenters' requests for standard 
contract language; however, the contract language must be customized 
depending upon the contract and the program. HUD anticipates providing 
sample language and/or discussion of contracting best practices but 
determined that the recipient is in the best position to determine what 
contract language is appropriate in each context.

Multiple Funding Sources/Recordkeeping for Multiple Funding Sec.  75.29 
/ Sec.  75.31

Clear Standards and Secure Online Tool

    Other commenters recommended that there should be clear standards 
for reporting on Section 3 regardless of the funding source to reduce 
the possibility of errors and to eliminate the need to report in 
different formats. These commenters suggested that if HUD defers to 
localities, the agency that is the primary recipient of HUD funding 
should determine which option of reporting should be used by 
subrecipients to allow for consistency in reporting approach. These 
commenters also recommended that public housing financial assistance 
guidelines should dictate reporting requirements for PHAs administering 
projects with multiple funding sources. For projects that are mix-
funded with PHA and other HUD funding, Sec.  75.29(a) says that the 
other HUD funding stream (e.g. CDBG) may report using the PHA criteria.
    Commenters recommended that compliance documentation be accessible 
in a secure online tool or standard form which would measure new hires, 
hours percentages and training persons and hours. These commenters went 
on to suggest developing a form for contractors or subcontractors to 
complete to confirm workers' Section 3 eligibility, which would ease 
administration and will foster consistency. With respect to the self-
certifications discussed in proposed Sec.  75.31, it would be helpful 
if HUD were to provide a form for this purpose.
    HUD Response: HUD thanks the commenters for their recommendation 
and notes that there will be a standard set of data reporting 
regardless of which system is used for reporting. The same data will be 
collected across programs for consistency; the only difference will be 
how it looks when reported.

Benchmarks for Section 3 Workers and Targeted Section 3 Workers

    Many commenters supported including benchmarks for Section 3 
workers and Targeted Section 3 workers. Some commenters supported HUD's 
initial benchmarks, as a starting point, and focus on labor hours. 
Additional commenters supported using both benchmarks stating that 
limiting the benchmark to only Targeted Section 3 workers would fail to 
encourage hiring of other Section 3 workers. Another commenter 
supported elimination of the 3% goal for non-construction contracts to 
be Section 3 business concerns. Other commenters supported the 
benchmarks with the caveat that HUD retain the new hire framework for 
PHAs or the tracking of the labor hours if they do not have an hour 
tracking system already in place. These commenters suggested evaluating 
the efficacy of this approach and revising as necessary if data 
indicates the change is not supporting sustained employment.
    Other commenters stated that HUD's benchmark that Targeted Section 
3 workers make up 5 percent of the total number of labor hours is too 
low. The commenters proposed that at least 15 percent of labor hours 
worked be the benchmark for Targeted Section 3 workers. The commenters 
stated that the Section 3 statute clearly prioritizes employment for 
residents of public housing and other HUD-assisted housing programs.
    Some commenters noted that the benchmark for labor hours is too 
ambitious and unreasonable. Commenters cited to the fact that low-
income workers are not necessarily qualified for construction jobs, 
even those jobs at the lower end of the

[[Page 61551]]

construction pay scale, and finding low-income workers who are both 
qualified for the positions and willing to work in construction is much 
harder than identifying the number of potentially eligible low-wage 
workers. Commenters also noted that many low-income persons have 
childcare and transportation challenges and many contractors do not 
have open positions to fill by low-income persons.
    Another comment opposed the 5% Targeted Section 3 goal, stating it 
was unrealistic given most PHA residents are seniors, have some form of 
disability, or already work. Commenters also noted that the benchmarks 
will be especially difficult to achieve in rural locations.
    One commenter opposed the two categories of Section 3 workers, 
noting the pool of workers is already small, and makes achievement of 
benchmarks challenging. While the additional categorization provides 
data collection value, it creates additional burden and goes beyond the 
statute's requirement. The commenter noted that the benchmark fails to 
recognize many other initiatives to assist residents to work towards 
long-term employment and self-sufficiency (such as Family Self-
Sufficiency (FSS) programs).
    Commenters also noted the current benchmarks have been difficult to 
meet, and that the new bar would likely require that all positions 
engaged, rather than only new hires, go to Section 3 workers. The 
commenter recommends that in an environment of under-funding and over-
regulating that HUD establish a modest benchmark that recognizes 
training and adjust upward later, if necessary. The commenter noted the 
current recommendation is extremely aggressive and unreasonable; and 
would result in few agencies meeting the mark. Additionally, it would 
fail to reduce reporting burdens, align regulations with standard 
business practices, or increase Section 3 successes.
    Other commenters focused on the Targeted Section 3 worker 
benchmark, noting that the category complicates tracking and decreases 
the likelihood of meeting benchmarks. The commenter suggested taking an 
alternate approach to tracking Targeted Section 3 workers without 
establishing a separate benchmark. One commenter stated that the 
benefits and goals of the Section 3 statute would be difficult to 
measure by tracking only Targeted Section 3 workers in that it would 
fail to represent the value of providing economic opportunities to 
individuals who are low-income but may live outside the immediate 
project area, who otherwise still qualify for Section 3 preference.
    Other commenters stated that for Subpart C, HUD should only measure 
compliance of Section 3 with overall Section 3 worker tracking and 
should not apply Targeted Section 3 workers metrics or benchmarks. The 
commenters stated support for retaining the existing 30 percent 
benchmark for all Section 3 new hires but that it should not be 
required to be disaggregated between Section 3 and Targeted Section 3 
workers. The commenters stated that this approach would keep the 
benchmarks in line with the goals of Section 3 while providing 
contractors and administering agencies with the ability to tailor 
implementation depending on the composition of the local workforce and 
specific project needs.
    A commenter noted that they ran numbers with the new metric, along 
with other PHAs, and they all reported much lower percentages, in most 
cases half of the proposed numbers. The commenter raised a concern with 
employee displacement if contractors are required to meet this new 
ratio, which is inconsistent with the goal of Section 3 to create new 
jobs rather than displace existing employees or inflate project costs. 
The commenter noted that recipients hiring contractors instead of 
replacing or hiring more employees could game the system or add 
significant costs by hiring additional but unnecessary Section 3 
workers for the project life.
    HUD Response: The statute requires Section 3 prioritization and 
this rule's goal is to ensure statutory adherence and streamlined 
reporting. HUD created the Targeted Section 3 worker category to 
include both the statutory priorities and policy priorities, for 
example, tracking the hiring of public housing residents where public 
housing assistance is involved and tracking the residents of the 
neighborhood or service area when other housing and community 
development assistance is used. Prioritization is meaningless without 
the categorical distinction and HUD believes that technology enables 
better tracking compared to at the statute's inception. As for the 
benchmarks, HUD will establish the benchmarks via Federal Register 
Notices which will allow them to change over time, as data is reported 
and gathered. HUD believes 5% is a reasonable estimate from the Office 
of Policy Development and Research (PD&R) data. Additionally, 
compliance can be evaluated qualitatively if the hours benchmark cannot 
be met. Under this rule, both measurements are permissible, and the 
requirements for qualitative evaluation are laid out in the rule. HUD 
believes this flexibility will deter any incentive to hire unnecessary 
Section 3 workers.

Qualitative Measurement

    One commenter supported changes to reporting requirements and 
appreciated the ability to report qualitative efforts if benchmarks are 
not met. One commenter stated that compliance should be evaluated 
qualitatively rather than using hours as a benchmark. Commenters stated 
that the proposed certification related to prioritization of Section 3 
hiring efforts would be burdensome to agencies and contractors. The 
commenter wrote that HUD should require agencies to certify what 
efforts they have implemented to achieve the goals of the Section 3 
program to be considered in compliance. This approach would maintain 
the benefits and incentives of the program and provide HUD with a tool 
for accountability.
    HUD Response: The statute requires agencies and contractors to 
prioritize their hiring efforts according to the statute's terms. The 
rule requires funding recipients to certify that they have acted in 
compliance with the statute, and to report on the quantitative outcomes 
of their efforts relative to the benchmarks. HUD does not consider it 
burdensome for a recipient of HUD funding to certify that they have 
acted in compliance with the statute. Furthermore, compliance can be 
evaluated qualitatively if the hours benchmark cannot be met. Under 
this rule, both measurements are permissible, and the requirements for 
qualitative evaluation are laid out in the rule. If reporting is above 
the benchmark, then HUD will presume compliance with the regulatory 
requirements; HUD wants to see actual positive outcomes rather than 
just a recipient's inputs. HUD appreciates the request for additional 
compliance tools but believes that requiring such reporting for all 
agencies would be overly burdensome.

Safe Harbor

    Commenters stated that the proposed rule is not clear on how Safe 
Harbor would be met for Section 3 projects. The commenters questioned 
what type of data collection would be used to assure accurate reporting 
and how to meet the percentages of Section 3 and Targeted Section 3 
workers. The commenters asked whether there would be a tool to assist 
with this data collection.
    HUD Response: HUD will issue sub-regulatory guidance and provide 
technical assistance on a program-by-program basis to assist recipients 
with

[[Page 61552]]

clearly understanding the Section 3 safe harbor parameters. Recipients 
will provide data regarding Section 3 and Targeted Section 3 workers 
through existing HUD information systems, as defined by each covered 
program. HUD will not impose additional data collection burdens on 
recipients because of the rule.

Small PHAs Should Have a Separate Benchmark

    One commenter recommended that Safe Harbor benchmarks should be 
established for small PHAs and suggested HUD establish a minimum 
threshold of work-able and non-working residents. Another commenter 
stated that some smaller businesses do not usually track labor hours 
performed on specific projects, and it can be a struggle for them to 
learn how to do so. On Davis-Bacon projects, contractors are required 
to submit certified payroll; however, some projects may be subject to 
Section 3 that are not subject to Davis-Bacon and related acts. The 
commenter stated that requiring the tracking and reporting of labor 
hours could pose a significant additional burden to small contractors.
    HUD Response: One of HUD's goals through this rule is to ensure 
that employment and other economic opportunities generated by Federal 
financial assistance for housing and community development programs 
are, to the greatest extent feasible, directed toward low- and very 
low-income persons, particularly (though not exclusively) those who 
receive government assistance for housing. HUD believes that it is 
essential to achieving this goal that small PHAs report on their 
efforts to comply with Section 3 but acknowledges that small PHAs may 
have more difficulty achieving the quantitative benchmarks and 
consequently has permitted a qualitative reporting alternative for 
small PHAs. HUD is considering further ways to streamline and ease 
qualitative reporting by creating a tracking form and timing submission 
deadlines consistently with timeframes that PHAs and other recipients 
of public housing financial assistance are already using to submit 
documents to HUD. HUD has established that small PHAs with less than 
250 public housing units will not be required to report labor hours or 
meet benchmarks, but instead will be permitted to submit qualitative 
reports on their efforts to involve residents in job-seeking and 
training endeavors. HUD recognizes the challenge when small PHAs have 
very few work-able, non-working residents that would make meeting 
benchmarks very difficult.

Alternatives

    One commenter suggested limiting the benchmark to only Targeted 
Section 3 workers in order to provide a more streamlined approach to 
reporting. The commenter stated that if the benchmark is narrowed to 
Targeted Section 3 workers, then tracking data for Section 3 workers 
should not be required. Other commenters recommended removing the 
Targeted Section 3 worker benchmark. One commenter stated that if labor 
hours are tracked, the requirement should be limited to Section 3 
workers in general and that the benefits of adding the Targeted Section 
3 worker subcategory are not apparent enough to outweigh the 
complications. One commenter supported giving PHAs and entities using 
housing and community development assistance a choice to use either 
targeted Section 3 workers or Section 3 workers as their benchmark.
    Other commenters recommended other benchmarking alternatives. Some 
commenters recommended that the benchmark include a focus on Section 3 
business concerns, such that 3% of all contracts are for Section 3 
business concerns. One commenter stated benchmarks should ensure that 
local jobs are provided to local persons to reduce commute times and 
recommended using geographically determined numbers. The commenter 
noted that many factors can affect regions and a national number can 
skew the worker availability distribution. One commenter suggested that 
such regional benchmarks allow HUD to forecast how many PHAs and 
Section 3 projects could meet the benchmarks assuming agencies are 
using their ``best efforts'' to hire Section 3 workers and Section 3 
projects are hiring and contracting with Section 3 workers and business 
concerns to the ``greatest extent feasible.'' According to comments, 
regional benchmarks can help account for uneven distribution of 
potential Section 3 workers throughout the country. Geographic 
standards may also help address differences between union and 
non[hyphen]union states. If HUD were to set regional standards, there 
should be a national level appeals process. Commenters also suggested 
allowing use of local adjustment factors and economic data when 
establishing compliance benchmarks, especially unemployment rates which 
affect the ability to meet benchmarks.
    One commenter stated the benchmark does not ensure Section 3 
workers are engaged in a mix of job categories or trades, or 
opportunities for upward mobility; 30% of hours worked should be 
measured for each job category/trade and protected classes. Other 
commenters suggested HUD consider the type of public housing financial 
assistance or other variables. The commenter recommended that in 
addition to different types of benchmarks HUD should maintain a ceiling 
for these benchmarks. The commenter noted a goal of 80% of entities 
meeting the benchmarks would be appropriate.
    Other commenters stated that in order to fulfill the statutory 
objectives of Section 3 to direct the financial opportunities to low- 
and very low-income persons and recipients of housing assistance, the 
final rule must: (1) Set benchmarks in a way that actually prioritizes 
HUD tenants; and (2) employ a definition of Section 3 worker and 
Targeted Section 3 worker that includes exclusively low-income 
individuals. Commenters also proposed separate benchmarks for public 
housing projects and non-public housing projects and provided a 
specific hierarchy of workers. Other commenters noted proposed 
benchmarks for PHAs should reflect the law's emphasis on providing 
opportunities for public and assisted housing recipients.
    Commenters suggested an alternative approach for workforce 
utilization setting goals for all construction and other blue-collar 
employment, such as landscaping and janitorial. The commenters 
suggested that labor hours also consider demographics, length of 
project, geography, and size of contractors.
    One commenter recommended that the determination of Section 3 
compliance be measured by combining all workers for all Section 3 
projects to get an overall picture of the number of low-income workers 
being paid with these federal dollars. If the percentages of Section 3 
and Targeted Section 3 workers are met, this better shows intent to 
comply with the spirit of Section 3.
    HUD Response: HUD appreciates the suggestions and has considered 
multiple benchmarking options. Creating separate benchmarks would make 
projects with co-funding difficult; the commenter's suggestions 
increase both complexity and the burden of reporting. HUD believes the 
current benchmark is a good starting place and notes that the 
regulation permits adjusting the benchmarks via Federal Register 
publication. HUD program staff will evaluate the level of effort 
expended by those recipients that fail to meet the benchmark safe 
harbor, and thus will ensure that the statutory terms are being 
properly enforced. HUD is most interested in strong outcomes for

[[Page 61553]]

Section 3 employees. In addition, HUD has no programs that align with 
specific regions and intends to see reporting data before making any 
additional distinctions, if appropriate.

Compliance (Sec.  75.33)

General

    A comment stated HUD needs to strike a balance between the limits 
of state and local agency resources and Section 3's goals to provide 
more effective resources to foster compliance. Similarly, another 
comment suggested HUD utilize Community Compass technical assistance 
funds to create best practice resources and employ contractors to 
provide Section 3 compliance support to those jurisdictions and PHAs 
without designated staff for this purpose. Another comment recommended 
HUD simplify the compliance requirements by establishing a ``presumed 
eligibility'' criteria for businesses or residents located in HUD-
approved Neighborhood Revitalization Strategy Areas, Choice 
Neighborhood target areas, Promise Zones, Empowerment Zones and 
Enterprise Communities, Opportunity Zones and other areas defined at 24 
CFR part 570.208(a)(1)(vii).
    A commenter suggested states and entitlement communities be 
required to develop Section 3 Plans that become part of the 5-year 
Consolidated Plan to allow time for compliance with the labor hours 
percentages while requiring demonstrated improvement over time. The 
plan should track Section 3 performance and demonstrate labor 
partnerships, construction, and training programs to target and find 
workers and an environment that promotes Section 3 goals. HUD should 
describe the plan's components, including how to notify the public of 
opportunities for involvement in designing the plan, how and when to 
notify the public when Section 3 employment and bidding opportunities 
arise, how to inform workers of their rights, and complaint processes. 
Commenters recommended HUD establish ethics standards for organizations 
who have a fiduciary responsibility over Section 3 funds. Other 
commenters suggested compliance failures to adhere to Section 3 
business concern criteria should be cured within two payroll periods or 
be terminated; terminated contractors should be banned from receiving 
HUD funds for 3 years from the termination date; and that persons found 
to have falsified their residence to qualify as a Section 3 worker 
should be suspended from participation for 3 years.
    Commenters stated HUD should: provide greater clarity on the 
obligations created by Sec.  75.33(a), especially since the preceding 
section, Sec.  75.31, imposes highly specific recordkeeping 
requirements; explain whether the recordkeeping obligation in Sec.  
75.33 is a restatement of the recordkeeping obligations set forth in 
Sec.  75.31, or whether additional records are required to demonstrate 
compliance; and HUD should provide guidance on documentation and 
recordkeeping related to ``best efforts'' or ``greatest extent 
feasible'' efforts.
    HUD Response: This rule is intended to strike a balance and foster 
compliance with Section 3's goals and will result in a reporting and 
recordkeeping burden reduction. HUD wants to ensure employers are 
invested in keeping Section 3 workers employed, and that there is 
enough opportunity to build skills and experience so that Section 3 
workers may develop self-sufficiency and compete for other jobs in the 
future. HUD will review Department-level strategies on how to 
effectively incorporate Section 3 reporting into current systems and 
data collection tools, including the Consolidated Plan. HUD will issue 
sub-regulatory guidance on reporting by program area and provide 
technical assistance to recipients for Section 3 compliance. HUD 
appreciates the suggestions and notes that there will be standardized 
compliance procedures across programs, and this will include ethics 
standards. Section 75.33 is a reaffirmation of the recordkeeping 
requirement set forth in Sec.  75.31, as recipients of HUD funding will 
need to have the records described in Sec.  75.31 available if HUD 
needs to do a compliance review of a recipient's Section 3 performance. 
HUD determined not to define the difference between ``best efforts'' or 
``greatest extent feasible,'' but rather to increase the emphasis on 
outcomes as a result of these efforts. Please see the ``Best efforts'' 
and ``greatest extent feasible'' section above. A recipient's reported 
results will be compared to the outcome metrics defined in the 
benchmark Notice. HUD program staff will evaluate the level of effort 
expended by those recipients that fail to meet the benchmark safe 
harbor, and thus will ensure that the statutory terms are being 
properly enforced.

Complaints and Monitoring

    Commenters stated each HUD program should have a detailed complaint 
process. A commenter supported the integration of Section 3 into each 
program area but noted the lack of detailed complaint provisions, and 
suggested the final rule require each HUD program to have a detailed 
complaint process, with enforcement assigned to Davis-Bacon and Labor 
Relations (DBLR), Office of Field Policy and Management (FPM), or the 
Office of Fair Housing and Equal Opportunity (FHEO).
    Commenters supported removing Section 3 enforcement from FHEO but 
strongly suggested HUD identify an office independent of the program 
offices to monitor and enforce Section 3 requirements, such as FPM, or 
a new Section 3 office fully funded and trained to work on Section 3. 
Giving responsibility for Section 3 compliance to the program that is 
responsible for funding that triggers Section 3 obligations is 
problematic because (1) HUD program staff have in the past referred to 
PHAs and jurisdictions, not the residents who are supposed to benefit 
from HUD programs, as their ``constituents,'' (2) there is currently no 
process for accepting and reviewing complaints in the proposed rule, 
(3) significant training and resources will be required to prepare 
program staff to oversee Section 3 compliance since they are not 
currently engaged in it. HUD should require that Section 3 policies, 
plans, procedures, and complaints are made publicly available by both 
the recipient and on HUD's website.
    Other commenters agreed with the proposed shift of oversight from 
FHEO to program offices and believed this will improve oversight 
because program offices already monitor recipients on a day-to-day 
basis, thus Section 3 monitoring will become part of normal overall 
monitoring. Another commenter stated transferring oversight and 
compliance from FHEO to program offices is an appropriate change on the 
condition that oversight practices are standardized across program 
offices. Another commenter was concerned about the Section 3 complaint 
process for residents; HUD program areas do not have detailed 
provisions for residents to file complaints on the part of PHAs or 
jurisdictions that do not meet program requirements. At a minimum, if 
HUD defers to grantees to field complaints from individuals, the 
process should require a grantee to inform HUD of the resolution of 
each complaint much like CPD does with CDBG-DR complaints.
    A further commenter stated it is not clear how the public will make 
complaints if the current complaint process is removed and asked how 
they will know which program office to contact. Other commenters 
suggested the final rule require a detailed complaint process identical 
or similar to

[[Page 61554]]

what is in the current rule. Further commenters expressed that HUD 
should keep the existing complaint process until it adopts a new one 
after public review and comment. Other commenters were concerned about 
the 958 Complaint Form's elimination and the impact on residents who 
will be left without protections or a process for monitoring and 
overseeing contractors who are violating Section 3 requirements. One 
commenter felt that to move the review process from FHEO to local HUD 
CPD would be disastrous.
    A commenter noted that HOME and CDBG recipients do not seem to 
understand the importance of Section 3 and the compliance enforcement--
appropriate remedies are not in place. According to one commenter, the 
promise of Section 3 has not yet been realized, largely due to the fact 
that none of the entities responsible for its administration--HUD, 
state and local governments, PHAs--have been sufficiently resourced to 
implement, monitor, and enforce Section 3 requirements. The HUD program 
offices responsible for funding all are currently under-resourced and 
could better fulfill their obligations in monitoring and enforcing 
Section 3 with dedicated staff.
    One commenter had concerns about moving Section 3 regulations from 
24 CFR part 135 under FHEO to the new part 75 under the Office of the 
Secretary; the commenter assumed Office of Field Policy and Management 
would have oversight of Section 3 under the proposed rule amendment and 
expressed concern over FPM's lack of capacity and technical knowledge 
to oversee monitoring and enforcement of Section 3. The commenter 
argued HUD has never seriously monitored and enforced the statute and 
that HUD program staff treat PHAs and jurisdictions as their 
constituents, not the residents who are the intended beneficiaries. 
Additionally, alternative procurement provisions should be created to 
help Section 3 business concerns compete with larger more established 
businesses.
    One commenter was concerned about different program offices 
providing conflicting information and hoped HUD would provide 
standardization and clear guidance; others suggested HUD request 
adequate funding to hire the necessary headquarters and field office 
staff to provide Section 3 technical assistance and to robustly monitor 
and enforce Section 3, as well as seeking adequate funding so that all 
jurisdictions and PHAs can hire and retain staff to serve as Section 3 
coordinators and to monitor and enforce Section 3 obligations. A 
commenter has received conflicting guidance from different program 
offices, resulting in findings and fines on several occasions.
    HUD should provide further detail as to what standards each program 
office would be using to provide oversight and what procedures are in 
place to ensure that PHAs receive consistent oversight across offices. 
Further clarification is also needed as to how the responsible program 
office would be designated for oversight when a project uses multiple 
funding sources and triggers oversight from multiple program offices.
    A commenter recommended HUD strengthen its compliance practices to 
incentivize performance while recognizing legitimate constraints. The 
commenter also recommends stating in the rule that HUD will deduct 
points in relevant HUD program Notices to applicants for competitive 
HUD funding who have not achieved Section 3 benchmarks and allowing 
applicants the ability to provide justifications for failure to meet 
benchmarks despite good faith efforts. The commenter also recommended 
allowing program offices to incentivize Section 3 compliance in funding 
Notices but have a Department-wide entity focus on all aspect of 
compliance (reporting, analysis, and information technology systems).
    HUD Response: HUD took the concerns about the complaint process 
under advisement, and Sec.  75.33(b) has been amended to include ``or 
local HUD field office.'' HUD believes Section 3's objectives will be 
better achieved by moving Section 3 oversight into the program offices 
so that HUD staff who are actively engaged with recipients in their 
program planning and activities will bring Section 3 concerns and 
considerations into their routine interactions with the recipients. HUD 
will provide external and internal technical guidance on complaint 
handling and routing. The Office of Field Policy and Management (FPM) 
will be taking a greater role at the field level by filtering 
complaints to the corresponding office, rather than every HUD program 
office having its own complaint process. The local HUD field office is 
part of the FPM organizational structure, and also provides individuals 
with a complaint venue when the complainant does not know which program 
office would be responsible. There will be variation in what guidance 
and/or compliance looks like for each program office, but HUD will 
provide support to the extent it is standardized across program 
offices.

Enforcement

    Commenters stated any contractor or Section 3 resident found to 
falsify data in order to receive benefits from HUD funded training, 
contracting, and employment should be immediately removed and/or barred 
from participation in Section 3 programs for ten years. Violations 
should be posted and made available to the public for review. Every PHA 
should have a written Section 3 Plan-Policy in place and attached to 
any Request for Proposals for bids.
    HUD Response: HUD believes that recipients should have the 
flexibility to determine how to implement Section 3. HUD also believes 
this new regulation will make such implementation easier. While the 
final rule does not require recipients to have Section 3 plans or 
policies, HUD views having them as a best practice that will aid 
recipients in achieving the Section 3 benchmarks. As for the concern 
about potential fraud, program offices will continue to monitor 
compliance with Section 3 requirements through evaluation of 
qualitative or quantitative reporting, complaint review, and program 
audits, if appropriate.

General Comments

    One commenter said all policies should be expressed in ``simple'' 
terms for all stakeholders, especially residents, to understand. 
Commenters stated there is little point in creating policies and 
programs that produce only six-week or six-month jobs, or jobs that do 
not lead workers out of poverty. HUD recipients have difficulty in 
assisting residents in obtaining and maintaining any jobs, let alone 
high-wage jobs that will lead to careers and help residents leave 
poverty behind.
    A commenter expressed the Section 3 rule is ``of great benefit to 
have in effect and keep up to date.'' Section 3 funding recipients 
should be mandated to actively seek employment at all times to the best 
of their ability and report an employment log to track job 
applications.
    One commenter indicated many of the proposed changes do not reflect 
the construction trade's current realities and would impose costly new 
obligations on PHAs without a funding source to pay for those 
requirements. Another commenter argued Section 3 is ``just another 
burdensome regulation'' that ``doesn't produce a positive outcome.'' 
One commenter stated the proposed rule would have an adverse impact on 
the Section 3 participation that HUD desires, whereas others supported 
the proposed rule amendments.
    One commenter stated public housing living conditions are poor; 
Section 3 programs are practically non-existent in the commenter's 
area; and the way that

[[Page 61555]]

public housing residents' income is calculated is problematic.
    A commenter stated Section 3 is one of HUD's most important 
responsibilities since it creates the standards for employment, 
training, and contracting opportunities generated from HUD financial 
assistance. This commenter felt a stronger Section 3 rule can lead to 
increased hiring and contracting opportunities; overall the proposed 
rule has many merits and is an improvement. Similarly, another 
commenter stated the potential benefits of Section 3 have never been 
realized; the improvements to the rule have potential to improve 
outcomes.
    According to one comment, the proposed rule amendments try to 
address Section 3 program implementation difficulties but still present 
incongruities; HUD should consider methods to enact preferences or 
incentives. A commenter stated it is difficult to find Section 3 
employers in some jurisdictions, and some jurisdictions have no active 
YouthBuild program. Commenters noted most HUD households are headed by 
or include females, minorities, or female minorities. Section 3 
regulations should be designed to give low- and very low-income people 
(particularly recipients of Federal housing assistance) a pathway out 
of poverty, and PHAs should be required to work with organizations that 
have a proven track record of successfully recruiting, training, and 
retaining women and minorities in the construction industry. A 
commenter recommended HUD work directly with the National Task Force on 
Tradeswomen's Issues.
    HUD Response: HUD thanks the commenters for their responses. This 
rule is intended to strike a balance and foster compliance with Section 
3's goals and will result in a reduction of reporting and recordkeeping 
burdens. HUD wants to ensure employers are invested in keeping Section 
3 workers employed, and that there is enough opportunity to build 
skills and experience so that Section 3 workers may develop self-
sufficiency and compete for other jobs in the future. HUD agrees that 
this regulation is designed to give low- and very low-income people 
(particularly recipients of Federal housing assistance) a pathway out 
of poverty. There is no mandate in the rule for Section 3 funding 
recipients to constantly apply for new jobs, nor are there requirements 
for PHAs to work with certain organizations.

Other Programs

    Commenters noted opportunity discrimination is unconstitutional; 
all citizens have a right to wealth and prosperity. States can support 
and invest in their cities' workforce through equity and management but 
should first complete a local needs assessment. One commenter referred 
to Perkins V (the Strengthening Career and Technical Education for the 
21st Century Act) requirements for eligible recipients to conduct a 
comprehensive local needs assessment every two years. One commenter 
suggested creating a Section 3 Score Card for public information to 
capture grantee compliance and ensure that contractor compliance with 
Section 3 requirements are considered for future employment and 
contracting opportunities, and improving the effectiveness of the 
program will enhance compliance to realistically measure targeted 
outcomes.
    A commenter recommended HUD consider developing an annual 
recognition program for PHAs, subrecipients, contractors, and 
subcontractors for excellence in Section 3 performance, rather than 
redesigning the tracking and reporting requirements.
    HUD Response: HUD thanks the commenters for their responses. HUD 
affirms that discrimination based on protected classes is 
unconstitutional. The Perkins programs noted in the comment are 
administered by the U.S. Department of Education and there are no 
requirements for eligible recipients to conduct a comprehensive local 
needs assessment every two years in the rule. There are no provisions 
to create a public Section 3 Score Card or an annual PHA recognition 
program at this time.

Technical Fix

    One commenter noted in the amendment to 24 CFR 93.407(d), the 
proposed rule still references 24 CFR part 35 instead of 24 CFR part 
75. The commenter recommended that HUD change the citation to reflect 
24 CFR part 75.
    HUD Response: Thank you for your comment, but HUD declines to 
change the citation. The amendment referred to is a technical amendment 
to the regulations unrelated to the Section 3 regulations. The cross-
reference to 24 CFR part 35 is in reference to records demonstrating 
compliance with lead-based paint requirements, which continue to be 
covered by 24 CFR part 35.

HUD Program Collaboration

    Commenters stated that funding for Section 3 coordinators, and 
technical assistance or written guidance on coordination with other 
self-sufficiency programs such as FSS would allow for Section 3 to more 
effectively meet its goals. One commenter opposed changes to the rule 
stating that HUD should not scale back its existing operations and 
rule. The commenter also recommended that HUD and other agencies ensure 
coordination with benefit planners so that people with disabilities are 
involved in planning neighborhoods and community opportunities for 
work.
    HUD Response: HUD appreciates the suggestion for more funding for 
Section 3 coordinators. HUD believes that this rule will streamline the 
Section 3 regulations to create additional incentives and streamline 
reporting requirements, thereby offsetting the need for more funding. 
HUD notes that by conducting in-service trainings and proactively 
engaging with appropriate partners in the Social Security 
Administration (Work Incentives Planning Assistance), Department of 
Labor (ETA & ODEP) and Health and Human Services (CMS, ACF & ACL) to 
identify best practices and model approaches, FPM will make the 
appropriate decisions regarding potential coordination with FSS, other 
self-sufficiency programs, and/or programs for people with 
disabilities. HUD continues to encourage PHAs and recipients of HUD 
funds to coordinate with other agencies and local communities to assist 
in hiring Section 3 workers. This rule does not change that. Moving the 
oversight of the rule to FPM and the program offices will not scale 
back HUD's role in ensuring compliance with Section 3 requirements. HUD 
believes that the move will actually ensure better compliance given the 
new location of oversight and the new tracking mechanisms.

Title VI

    One commenter suggested the Section 3 rule should include 
information that Title VI of the Civil Rights Act also applies to 
Section 3, prohibits against discrimination, and requires language 
assistance.
    HUD Response: Title VI applies to any program or activity receiving 
Federal financial assistance from HUD. Section 3 is a requirement, not 
a program that receives HUD funding.

Extend Comment Period

    One commenter recommended HUD extend the comment period for 
affordable housing developers to suggest more effective changes.
    HUD Response: HUD believes that the 60-day comment period provided 
ample

[[Page 61556]]

opportunity for affordable housing developers and other members of the 
public to suggest changes to this rule.

Outside the Rulemaking Scope

    One commenter, a stakeholder in a major metropolitan area PHA that 
is being monitored by a ``Federal Monitor'' as a result of a 958 
Complaint, stated that the appointed Federal Monitor has no housing 
experience and that all parties involved have missed the most important 
purpose of Section 3, which is economic empowerment for low and very 
low-income persons residing in local communities for HUD invested 
projects.
    One commenter proposed defining an execution fee as a ``percentage 
of bidder's final submitted price added by the recipient or general 
contractor because the contractor/subcontractor provided no Section 3 
benefit.''
    One commenter stated concern about the lack of focus on higher 
level training as a vehicle for individuals to develop skills and build 
a better future. The commenter stated that the proposed benchmarks and 
guidelines provide no framework for differentiating training or skilled 
work classifications from general labor, so there would be no incentive 
for creating higher level opportunities. The commenter requested that 
HUD provide guidance on how to encourage this sort of activity under 
the new benchmarks.
    HUD Response: HUD thanks the commenters for their suggestions, 
however, these comments are outside the scope of this rulemaking.

Miscellaneous

Impact on Rural Areas and States

    Commenters stated it is difficult to comply with Section 3 
requirements in rural areas. The goals of Section 3 are more feasible 
in densely populated urban areas. The proposed rule does not improve 
this circumstance. Section 3 eligible individuals cannot take advantage 
of Section 3 opportunities in rural areas because they are nonexistent. 
There are not ample conditions to facilitate Section 3 in small 
communities and rural areas. Rural areas have less availability of 
contractors and employees and there needs to be flexibility to engage 
people outside their service area to complete projects. One commenter 
noted benchmarking methodology seems strongly skewed toward large urban 
centers and overlooks geographically large states with relatively small 
rural populations, and asked HUD to make exceptions for jurisdictions 
with smaller and more rural populations. Some commenters noted that 
contractors in rural states rarely need to hire new employees because 
the projects are small, the contractors have limited growth potential, 
or the employers have tenured staff. The commenter further stated that 
the new hire's length of employment coincides with the project and 
terminates at project completion.
    Commenters noted Section 3 is particularly difficult for states to 
administer. Another commenter explained that as a state, it does not 
hire the contractors for the CDBG projects. The local jurisdictions do 
that. It has no opportunity to promote the hiring of Section 3 business 
concerns. The very small communities with which it works have 
implemented procurement policies that award contracts to the lowest 
responsible bidder. They will not award a contract to a higher bidder 
just because the bidder is a Section 3 business concern. The commenter 
stated that the Section 3 regulation should apply to the CDBG 
Entitlement program and not the Small Cities program. One commenter 
suggested that state CDBG recipients should have the same flexibility 
in reporting as small PHAs.
    HUD Response: HUD acknowledges that implementing Section 3 in 
various geographic areas presents different challenges for rural areas 
versus densely populated urban areas. HUD believes this has been 
addressed within the proposed Section 3 regulation by using a circle 
centered around the worksite that expands until it reaches a population 
of at least 5,000. HUD further acknowledges that, in particularly 
remote areas, the expandable circle may reach a size that may be 
impracticable to match those benefiting from the project with the 
Section 3 benchmark. If the recipient is unable to meet the Section 3 
benchmark described in Sec.  75.11, it will be required to report in a 
form prescribed by HUD on the qualitative nature of its activities or 
those of its contractors and subcontractors. This will allow the 
recipient to explain in qualitative means why it was unable to meet the 
Section 3 benchmark. HUD is sympathetic to the issues raised for rural 
areas and will watch implementation carefully as it progresses, 
allowing for updates as deemed necessary. HUD will also provide sub-
regulatory guidance on the submission of qualitative reports to enable 
smoother implementation of the requirement.

Coordination With Nonprofit Organizations and Other Agencies

    Commenters suggested HUD require PHAs and other recipients to work 
with organizations with a proven record of accomplishment of success in 
the recruitment, training, and retention of women and minorities in the 
construction industry and other blue-collar occupations. The Department 
of Labor is already working with many of these organizations and has a 
list of apprenticeship training and technical assistance providers to 
help with the recruitment of Section 3 residents, pre-apprenticeship 
training and ongoing support. Commenters also suggested that HUD work 
directly with the many tradeswomen organizations, and other nonprofits 
already providing construction readiness training programs (also called 
pre-apprenticeship training) and the National Task Force on 
Tradeswomen's Issues. In 2018, women made up only 3.4% of construction 
workers. While this figure represents progress, it demonstrates the 
need for HUD and its recipients to partner with tradeswomen and other 
organizations who have expertise in successfully getting women and 
minorities into the construction trades, and, more importantly, 
creating a real opportunity for careers in the construction industry. 
One commenter recommended forging closer ties with the Tribal 
Employment Rights Offices and directing the HOME and CDBG programs to 
consider this approach to ensure tribal communities' benefit from HUD 
program projects nearby. Other commenters suggested planning grants to 
form or strengthen partnerships with Workforce Investment Boards or 
inter-agency collaborations with workforce programs within the 
Department of Labor.
    HUD Response: HUD concurs that building strong collaborations 
between and among several Federal, state, and local partners will aid 
Section 3's goals. HUD will consult with the Departments of Labor, 
Health and Human Services, Commerce, Small Business Administration, and 
other agencies as determined by the HUD Secretary to meet the Section 3 
statue's mandate at 12 U.S.C. 1701u(f). HUD will also take the comments 
provided under consideration as it looks for ways to conduct successful 
outreach and technical assistance strategies for Section 3 
implementation.

Outreach and Training

    Commenters recommended that HUD facilitate the competition for 
Section 3 excellence among developers and contractors by developing an 
online database of completed Section 3 covered projects that includes 
the names of the developer and general contractor, the nature and size 
of the project, and the Section 3 employment, contracting, training and 
retention outcomes

[[Page 61557]]

achieved. Commenters urged HUD to create a national database of Section 
3 outcomes and to facilitate the inclusion of training and retention 
programs in bid materials by collecting and sharing best procurement 
practices.
    One commenter suggested HUD should explicitly require PHAs and CDBG 
recipients to make reasonable efforts to connect Section 3 workers and 
Targeted Section 3 workers with local workforce development and career 
and technical education training. Another commenter recommended that 
the rule should give emphasis to training opportunities as is 
emphasized in the Section 3 statute because training is a potential 
response for recipients who are submitting qualitative reports for 
failure to meet Section 3 benchmarks.
    One commenter stated there are no provisions in the rule regarding 
training. Similarly, another commenter noted the benchmark fails to 
recognize the statutory reference to training and employment 
opportunities. Likewise, commenters requested HUD clarify whether it is 
proposing new ways to track or report on Section 3 training. In the 
discussion of proposed Sec. Sec.  75.15 and 75.25, HUD states that one 
of the qualitative measures a locality could use is paying for 
apprenticeship programs and/or offsite job training. One commenter 
welcomes any opportunity to expand these programs and recommends that 
HUD make job training an economic development activity instead of 
public service under the CDBG regulations. Alternatively, HUD could 
consider raising the public service cap for CDBG funds in order to 
accommodate additional job training programs.
    A commenter recommended HUD provide outreach on training, 
employment and asset building programs to HUD assisted residents, 
including Family Self Sufficiency, Jobs Plus, and the Resident 
Opportunity and Self-Sufficiency programs. HUD should create resource 
guides on how CDBG has been used to support effective job training 
programs. A commenter suggested HUD should design a Section 3 worker's 
rights poster with input from HOME and CDBG grantees. Commenters noted 
changes to Section 3 reporting and tracking requirements may require 
additional resources for administering agencies, particularly PHAs in 
receipt of public housing assistance funds. HUD funding for the 
implementation of an IT system to enhance the current system and 
integrate with contractors would be particularly welcome to ease 
Section 3 monitoring and reporting for all parties. Having dedicated 
funding for the overall program, including support for resident 
training, IT system enhancements, and other related measures, would 
help to further Section 3 goals while limiting potential administrative 
burdens.
    One commenter stated PHAs noted they are most successful in helping 
residents find employment when they can offer employment services and 
trainings to help them gain the skills necessary to access jobs. 
However, additional funding is needed for programs like Family Self 
Sufficiency, Resident Opportunities and Self-Sufficiency, Jobs-Plus 
Initiative, and the Public Housing Operating Fund. One commenter 
recommended that HUD provide recipients the addresses of all public 
housing, PBRA projects, and Housing Choice Voucher projects by counties 
to assist in matching workers' addresses and automatically designating 
them as Section 3 workers; that HUD assist Section 3 workers in housing 
assistance; that Section 3 workers receive a living wage; that HUD help 
provide life skills such as budget counseling; and that HUD be 
proactive in supporting and developing (in conjunction with the 
Department of Labor) apprenticeship and other training programs for 
assisted housing residents and other low-income people.
    One commenter recommended that HUD incentivize widespread 
replication of successful mentorship programs; create regional programs 
patterned after successful mentorship programs that smaller PHAs can 
access cooperatively; ensure the program allows for a tiered approach 
that allows Section 3 contractors to gain vital experience on smaller 
projects then graduate up to increased responsibility; and ensure that 
the Section 3 program continues to allow PHAs to use Section 3 
contractors to complete work at all levels, including very small 
projects. One commenter suggested HUD request that the President's 
Budget include adequate funding to enable HUD to hire the necessary 
headquarters and field office staff to provide Section 3 technical 
assistance and to robustly monitor and enforce Section 3. Also, the 
President's Budget should seek adequate funding so that all 
jurisdictions and PHAs can hire and retain staff to serve as Section 3 
coordinators and to monitor and enforce Section 3 obligations.
    HUD Response: HUD thanks the commenters for their suggestions; as 
HUD updates its systems, HUD will take the suggestions under 
advisement. HUD encourages CDBG recipients to collaborate with local 
workforce development boards and training providers to create effective 
connections between them and Section 3 and Targeted Section 3 workers. 
HUD will also provide sub-regulatory guidance and technical assistance 
promoting career and technical education training. HUD believes 
tracking labor hours provides a picture as to the success of providing 
job opportunities with HUD financial assistance, but as noted in the 
proposed rule the qualitative reporting will consider training. 
Reporting entities may consider training to help meet its employment 
goals and provide such information if goals are not met and entities 
are required to respond qualitatively. HUD will not provide a separate 
funding source; however, HUD will build on this final rule by providing 
technical assistance guidance for all HUD Section 3 programs. HUD will 
consider such guidance in creating materials for use by grantees. PHAs 
should already be tracking labor hours for Davis-Bacon or wage 
requirements and should not be doing anything more than what they did 
before to verify Section 3 workers as new hires. This rule just lays 
out the process for such verification. Once a PHA determines a Section 
3 worker or Targeted Section 3 worker is hired or currently employed, 
the PHA would just report those hours as the numerator over the total 
labor hours funded with Operating and Capital Funds as the denominator.
    HUD appreciates the input on ways HUD can help residents and is 
continuing to look at ways to make programs like Family Self 
Sufficiency, Resident Opportunities and Self-Sufficiency, Jobs-Plus 
Initiative more effective. HUD will be sure to consider those 
recommendations in future rulemaking. Section 3, however, is focused on 
how to provide job opportunities created by HUD federal financial 
assistance and does not have funding directly associated with it that 
can be used for those programs. Reporting entities may consider 
training to help meet their employment goals and provide such 
information if goals are not met and entities are required to respond 
qualitatively. HUD does not think it is appropriate to provide access 
to a list of all public housing, PBRA projects and Housing Choice 
Voucher residents to the public; such data sharing would implicate 
privacy concerns. Additionally, the PHA would have that information for 
seeking to hire such persons as Targeted Section 3 workers for public 
housing assistance.
    HUD appreciates the suggestions and will consider them in providing 
guidance and technical assistance by both FPM and the program offices. 
HUD believes that there will be adequate funding for Section 3 
technical assistance and monitoring in FPM. The FY2020 President's 
Budget Request

[[Page 61558]]

Congressional Justification specifically requested: ``$51.5 million to 
support 334 FTEs, consistent with the estimated 2019 Annualized CR 
level. Resources will support ongoing community engagement, monitoring 
and technical assistance pertaining to Section 3, compliance with the 
Davis-Bacon and Related Acts, enhancement of the overall customer 
experience and disaster recovery responsiveness at the state and local 
levels for clients and customers.'' \6\ Federal financial assistance 
recipients should make their own determinations about staffing levels 
necessary to implement the assistance received.
---------------------------------------------------------------------------

    \6\ HUD's FY2020 Congressional Justification for President's 
Budget, https://www.hud.gov/sites/dfiles/CFO/documents/2020HUDCongressionalJustifications4-2-19.pdf.
---------------------------------------------------------------------------

Rental Assistance Demonstration (RAD)

    Commenters recommended the RAD Notice should be amended to indicate 
that Section 3 obligations be extended post-conversion to PBV because 
currently Section 3 no longer applies unless additional Federal 
financial assistance is later used for rehabilitation. Commenters also 
asked for further clarification regarding RAD conversion applicability 
during and after construction. Eliminating RAD projects from Section 3 
applicability will reduce contract awards that can provide 
opportunities to Section 3 residents. HUD should revise the rule to 
expand the definition of Targeted Section 3 worker to cover RAD and 
other HUD assisted tenants, and should require owners and managers of 
RAD-converted projects to hire, train, and contract with Section 3 
residents to the greatest extent feasible in their own operations.
    HUD Response: The Section 3 statute does not apply to properties 
that are recipients of Section 8 rental assistance unless they are 
recipients of other Federal funding covered by the Section 3 statute. A 
RAD transaction is a conversion at a moment in time and, subsequent to 
the conversion, the property is governed by the Section 8 requirements. 
HUD has administratively applied Section 3 during the RAD-related 
construction period even though not required by the RAD statute or the 
Section 3 statute. See RAD Notice Revision 4 and RAD program 
documents.\7\ HUD has declined to extend Section 3 to the Section 8 
portfolio, as that would be a significant expansion of the Section 3 
statute's parameters. HUD has defined ``Targeted Section 3 workers'' to 
include residents of public housing and Section 8 housing, which means 
that HUD funding recipients must report on hiring of these types of 
HUD-assisted tenants, which includes tenants of RAD-converted Section 8 
properties.
---------------------------------------------------------------------------

    \7\ Rental Assistance Demonstration--Final Implementation, 
Revision 4 Notice H-2019-09 PIH-2019-23 (HA), issued September 5, 
2019.
---------------------------------------------------------------------------

Notice of Funding Availability (NOFA)

    One commenter wrote in support of the NOFA certification's removal. 
Several commenters supported the current requirement that NOFA 
applicants submit a certification of intent to comply with Section 3 
requirements along with a statement of their proposed Section 3 
activities. Commenters noted that performance among PHAs, developers, 
and contractors varies greatly when it comes to meeting Section 3 
requirements. One commenter gave an example where a contractor might 
merely hold a job fair and interview any qualified Section 3 residents 
who apply, while another might make Section 3 hiring a condition of all 
major subcontract awards, contract with a community organization to 
conduct outreach and referral services, establish a pre-construction 
and/or on-the-job training program, provide job coaching and other 
supports, and retain Section 3 workers after completion of the Section 
3 project. Commenters went on to state that using a bidder's past 
Section 3 performance and the quality of their proposed Section 3 plan 
can have a profound effect on the quality of economic opportunities 
provided to Section 3 residents.
    HUD Response: HUD decided to continue with the change in the 
proposed rule and to omit specific requirements for Notices of Funding 
Availability (NOFA) in the final rule; however, the final rule will 
require that all NOFAs issued by HUD that announce the availability of 
funding covered by section 75.3 will include notice that part 75 is 
applicable to the funding and may include, as appropriate for specific 
NOFAs, points or bonus points for Section 3 plans. Where Section 3 is 
applicable, the inclusion of specific requirements in the regulation 
regarding the NOFA does not change the recipient's obligation to have a 
compliant Section 3 implementation strategy. Similarly, where Section 3 
is not applicable, the regulatory language would not apply. The 
presence or absence of the NOFA clause in the regulation has no effect 
on applicability of Section 3. HUD anticipates that program offices 
will include scoring for Section 3 plans where relevant and exclude 
Section 3 scoring where the nature of the grant being awarded is 
incompatible with Section 3 endeavors (such as funding for sweat-equity 
homeownership initiatives). HUD is in the process of developing 
improved databases to inform program offices, funding recipients, and 
the public-at-large regarding Section 3-covered projects and the 
outcomes achieved. HUD hopes that these databases, plus anticipated 
technical assistance to disseminate information regarding Section 3 
best practices, will provide a foundation for more impactful 
implementation of Section 3 over time.

Professional Services Exclusion

    Commenters stated HUD should retain the 3% benchmark for 
professional services contracts, as it is not uncommon for professional 
services companies to meet the qualifications of a Section 3 business 
concern. It helps businesses who employ workers who were low-income 
when they were hires or businesses who were started by low-income or 
public housing residents that have grown professionally to provide 
employment opportunities to other low-income people.
    Other commenters noted excluding professional services positions--
typically higher paying, higher career growth--would effectively limit 
Section 3 workers to construction services, diminishing the potential 
positive impact of the statute. Ultimately, it will not provide HUD 
with adequate data on positive or negative impacts of Section 3's 
intended goals. The intended goal of the Section 3 statute is to 
positively impact the lives of HUD assisted residents through 
meaningful job placement and training that will ultimately lead to 
greater self-sufficiency. The current rule includes a goal of 30% of 
new hires in management and administrative jobs, technical, 
professional, building trades, and non-construction jobs and all 
levels. Professional service jobs include accounting, legal services, 
financial consulting, architectural and engineering services. The 
proposed rule indicates that professional services will be excluded 
from benchmarking requirements, but HUD will allow voluntary reporting 
of these workers. A commenter suggested maintaining the current rule's 
requirement of reporting on professional services but moving to total 
labor hours worked in both construction and non-construction services, 
and better tracking this data through streamlined reporting systems.
    Other commenters supported excluding professional services from 
benchmarking requirements while allowing voluntary reporting of such 
workers; excluding certain types of contracts such as material and 
supply,

[[Page 61559]]

and professional service; and excluding professional services from 
covered activities and suggested adding a benchmark for training 
activities. One commenter noted it experienced the same challenges as 
other HUD partners in meeting Section 3 goals when working with 
professional service vendors. However, the commenter noticed that in 
some cases vendors can carve out small segments of highly skilled work 
or training for low-income residents (e.g., providing an internship or 
hiring a recent graduate to perform a small scope of work.) While the 
rule allows voluntary participation of professional service vendors, 
commenter suggests that HUD give discretion to recipients to mandate 
Section 3 participation by these partners, without necessarily holding 
them to specific benchmarks like contractors.
    HUD Response: HUD acknowledges that there are occasions when 
employers can create opportunities for Section 3 employment in the 
professional services context, and HUD lauds these efforts. At the same 
time, data indicate that there are relatively few such opportunities 
for Section 3 hiring in professional services fields such as legal 
services and civil engineering. Many of the positions within these 
professional services fields require specialized degrees and in many 
cases the hiring is not directly tracked to a specific Federally funded 
project or activity. To ensure that the carve-out for professional 
services is relatively narrow, however, HUD has revised the definition 
of professional services. While keeping the modified exclusion for 
professional services in the final rule, HUD notes that the reporting 
structure in the proposed rule allows a recipient to count as Section 3 
labor hours and as Targeted Section 3 labor hours any work performed by 
a Section 3 worker or a Targeted Section 3 worker (i.e., in the 
numerator of the calculation), even when the professional services as a 
whole are not counted in the baseline reporting (i.e., in the 
denominator of the calculation). The effect of this reporting structure 
is to give a recipient a bonus if they are able to report Section 3 
hours in the professional services context. As referenced in the 
comments, vendors can sometimes create opportunities in the 
professional services context, and HUD seeks to reward this behavior. 
In addition, recipients are provided significant discretion in how they 
seek to implement their Section 3 obligations. A recipient could elect 
to require, at the local level, additional Section 3 obligations with 
respect to professional services through the terms of the funding 
contract.

V. Findings and Certifications

Regulatory Review--Executive Orders 12866 and 13563

    Under Executive Order 12866 (Regulatory Planning and Review), a 
determination must be made whether a regulatory action is significant 
and, therefore, subject to review by the Office of Management and 
Budget (OMB) in accordance with the requirements of the order. 
Executive Order 13563 (Improving Regulations and Regulatory Review) 
directs executive agencies to analyze regulations that are ``outmoded, 
ineffective, insufficient, or excessively burdensome, and to modify, 
streamline, expand, or repeal them in accordance with what has been 
learned.'' Executive Order 13563 also directs that, where relevant, 
feasible, and consistent with regulatory objectives, and to the extent 
permitted by law, agencies are to identify and consider regulatory 
approaches that reduce burdens and maintain flexibility and freedom of 
choice for the public.
    This rule was determined to be a ``significant regulatory action'' 
as defined in Section 3(f) of the order (although not an economically 
significant regulatory action under the order). Consistent with 
Executive Order 13563, this rule creates new part 75 regulations that 
would replace the part 135 regulations, with the intention to make 
compliance with Section 3 more effective and less burdensome, and 
therefore, help to contribute to job creation for low- and very low-
income persons. HUD has prepared a Regulatory Impact Analysis (RIA) 
that addresses the rule's costs and benefits. HUD's RIA is part of the 
docket file for this rule.
    The docket file is available for public inspection in the 
Regulations Division, Office of the General Counsel, Room 10276, 451 
7th Street SW, Washington, DC 20410-0500. Due to security measures at 
the HUD Headquarters building, please schedule an appointment to review 
the docket file by calling the Regulations Division at 202-402-3055 
(this is not a toll-free number). Individuals with speech or hearing 
impairments may access this number via TTY by calling the Federal Relay 
Service at toll-free 800-877-8339.

Environmental Impact

    The final rule does not direct, provide for assistance or loan and 
mortgage insurance for, or otherwise govern or regulate, real property 
acquisition, disposition, leasing, rehabilitation, alteration, 
demolition, or new construction, or establish, revise, or provide for 
standards for construction or construction materials, manufactured 
housing, or occupancy. Accordingly, under 24 CFR 50.19(c)(1), this rule 
is categorically excluded from environmental review under the National 
Environmental Policy Act of 1969 (42 U.S.C. 4321).

Unfunded Mandates Reform Act

    The Unfunded Mandates Reform Act of 1995 (2 U.S.C. 1531-1538) 
(UMRA) establishes requirements for Federal agencies to assess the 
effects of their regulatory actions on State, local, and tribal 
governments and on the private sector. This proposed rule does not 
impose a Federal mandate on any state, local, or tribal government, or 
on the private sector, within the meaning of UMRA.

Regulatory Flexibility Act

    The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) generally 
requires an agency to conduct a regulatory flexibility analysis of any 
rule subject to notice and comment rulemaking requirements, unless the 
agency certifies that the rule will not have a significant economic 
impact on a substantial number of small entities. As has been discussed 
in this preamble, this rule updates HUD's Section 3 regulations and 
replace them with a new 24 CFR part 75, for which the objective is to 
increase employment opportunities for low- and very low-income persons 
and businesses that are owned by or employ such persons. These entities 
generally are small and therefore strengthening the requirements of 
Section 3 should benefit small businesses that are Section 3 business 
concerns. This rule also considers the burden on small public housing 
agencies (PHAs), defined in this rule as a PHA that manages or operates 
fewer than 250 public housing units, and reduces the burden on them 
through a new streamlined reporting process that would not require them 
to report labor hours or new hires. There are approximately 2,950 PHAs, 
of which approximately 2,250 are small.
    As more fully discussed in the accompanying RIA, the number of 
economic opportunities generated for Section 3 residents and businesses 
will not increase to the degree that this rule would have a significant 
economic impact on a substantial number of small entities. In addition, 
for those small entities that must comply with this rule, the changes 
made by this proposed rule are designed to reduce burden on them, as 
well as all recipients. The current recordkeeping and reporting 
requirements for Section 3 is 90,180

[[Page 61560]]

hours with a cost of $1,817,000. HUD estimated that this new rule will 
reduce the number of hours by 68 percent to 25,910 hours. The biggest 
reduction will be for small PHAs that will no longer need to do 
quantitative analysis with a total estimated time saving of 12,375 
hours with a cost of $281,036, or approximately $125 for small PHAs. 
HUD also anticipates an across the board savings in recordkeeping given 
the time savings resulting from less time reporting new hires as a 
separate metric. For these reasons, HUD has determined that this rule 
would not have a significant economic impact on a substantial number of 
small entities.

Executive Order 13132, Federalism

    Executive Order 13132 (entitled ``Federalism'') prohibits an agency 
from publishing any rule that has federalism implications if the rule 
either: (1) Imposes substantial direct compliance costs on State and 
local governments and is not required by statute, or (2) preempts State 
law, unless the agency meets the consultation and funding requirements 
of Section 6 of the Executive Order. This final rule does not have 
federalism implications and does not impose substantial direct 
compliance costs on State and local governments nor preempt state law 
within the meaning of the Executive Order.

Paperwork Reduction Act

    Currently, 24 CFR part 135 requires that all recipients track and 
report Section 3 information to HUD, includes prescriptive contractual 
language, requires compliance by contractors of the Section 3 
requirements, contains reporting and recordkeeping requirements, and 
provides for the filing of Section 3 complaints. SPEARS is the main 
site in which HUD captures the number of Section 3 residents hired and 
the number of contracts awarded to Section 3 business concerns. The 
existing information collection requirement for these requirements has 
been approved by the Office of Management and Budget (OMB) under the 
Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520) and assigned OMB 
control number 2529-0043.
    The rule would change the existing reporting requirement to 
decrease qualitatively those who need to report, excluding small PHAs 
and recipients of Section 3 projects under the $200,000 threshold, and 
require reporting only once a year by recipients of completed projects. 
HUD provides in Sec. Sec.  75.15 and 75.25 that recipients would be 
required to submit reports to HUD annually either in a qualitative form 
or quantitative form. HUD includes all the large PHAs in the Sec.  
75.15(a) reporting number for reporting on the Section 3 benchmarks and 
estimates 2 hours to track and report annually given the amount of 
funds handled by these PHAs. HUD also estimates that a PHA will employ 
approximately seven contractors or subcontractors each fiscal year that 
would need to track and report up to the PHA, each at one-half an hour 
for reporting time. Lastly, HUD estimates that 5 percent of the 700 
large PHAs may fail the Section 3 benchmarks and would need to report 
on their qualitative efforts along with the 2,250 small PHAs and 
estimates that such reporting would take one-half an hour.
    As for Sec.  75.25(a), HUD estimates that 66 percent of most 
program recipients would complete projects in a fiscal year that need 
to be reported except that for the HOME program, HUD estimates that 90 
percent of HOME recipients would complete projects in a fiscal year, at 
an estimate of 3,600 recipients. Given these projects are more diverse 
in size, HUD estimates that the average time to report on the Section 3 
benchmarks for recipients would be 1 hour. HUD also estimates that a 
Section 3 project will engage approximately five contractors or 
subcontractors each fiscal year that would also need to track and 
report up to the Section 3 project recipient, each at one-half an hour 
for reporting time. Lastly, HUD estimates that 5 percent of the 3,600 
recipients may fail the Section 3 benchmarks and would need to report 
on their qualitative efforts and estimates that such reporting would 
take one-half an hour.
    HUD also notes that the rule no longer requires the inclusion of 
prescriptive contractual language. See Sec. Sec.  75.17 and 75.27. HUD 
believes that this change will result in a de minimis upfront burden 
related to updating contracts, if recipients, subrecipients, and 
contractors chose to do so, but that removing the requirement will 
actually reduce burden on recipients, subrecipients, and contractors on 
a sustained basis by giving them flexibility to use alternative or 
existing contractual language. HUD also provides for recordkeeping 
requirements at Sec.  75.31 and believes that the maintaining of 
records by recipients will take a recipient approximately 2 hours. 
However, HUD notes that some programs, such as HOME, already have 
recordkeeping requirements that are part of existing approved 
Information Collection Requests and, thus, excludes those programs from 
the burden matrix. Lastly, HUD maintains the option for individuals to 
file complaints and retains the frequency number that was in the 
existing Section 3 reporting burden.
    In accordance with the Paperwork Reduction Act, an agency may not 
conduct or sponsor, and a person is not required to respond to, a 
collection of information, unless the collection displays a currently 
valid OMB control number. The current recordkeeping requirements for 
Section 3 is 90,180 hours with a cost of $1,817,000. HUD estimates that 
this new rule will reduce the number of hours by 68 percent to 25,910 
hours for a total cost savings of approximately $1.2 million. The 
overall reporting and recordkeeping burden is estimated as follows:

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                           Frequency of
                 Information collection                      Number of     response per     Burden hour    Annual burden    Hourly cost     Annual cost
                                                            respondents        annum       per response        hours       per response
--------------------------------------------------------------------------------------------------------------------------------------------------------
Sec.   75.15(a) Labor Hour or New Hire Reporting for PHA             700               1               2           1,400          $22.71      $31,794.00
Sec.   75.15(a) Labor Hour or New Hire Reporting for               4,900               1             0.5           2,450           22.71       55,639.50
 Contractors or Subcontractors of PHAs..................
Sec.   75.15(b)-(d) Qualitative Reporting for PHAs......           2,300               1             0.5           1,150           22.71       26,116.50
Sec.   75.25(a) Labor Hour Reporting for Section 3                 3,600               1               1           3,600           22.71       81,756.00
 Projects...............................................
Sec.   75.25(a) Labor Hour Reporting for Contractors and          10,800               1             0.5           5,400           22.71      122,634.00
 Subcontractors on Section 3 Projects...................

[[Page 61561]]

 
Sec.   75.25(b) Qualitative Reporting for Section 3                  180               1             0.5              90           22.71        2,043.90
 Projects...............................................
Sec.   75.31 Recordkeeping..............................           5,900               1               2          11,800           22.71      267,978.00
Sec.   75.33 Complaints.................................              20               1               1              20           10.00          200.00
                                                         -----------------------------------------------------------------------------------------------
    Total...............................................  ..............  ..............  ..............          25,910  ..............      588,161.90
--------------------------------------------------------------------------------------------------------------------------------------------------------

    HUD will update the appropriate OMB control number 2529-0043 to 
reflect this reduction in burden.

Congressional Review of Final Rules

    The Office of Information and Regulatory Affairs has determined 
that this final rule is not a major rule, as defined by 5 U.S.C. 804, 
for purposes of congressional review of agency rulemaking pursuant to 
the Congressional Review Act, Public Law 104-121, sec. 251, 110 Stat. 
868, 873 (codified at 5 U.S.C. 804). This rule will not result in an 
annual effect on the economy of $100 million or more; a major increase 
in costs or prices; or significant adverse effects on competition, 
employment, investment, productivity, innovation, or the ability of 
U.S.-based companies to compete with foreign-based companies in 
domestic and export markets.

List of Subjects

24 CFR Part 5

    Administrative practice and procedure, Aged, Claims, Crime, 
Government contracts, Grant programs-housing and community development, 
Individuals with disabilities, Intergovernmental relations, Loan 
programs-housing and community development, Low- and moderate-income 
housing, Mortgage insurance, Penalties, Pets, Public housing, Rent 
subsidies, Reporting and recordkeeping requirements, Social security, 
Unemployment compensation, Wages.

24 CFR Part 14

    Claims, Equal access to justice, Lawyers, Reporting and 
recordkeeping requirements.

24 CFR Part 75

    Administrative practice and procedure, Community development, 
Government contracts, Grant programs--housing and community 
development, Housing, Loan programs--housing and community development, 
Reporting and recordkeeping requirements, Small businesses.

24 CFR Part 91

    Aged, Grant programs-housing and community development, Homeless, 
Individuals with disabilities, Low- and moderate-income housing, 
Reporting and recordkeeping requirements.

24 CFR Part 92

    Administrative practice and procedure, Low- and moderate-income 
housing, Manufactured homes, Rent subsidies, Reporting and 
recordkeeping requirements.

24 CFR Part 93

    Administrative practice and procedure, Grant programs-housing and 
community development, Low- and moderate-income housing, Manufactured 
homes, Rent subsidies, Reporting and recordkeeping requirements.

24 CFR Part 135

    Administrative practice and procedure, Community development, Equal 
employment opportunity, Government contracts, Grant programs--housing 
and community development, Housing, Loan programs--housing and 
community development, Reporting and recordkeeping requirements, Small 
businesses.

24 CFR Part 266

    Intergovernmental relations, Low- and moderate-income housing, 
Mortgage insurance, Reporting and recordkeeping requirements.

24 CFR Part 570

    Administrative practice and procedure, American Samoa, Community 
development block grants, Grant programs-education, Grant programs-
housing and community development, Guam, Indians, Loan programs-housing 
and community development, Low- and moderate-income housing, Northern 
Mariana Islands, Pacific Islands Trust Territory, Puerto Rico, 
Reporting and recordkeeping requirements, Student aid, Virgin Islands.

24 CFR Part 576

    Community facilities, Grant programs-housing and community 
development, Grant programs-social programs, Homeless, Reporting and 
recordkeeping requirements.

24 CFR Part 578

    Community development, Community facilities, Grant programs-housing 
and community development, Grant programs-social programs, Homeless, 
Reporting and recordkeeping requirements.

24 CFR Part 905

    Grant programs-housing and community development, Public housing, 
Reporting and recordkeeping requirements.

24 CFR Part 964

    Grant programs-housing and community development, Public housing, 
Reporting and recordkeeping requirements.

24 CFR Part 983

    Grant programs-housing and community development, Low- and 
moderate-income housing, Rent subsidies, Reporting and recordkeeping 
requirements.

24 CFR Part 1000

    Aged, Community development block grants, Grant programs-housing 
and community development, Grant programs-Indians, Indians, Individuals 
with disabilities, Public housing, Reporting and recordkeeping 
requirements.

    Accordingly, for the reasons described in the preamble, under the 
authority 12 U.S.C. 1701u; 42 U.S.C. 3535(d), HUD amends 24 CFR parts 
5, 14, 75, 91, 92, 93, 135, 266, 570, 576, 578, 905, 964, 983, and 1000 
as follows:

PART 5--GENERAL HUD PROGRAM REQUIREMENTS; WAIVERS

0
1. The authority for part 5 is revised to read as follows:

    Authority:  12 U.S.C. 1701u and 1701x; 42 U.S.C. 1437a, 1437c, 
1437d, 1437f, 1437n, 3535(d); Sec. 327, Pub. L. 109-115, 119 Stat. 
2936; Sec. 607, Pub. L. 109-115, 119 Stat.

[[Page 61562]]

3051 (42 U.S.C. 14043e et seq.); E.O. 13279, 67 FR 77141, 3 CFR, 
2002 Comp., p. 258; and E.O. 13559, 75 FR 71319, 3 CFR 2010 Comp., 
p. 273.


Sec.  5.105  [Amended]

0
2. Amend Sec.  5.105(a) by removing ``; section 3 of the Housing and 
Urban Development Act of 1968 (12 U.S.C. 1701u) and implementing 
regulations at 24 CFR part 135.''

PART 14--IMPLEMENTATION OF THE EQUAL ACCESS TO JUSTICE ACT IN 
ADMINISTRATIVE PROCEEDINGS

0
3. The authority for part 14 continues to read as follows:

    Authority:  5 U.S.C. 504(c)(1); 42 U.S.C. 3535(d).


Sec.  14.115  [Amended]

0
4. Amend Sec.  14.115 by removing and reserving paragraph (a)(5).

0
5. Add part 75 to read as follows:

PART 75--ECONOMIC OPPORTUNITIES FOR LOW- AND VERY LOW-INCOME 
PERSONS

Subpart A--General Provisions
Sec.
75.1 Purpose.
75.3 Applicability.
75.5 Definitions.
75.7 Requirements applicable to HUD NOFAs for Section 3 covered 
programs.
Subpart B--Additional Provisions for Public Housing Financial 
Assistance
75.9 Requirements.
75.11 Targeted Section 3 worker for public housing financial 
assistance.
75.13 Section 3 safe harbor.
75.15 Reporting.
75.17 Contract provisions.
Subpart C--Additional Provisions for Housing and Community Development 
Financial Assistance
75.19 Requirements.
75.21 Targeted Section 3 worker for housing and community 
development financial assistance.
75.23 Section 3 safe harbor.
75.25 Reporting.
75.27 Contract provisions.
Subpart D--Provisions for Multiple Funding Sources, Recordkeeping and 
Compliance
75.29 Multiple funding sources.
75.31 Recordkeeping.
75.33 Compliance.

    Authority:  12 U.S.C. 1701u; 42 U.S.C. 3535(d).

Subpart A--General Provisions


Sec.  75.1   Purpose.

    This part establishes the requirements to be followed to ensure the 
objectives of Section 3 of the Housing and Urban Development Act of 
1968 (12 U.S.C. 1701u) (Section 3) are met. The purpose of Section 3 is 
to ensure that economic opportunities, most importantly employment, 
generated by certain HUD financial assistance shall be directed to low- 
and very low-income persons, particularly those who are recipients of 
government assistance for housing or residents of the community in 
which the Federal assistance is spent.


Sec.  75.3   Applicability.

    (a) General applicability. Section 3 applies to public housing 
financial assistance and Section 3 projects, as follows:
    (1) Public housing financial assistance. Public housing financial 
assistance means:
    (i) Development assistance provided pursuant to section 5 of the 
United States Housing Act of 1937 (the 1937 Act);
    (ii) Operations and management assistance provided pursuant to 
section 9(e) of the 1937 Act;
    (iii) Development, modernization, and management assistance 
provided pursuant to section 9(d) of the 1937 Act; and
    (iv) The entirety of a mixed-finance development project as 
described in 24 CFR 905.604, regardless of whether the project is fully 
or partially assisted with public housing financial assistance as 
defined in paragraphs (a)(1)(i) through (iii) of this section.
    (2) Section 3 projects. (i) Section 3 projects means housing 
rehabilitation, housing construction, and other public construction 
projects assisted under HUD programs that provide housing and community 
development financial assistance when the total amount of assistance to 
the project exceeds a threshold of $200,000. The threshold is $100,000 
where the assistance is from the Lead Hazard Control and Healthy Homes 
programs, as authorized by Sections 501 or 502 of the Housing and Urban 
Development Act of 1970 (12 U.S.C. 1701z-1 or 1701z-2), the Lead-Based 
Paint Poisoning Prevention Act (42 U.S.C 4801 et seq.); and the 
Residential Lead-Based Paint Hazard Reduction Act of 1992 (42 U.S.C. 
4851 et seq.). The project is the site or sites together with any 
building(s) and improvements located on the site(s) that are under 
common ownership, management, and financing.
    (ii) The Secretary must update the thresholds provided in paragraph 
(a)(2)(i) of this section not less than once every 5 years based on a 
national construction cost inflation factor through Federal Register 
notice not subject to public comment. When the Secretary finds it is 
warranted to ensure compliance with Section 3, the Secretary may 
adjust, regardless of the national construction cost factor, such 
thresholds through Federal Register notice, subject to public comment.
    (iii) The requirements in this part apply to an entire Section 3 
project, regardless of whether the project is fully or partially 
assisted under HUD programs that provide housing and community 
development financial assistance.
    (b) Contracts for materials. Section 3 requirements do not apply to 
material supply contracts.
    (c) Indian and Tribal preferences. Contracts, subcontracts, grants, 
or subgrants subject to Section 7(b) of the Indian Self-Determination 
and Education Assistance Act (25 U.S.C. 5307(b)) or subject to tribal 
preference requirements as authorized under 101(k) of the Native 
American Housing Assistance and Self-Determination Act (25 U.S.C. 
4111(k)) must provide preferences in employment, training, and business 
opportunities to Indians and Indian organizations, and are therefore 
not subject to the requirements of this part.
    (d) Other HUD assistance and other Federal assistance. Recipients 
that are not subject to Section 3 are encouraged to consider ways to 
support the purpose of Section 3.


Sec.  75.5  Definitions.

    The terms HUD, Public housing, and Public Housing Agency (PHA) are 
defined in 24 CFR part 5. The following definitions also apply to this 
part:
    1937 Act means the United States Housing Act of 1937, 42 U.S.C. 
1437 et seq.
    Contractor means any entity entering into a contract with:
    (1) A recipient to perform work in connection with the expenditure 
of public housing financial assistance or for work in connection with a 
Section 3 project; or
    (2) A subrecipient for work in connection with a Section 3 project.
    Labor hours means the number of paid hours worked by persons on a 
Section 3 project or by persons employed with funds that include public 
housing financial assistance.
    Low-income person means a person as defined in Section 3(b)(2) of 
the 1937 Act.
    Material supply contracts means contracts for the purchase of 
products and materials, including, but not limited to, lumber, drywall, 
wiring, concrete, pipes, toilets, sinks, carpets, and office supplies.
    Professional services means non-construction services that require 
an

[[Page 61563]]

advanced degree or professional licensing, including, but not limited 
to, contracts for legal services, financial consulting, accounting 
services, environmental assessment, architectural services, and civil 
engineering services.
    Public housing financial assistance means assistance as defined in 
Sec.  75.3(a)(1).
    Public housing project is defined in 24 CFR 905.108.
    Recipient means any entity that receives directly from HUD public 
housing financial assistance or housing and community development 
assistance that funds Section 3 projects, including, but not limited 
to, any State, local government, instrumentality, PHA, or other public 
agency, public or private nonprofit organization.
    Section 3 means Section 3 of the Housing and Urban Development Act 
of 1968, as amended (12 U.S.C. 1701u).
    Section 3 business concern means:
    (1) A business concern meeting at least one of the following 
criteria, documented within the last six-month period:
    (i) It is at least 51 percent owned and controlled by low- or very 
low-income persons;
    (ii) Over 75 percent of the labor hours performed for the business 
over the prior three-month period are performed by Section 3 workers; 
or
    (iii) It is a business at least 51 percent owned and controlled by 
current public housing residents or residents who currently live in 
Section 8-assisted housing.
    (2) The status of a Section 3 business concern shall not be 
negatively affected by a prior arrest or conviction of its owner(s) or 
employees.
    (3) Nothing in this part shall be construed to require the 
contracting or subcontracting of a Section 3 business concern. Section 
3 business concerns are not exempt from meeting the specifications of 
the contract.
    Section 3 project means a project defined in Sec.  75.3(a)(2).
    Section 3 worker means:
    (1) Any worker who currently fits or when hired within the past 
five years fit at least one of the following categories, as documented:
    (i) The worker's income for the previous or annualized calendar 
year is below the income limit established by HUD.
    (ii) The worker is employed by a Section 3 business concern.
    (iii) The worker is a YouthBuild participant.
    (2) The status of a Section 3 worker shall not be negatively 
affected by a prior arrest or conviction.
    (3) Nothing in this part shall be construed to require the 
employment of someone who meets this definition of a Section 3 worker. 
Section 3 workers are not exempt from meeting the qualifications of the 
position to be filled.
    Section 8-assisted housing refers to housing receiving project-
based rental assistance or tenant-based assistance under Section 8 of 
the 1937 Act.
    Service area or the neighborhood of the project means an area 
within one mile of the Section 3 project or, if fewer than 5,000 people 
live within one mile of a Section 3 project, within a circle centered 
on the Section 3 project that is sufficient to encompass a population 
of 5,000 people according to the most recent U.S. Census.
    Small PHA means a public housing authority that manages or operates 
fewer than 250 public housing units.
    Subcontractor means any entity that has a contract with a 
contractor to undertake a portion of the contractor's obligation to 
perform work in connection with the expenditure of public housing 
financial assistance or for a Section 3 project.
    Subrecipient has the meaning provided in the applicable program 
regulations or in 2 CFR 200.93.
    Targeted Section 3 worker has the meanings provided in Sec. Sec.  
75.11, 75.21, or 75.29, and does not exclude an individual that has a 
prior arrest or conviction.
    Very low-income person means the definition for this term set forth 
in section 3(b)(2) of the 1937 Act.
    YouthBuild programs refers to YouthBuild programs receiving 
assistance under the Workforce Innovation and Opportunity Act (29 
U.S.C. 3226).


Sec.  75.7  Requirements applicable to HUD NOFAs for Section 3 covered 
programs.

    All notices of funding availability (NOFAs) issued by HUD that 
announce the availability of funding covered by Sec.  75.3 will include 
notice that this part is applicable to the funding and may include, as 
appropriate for the specific NOFA, points or bonus points for the 
quality of Section 3 plans.

Subpart B--Additional Provisions for Public Housing Financial 
Assistance


Sec.  75.9  Requirements.

    (a) Employment and training. (1) Consistent with existing Federal, 
state, and local laws and regulations, PHAs or other recipients 
receiving public housing financial assistance, and their contractors 
and subcontractors, must make their best efforts to provide employment 
and training opportunities generated by the public housing financial 
assistance to Section 3 workers.
    (2) PHAs or other recipients, and their contractors and 
subcontractors, must make their best efforts described in paragraph 
(a)(1) of this section in the following order of priority:
    (i) To residents of the public housing projects for which the 
public housing financial assistance is expended;
    (ii) To residents of other public housing projects managed by the 
PHA that is providing the assistance or for residents of Section 8-
assisted housing managed by the PHA;
    (iii) To participants in YouthBuild programs; and
    (iv) To low- and very low-income persons residing within the 
metropolitan area (or nonmetropolitan county) in which the assistance 
is expended.
    (b) Contracting. (1) Consistent with existing Federal, state, and 
local laws and regulations, PHAs and other recipients of public housing 
financial assistance, and their contractors and subcontractors, must 
make their best efforts to award contracts and subcontracts to business 
concerns that provide economic opportunities to Section 3 workers.
    (2) PHAs and other recipients, and their contractors and 
subcontractors, must make their best efforts described in paragraph 
(b)(1) of this section in the following order of priority:
    (i) To Section 3 business concerns that provide economic 
opportunities for residents of the public housing projects for which 
the assistance is provided;
    (ii) To Section 3 business concerns that provide economic 
opportunities for residents of other public housing projects or 
Section-8 assisted housing managed by the PHA that is providing the 
assistance;
    (iii) To YouthBuild programs; and
    (iv) To Section 3 business concerns that provide economic 
opportunities to Section 3 workers residing within the metropolitan 
area (or nonmetropolitan county) in which the assistance is provided.


Sec.  75.11  Targeted Section 3 worker for public housing financial 
assistance.

    (a) Targeted Section 3 worker. A Targeted Section 3 worker for 
public housing financial assistance means a Section 3 worker who is:
    (1) A worker employed by a Section 3 business concern; or
    (2) A worker who currently fits or when hired fit at least one of 
the following categories, as documented within the past five years:
    (i) A resident of public housing or Section 8-assisted housing;

[[Page 61564]]

    (ii) A resident of other public housing projects or Section 8-
assisted housing managed by the PHA that is providing the assistance; 
or
    (iii) A YouthBuild participant.
    (b) [Reserved]


Sec.  75.13  Section 3 safe harbor.

    (a) General. PHAs and other recipients will be considered to have 
complied with requirements in this part, in the absence of evidence to 
the contrary, if they:
    (1) Certify that they have followed the prioritization of effort in 
Sec.  75.9; and
    (2) Meet or exceed the applicable Section 3 benchmarks as described 
in paragraph (b) of this section.
    (b) Establishing benchmarks. (1) HUD will establish Section 3 
benchmarks for Section 3 workers or Targeted Section 3 workers or both 
through a document published in the Federal Register. HUD may establish 
a single nationwide benchmark for Section 3 workers and a single 
nationwide benchmark for Targeted Section 3 workers, or may establish 
multiple benchmarks based on geography, the type of public housing 
financial assistance, or other variables. HUD will update the 
benchmarks through a document published in the Federal Register, 
subject to public comment, not less frequently than once every 3 years. 
Such notice shall include aggregate data on labor hours and the 
proportion of PHAs and other recipients meeting benchmarks, as well as 
other metrics reported pursuant to Sec.  75.15 as deemed appropriate by 
HUD, for the 3 most recent reporting years.
    (2) In establishing the Section 3 benchmarks, HUD may consider the 
industry averages for labor hours worked by specific categories of 
workers or in different localities or regions; averages for labor hours 
worked by Section 3 workers and Targeted Section 3 workers as reported 
by recipients pursuant to this section; and any other factors HUD deems 
important. In establishing the Section 3 benchmarks, HUD will exclude 
professional services from the total number of labor hours as such 
hours are excluded from the total number of labor hours to be reported 
per Sec.  75.15(a)(4).
    (3) Section 3 benchmarks will consist of the following two ratios:
    (i) The number of labor hours worked by Section 3 workers divided 
by the total number of labor hours worked by all workers funded by 
public housing financial assistance in the PHA's or other recipient's 
fiscal year.
    (ii) The number of labor hours worked by Targeted Section 3 
workers, as defined in Sec.  75.11(a), divided by the total number of 
labor hours worked by all workers funded by public housing financial 
assistance in the PHA's or other recipient's fiscal year.


Sec.  75.15  Reporting.

    (a) Reporting of labor hours. (1) For public housing financial 
assistance, PHAs and other recipients must report in a manner 
prescribed by HUD:
    (i) The total number of labor hours worked;
    (ii) The total number of labor hours worked by Section 3 workers; 
and
    (iii) The total number of labor hours worked by Targeted Section 3 
workers.
    (2) Section 3 workers' and Targeted Section 3 workers' labor hours 
may be counted for five years from when their status as a Section 3 
worker or Targeted Section 3 worker is established pursuant to Sec.  
75.31.
    (3) The labor hours reported under paragraph (a)(1) of this section 
must include the total number of labor hours worked with public housing 
financial assistance in the fiscal year of the PHA or other recipient, 
including labor hours worked by any contractors and subcontractors that 
the PHA or other recipient is required, or elects pursuant to paragraph 
(a)(4) of this section, to report.
    (4) PHAs and other recipients reporting under this section, as well 
as contractors and subcontractors who report to PHAs and recipients, 
may report labor hours by Section 3 workers, under paragraph (a)(1)(ii) 
of this section, and labor hours by Targeted Section 3 workers, under 
paragraph (a)(1)(iii) of this section, from professional services 
without including labor hours from professional services in the total 
number of labor hours worked under paragraph (a)(1)(i) of this section. 
If a contract covers both professional services and other work and the 
PHA, other recipient, contractor, or subcontractor chooses not to 
report labor hours from professional services, the labor hours under 
the contract that are not from professional services must still be 
reported.
    (5) PHAs and other recipients may report on the labor hours of the 
PHA, the recipient, a contractor, or a subcontractor based on the 
employer's good faith assessment of the labor hours of a full-time or 
part-time employee informed by the employer's existing salary or time 
and attendance based payroll systems, unless the project or activity is 
otherwise subject to requirements specifying time and attendance 
reporting.
    (b) Additional reporting if Section 3 benchmarks are not met. If 
the PHA's or other recipient's reporting under paragraph (a) of this 
section indicates that the PHA or other recipient has not met the 
Section 3 benchmarks described in Sec.  75.13, the PHA or other 
recipient must report in a form prescribed by HUD on the qualitative 
nature of its Section 3 compliance activities and those of its 
contractors and subcontractors. Such qualitative efforts may, for 
example, include but are not limited to the following:
    (1) Engaged in outreach efforts to generate job applicants who are 
Targeted Section 3 workers.
    (2) Provided training or apprenticeship opportunities.
    (3) Provided technical assistance to help Section 3 workers compete 
for jobs (e.g., resume assistance, coaching).
    (4) Provided or connected Section 3 workers with assistance in 
seeking employment including: drafting resumes, preparing for 
interviews, and finding job opportunities connecting residents to job 
placement services.
    (5) Held one or more job fairs.
    (6) Provided or referred Section 3 workers to services supporting 
work readiness and retention (e.g., work readiness activities, 
interview clothing, test fees, transportation, child care).
    (7) Provided assistance to apply for/or attend community college, a 
four-year educational institution, or vocational/technical training.
    (8) Assisted Section 3 workers to obtain financial literacy 
training and/or coaching.
    (9) Engaged in outreach efforts to identify and secure bids from 
Section 3 business concerns.
    (10) Provided technical assistance to help Section 3 business 
concerns understand and bid on contracts.
    (11) Divided contracts into smaller jobs to facilitate 
participation by Section 3 business concerns.
    (12) Provided bonding assistance, guaranties, or other efforts to 
support viable bids from Section 3 business concerns.
    (13) Promoted use of business registries designed to create 
opportunities for disadvantaged and small businesses.
    (14) Outreach, engagement, or referrals with the state one-stop 
system as defined in Section 121(e)(2) of the Workforce Innovation and 
Opportunity Act.
    (c) Reporting frequency. Unless otherwise provided, PHAs or other 
recipients must report annually to HUD under paragraph (a) of this 
section, and, where required, under paragraph (b) of this section, in a 
manner consistent with reporting requirements for the applicable HUD 
program.
    (d) Reporting by Small PHAs. Small PHAs may elect not to report 
under

[[Page 61565]]

paragraph (a) of this section. Small PHAs that make such election are 
required to report on their qualitative efforts, as described in 
paragraph (b) of this section, in a manner consistent with reporting 
requirements for the applicable HUD program.


Sec.  75.17  Contract provisions.

    (a) PHAs or other recipients must include language in any agreement 
or contract to apply Section 3 to contractors.
    (b) PHAs or other recipients must require contractors to include 
language in any contract or agreement to apply Section 3 to 
subcontractors.
    (c) PHAs or other recipients must require all contractors and 
subcontractors to meet the requirements of Sec.  75.9, regardless of 
whether Section 3 language is included in contracts.

Subpart C--Additional Provisions for Housing and Community 
Development Financial Assistance


Sec.  75.19  Requirements.

    (a) Employment and training. (1) To the greatest extent feasible, 
and consistent with existing Federal, state, and local laws and 
regulations, recipients covered by this subpart shall ensure that 
employment and training opportunities arising in connection with 
Section 3 projects are provided to Section 3 workers within the 
metropolitan area (or nonmetropolitan county) in which the project is 
located.
    (2) Where feasible, priority for opportunities and training 
described in paragraph (a)(1) of this section should be given to:
    (i) Section 3 workers residing within the service area or the 
neighborhood of the project, and
    (ii) Participants in YouthBuild programs.
    (b) Contracting. (1) To the greatest extent feasible, and 
consistent with existing Federal, state, and local laws and 
regulations, recipients covered by this subpart shall ensure contracts 
for work awarded in connection with Section 3 projects are provided to 
business concerns that provide economic opportunities to Section 3 
workers residing within the metropolitan area (or nonmetropolitan 
county) in which the project is located.
    (2) Where feasible, priority for contracting opportunities 
described in paragraph (b)(1) of this section should be given to:
    (i) Section 3 business concerns that provide economic opportunities 
to Section 3 workers residing within the service area or the 
neighborhood of the project, and
    (ii) YouthBuild programs.


Sec.  75.21  Targeted Section 3 worker for housing and community 
development financial assistance.

    (a) Targeted Section 3 worker. A Targeted Section 3 worker for 
housing and community development financial assistance means a Section 
3 worker who is:
    (1) A worker employed by a Section 3 business concern; or
    (2) A worker who currently fits or when hired fit at least one of 
the following categories, as documented within the past five years:
    (i) Living within the service area or the neighborhood of the 
project, as defined in Sec.  75.5; or
    (ii) A YouthBuild participant.
    (b) [Reserved]


Sec.  75.23  Section 3 safe harbor.

    (a) General. Recipients will be considered to have complied with 
requirements in this part, in the absence of evidence to the contrary 
if they:
    (1) Certify that they have followed the prioritization of effort in 
Sec.  75.19; and
    (2) Meet or exceed the applicable Section 3 benchmark as described 
in paragraph (b) of this section.
    (b) Establishing benchmarks. (1) HUD will establish Section 3 
benchmarks for Section 3 workers or Targeted Section 3 workers or both 
through a document published in the Federal Register. HUD may establish 
a single nationwide benchmark for Section 3 workers and a single 
nationwide benchmark for Targeted Section 3 workers, or may establish 
multiple benchmarks based on geography, the nature of the Section 3 
project, or other variables. HUD will update the benchmarks through a 
document published in the Federal Register, subject to public comment, 
not less frequently than once every 3 years. Such notice shall include 
aggregate data on labor hours and the proportion of recipients meeting 
benchmarks, as well as other metrics reported pursuant to Sec.  75.25 
as deemed appropriate by HUD, for the 3 most recent reporting years.
    (2) In establishing the Section 3 benchmarks, HUD may consider the 
industry averages for labor hours worked by specific categories of 
workers or in different localities or regions; averages for labor hours 
worked by Section 3 workers and Targeted Section 3 workers as reported 
by recipients pursuant to this section; and any other factors HUD deems 
important. In establishing the Section 3 benchmarks, HUD will exclude 
professional services from the total number of labor hours as such 
hours are excluded from the total number of labor hours to be reported 
per Sec.  75.25(a)(4).
    (3) Section 3 benchmarks will consist of the following two ratios:
    (i) The number of labor hours worked by Section 3 workers divided 
by the total number of labor hours worked by all workers on a Section 3 
project in the recipient's program year.
    (ii) The number of labor hours worked by Targeted Section 3 workers 
as defined in Sec.  75.21(a), divided by the total number of labor 
hours worked by all workers on a Section 3 project in the recipient's 
program year.


Sec.  75.25  Reporting.

    (a) Reporting of labor hours. (1) For Section 3 projects, 
recipients must report in a manner prescribed by HUD:
    (i) The total number of labor hours worked;
    (ii) The total number of labor hours worked by Section 3 workers; 
and
    (iii) The total number of labor hours worked by Targeted Section 3 
workers.
    (2) Section 3 workers' and Targeted Section 3 workers' labor hours 
may be counted for five years from when their status as a Section 3 
worker or Targeted Section 3 worker is established pursuant to Sec.  
75.31.
    (3) The labor hours reported under paragraph (a)(1) of this section 
must include the total number of labor hours worked on a Section 3 
project, including labor hours worked by any subrecipients, contractors 
and subcontractors that the recipient is required, or elects pursuant 
to paragraph (a)(4) of this section, to report.
    (4) Recipients reporting under this section, as well as 
subrecipients, contractors and subcontractors who report to recipients, 
may report labor hours by Section 3 workers, under paragraph (a)(1)(ii) 
of this section, and labor hours by Targeted Section 3 workers, under 
paragraph (a)(1)(iii) of this section, from professional services 
without including labor hours from professional services in the total 
number of labor hours worked under paragraph (a)(1)(i) of this section. 
If a contract covers both professional services and other work and the 
recipient or contractor or subcontractor chooses not to report labor 
hours from professional services, the labor hours under the contract 
that are not from professional services must still be reported.
    (5) Recipients may report their own labor hours or that of a 
subrecipient, contractor, or subcontractor based on the employer's good 
faith assessment of the labor hours of a full-time or part-time 
employee informed by the employer's existing salary or time and 
attendance based payroll systems, unless the project or activity is

[[Page 61566]]

otherwise subject to requirements specifying time and attendance 
reporting.
    (b) Additional reporting if Section 3 benchmarks are not met. If 
the recipient's reporting under paragraph (a) of this section indicates 
that the recipient has not met the Section 3 benchmarks described in 
Sec.  75.23, the recipient must report in a form prescribed by HUD on 
the qualitative nature of its activities and those its contractors and 
subcontractors pursued. Such qualitative efforts may, for example, 
include but are not limited to the following:
    (1) Engaged in outreach efforts to generate job applicants who are 
Targeted Section 3 workers.
    (2) Provided training or apprenticeship opportunities.
    (3) Provided technical assistance to help Section 3 workers compete 
for jobs (e.g., resume assistance, coaching).
    (4) Provided or connected Section 3 workers with assistance in 
seeking employment including: drafting resumes, preparing for 
interviews, and finding job opportunities connecting residents to job 
placement services.
    (5) Held one or more job fairs.
    (6) Provided or referred Section 3 workers to services supporting 
work readiness and retention (e.g., work readiness activities, 
interview clothing, test fees, transportation, child care).
    (7) Provided assistance to apply for/or attend community college, a 
four-year educational institution, or vocational/technical training.
    (8) Assisted Section 3 workers to obtain financial literacy 
training and/or coaching.
    (9) Engaged in outreach efforts to identify and secure bids from 
Section 3 business concerns.
    (10) Provided technical assistance to help Section 3 business 
concerns understand and bid on contracts.
    (11) Divided contracts into smaller jobs to facilitate 
participation by Section 3 business concerns.
    (12) Provided bonding assistance, guaranties, or other efforts to 
support viable bids from Section 3 business concerns.
    (13) Promoted use of business registries designed to create 
opportunities for disadvantaged and small businesses.
    (14) Outreach, engagement, or referrals with the state one-stop 
system as defined in Section 121(e)(2) of the Workforce Innovation and 
Opportunity Act.
    (c) Reporting frequency. Unless otherwise provided, recipients must 
report annually to HUD under paragraph (a) of this section, and, where 
required, under paragraph (b) of this section, on all projects 
completed within the reporting year in a manner consistent with 
reporting requirements for the applicable HUD program.


Sec.  75.27  Contract provisions.

    (a) Recipients must include language applying Section 3 
requirements in any subrecipient agreement or contract for a Section 3 
project.
    (b) Recipients of Section 3 funding must require subrecipients, 
contractors, and subcontractors to meet the requirements of Sec.  
75.19, regardless of whether Section 3 language is included in 
recipient or subrecipient agreements, program regulatory agreements, or 
contracts.

Subpart D--Provisions for Multiple Funding Sources, Recordkeeping, 
and Compliance


Sec.  75.29  Multiple funding sources.

    (a) If a housing rehabilitation, housing construction or other 
public construction project is subject to Section 3 pursuant to Sec.  
75.3(a)(1) and (2), the recipient must follow subpart B of this part 
for the public housing financial assistance and may follow either 
subpart B or C of this part for the housing and community development 
financial assistance. For such a project, the following applies:
    (1) For housing and community development financial assistance, a 
Targeted Section 3 worker is any worker who meets the definition of a 
Targeted Section 3 worker in either subpart B or C of this part; and
    (2) The recipients of both sources of funding shall report on the 
housing rehabilitation, housing construction, or other public 
construction project as a whole and shall identify the multiple 
associated recipients. PHAs and other recipients must report the 
following information:
    (i) The total number of labor hours worked on the project;
    (ii) The total number of labor hours worked by Section 3 workers on 
the project; and
    (iii) The total number of labor hours worked by Targeted Section 3 
workers on the project.
    (b) If a housing rehabilitation, housing construction, or other 
public construction project is subject to Section 3 because the project 
is assisted with funding from multiple sources of housing and community 
development assistance that exceed the thresholds in Sec.  75.3(a)(2), 
the recipient or recipients must follow subpart C of this part, and 
must report to the applicable HUD program office, as prescribed by HUD.


Sec.  75.31  Recordkeeping.

    (a) HUD shall have access to all records, reports, and other 
documents or items of the recipient that are maintained to demonstrate 
compliance with the requirements of this part, or that are maintained 
in accordance with the regulations governing the specific HUD program 
by which the Section 3 project is governed, or the public housing 
financial assistance is provided or otherwise made available to the 
recipient, subrecipient, contractor, or subcontractor.
    (b) Recipients must maintain documentation, or ensure that a 
subrecipient, contractor, or subcontractor that employs the worker 
maintains documentation, to ensure that workers meet the definition of 
a Section 3 worker or Targeted Section 3 worker, at the time of hire or 
the first reporting period, as follows:
    (1) For a worker to qualify as a Section 3 worker, one of the 
following must be maintained:
    (i) A worker's self-certification that their income is below the 
income limit from the prior calendar year;
    (ii) A worker's self-certification of participation in a means-
tested program such as public housing or Section 8-assisted housing;
    (iii) Certification from a PHA, or the owner or property manager of 
project-based Section 8-assisted housing, or the administrator of 
tenant-based Section 8-assisted housing that the worker is a 
participant in one of their programs;
    (iv) An employer's certification that the worker's income from that 
employer is below the income limit when based on an employer's 
calculation of what the worker's wage rate would translate to if 
annualized on a full-time basis; or
    (v) An employer's certification that the worker is employed by a 
Section 3 business concern.
    (2) For a worker to qualify as a Targeted Section 3 worker, one of 
the following must be maintained:
    (i) For a worker to qualify as a Targeted Section 3 worker under 
subpart B of this part:
    (A) A worker's self-certification of participation in public 
housing or Section 8-assisted housing programs;
    (B) Certification from a PHA, or the owner or property manager of 
project-based Section 8-assisted housing, or the administrator of 
tenant-based Section 8-assisted housing that the worker is a 
participant in one of their programs;
    (C) An employer's certification that the worker is employed by a 
Section 3 business concern; or
    (D) A worker's certification that the worker is a YouthBuild 
participant.

[[Page 61567]]

    (ii) For a worker to qualify as a Targeted Section 3 worker under 
subpart C of this part:
    (A) An employer's confirmation that a worker's residence is within 
one mile of the work site or, if fewer than 5,000 people live within 
one mile of a work site, within a circle centered on the work site that 
is sufficient to encompass a population of 5,000 people according to 
the most recent U.S. Census;
    (B) An employer's certification that the worker is employed by a 
Section 3 business concern; or
    (C) A worker's self-certification that the worker is a YouthBuild 
participant.
    (c) The documentation described in paragraph (b) of this section 
must be maintained for the time period required for record retentions 
in accordance with applicable program regulations or, in the absence of 
applicable program regulations, in accordance with 2 CFR part 200.
    (d) A PHA or recipient may report on Section 3 workers and Targeted 
Section 3 workers for five years from when their certification as a 
Section 3 worker or Targeted Section 3 worker is established.


Sec.  75.33  Compliance.

    (a) Records of compliance. Each recipient shall maintain adequate 
records demonstrating compliance with this part, consistent with other 
recordkeeping requirements in 2 CFR part 200.
    (b) Complaints. Complaints alleging failure of compliance with this 
part may be reported to the HUD program office responsible for the 
public housing financial assistance or the Section 3 project, or to the 
local HUD field office.
    (c) Monitoring. HUD will monitor compliance with the requirements 
of this part. The applicable HUD program office will determine 
appropriate methods by which to oversee Section 3 compliance. HUD may 
impose appropriate remedies and sanctions in accordance with the laws 
and regulations for the program under which the violation was found.

PART 91--CONSOLIDATED SUBMISSIONS FOR COMMUNITY PLANNING AND 
DEVELOPMENT PROGRAMS

0
6. The authority citation for part 91 continues to read as follows:

    Authority:  42 U.S.C. 3535(d), 3601-3619, 5301-5315, 11331-
11388, 12701-12711, 12741-12756, and 12901-12912.


Sec.  91.215  [Amended]

0
7. Amend Sec.  91.215(j) by removing ``24 CFR part 135'' and adding, in 
its place ``24 CFR part 75''.


Sec.  91.225  [Amended]

0
8. Amend Sec.  91.225(a)(7) by removing ``24 CFR part 135'' and adding, 
in its place ``24 CFR part 75''.


Sec.  91.325  [Amended]

0
9. Amend Sec.  91.325(a)(7) by removing ``24 CFR part 135'' and adding, 
in its place ``24 CFR part 75''.


Sec.  91.425  [Amended]

0
10. Amend Sec.  91.425(a)(1)(vii) by removing ``24 CFR part 135'' and 
adding, in its place ``24 CFR part 75''.

PART 92--HOME INVESTMENT PARTNERSHIPS PROGRAM

0
11. The authority citation for part 92 continues to read as follows:

    Authority:  42 U.S.C. 3535(d), 12 U.S.C. 1701x and 4568.


0
12. Amend Sec.  92.508 as follows:
0
a. Remove paragraph (a)(7)(i)(B);
0
b. Redesignate paragraph (a)(7)(i)(C) as (a)(7)(i)(B); and
0
c. Add paragraph (a)(7)(xi).
    The addition reads as follows:


Sec.  92.508  Recordkeeping.

    (a) * * *
    (7) * * *
    (xi) Documentation of actions undertaken to meet the requirements 
of 24 CFR part 75 which implements section 3 of the Housing Development 
Act of 1968, as amended (12 U.S.C. 1701u).
* * * * *

PART 93--HOUSING TRUST FUND

0
13. The authority citation for part 93 continues to read as follows:

    Authority:  42 U.S.C. 3535(d), 12 U.S.C. 4568.


0
14. Amend Sec.  93.407 as follows:
0
a. Redesignate paragraphs (a)(5)(ii) through (ix) as paragraphs 
(a)(5)(iii) through (x);
0
b. Remove paragraph (a)(5)(i)(B);
0
c. Redesignate paragraph (a)(5)(i)(A) as paragraph (a)(5)(ii);
0
d. In newly redesignated paragraph (a)(5)(iv), remove ``24 part 35'' 
and add in its place ``24 CFR part 35''; and
0
e. Add paragraph (a)(5)(xi).
    The addition reads as follows:


Sec.  93.407  Recordkeeping.

    (a) * * *
    (5) * * *
    (xi) Documentation of actions undertaken to meet the requirements 
of 24 CFR part 75, which implements section 3 of the Housing and Urban 
Development Act of 1968, as amended (12 U.S.C. 1701u).
* * * * *

CHAPTER I--OFFICE OF ASSISTANT SECRETARY FOR EQUAL OPPORTUNITY, 
DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT [AMENDED]

0
15. Under the authority of 42 U.S.C. 3535(d), in chapter I, remove 
designated subchapter headings A and B.

PART 135 --[REMOVED]

0
16. Remove part 135.

PART 266--HOUSING FINANCE AGENCY RISK-SHARING PROGRAM FOR INSURED 
AFFORDABLE MULTIFAMILY PROJECT LOANS

0
17. The authority citation for part 266 continues to read as follows:

    Authority:  12 U.S.C. 1707; 42 U.S.C. 3535(d).


Sec.  266.220  [Amended]

0
18. Amend Sec.  266.220(c) by removing ``; section 3 of the Housing and 
Urban Development Act of 1968 (12 U.S.C. 1701u), as implemented by 24 
CFR part 135''.

PART 570--COMMUNITY DEVELOPMENT BLOCK GRANTS

0
19. The authority citation for part 570 continues to read as follows:

    Authority:  12 U.S.C. 1701x, 1701 x-1; 42 U.S.C. 3535(d) and 
5301-5320.


Sec.  570.487  [Amended]

0
20. Amend Sec.  570.487(d) by removing ``24 CFR part 135'' and adding 
in its place ``24 CFR part 75''.


Sec.  570.607  [Amended]

0
21. Amend Sec.  570.607(b) by removing ``24 CFR part 135'' and adding 
in its place ``24 CFR part 75''.

PART 574--HOUSING OPPORTUNITIES FOR PERSONS WITH AIDS

0
22. The authority citation for part 574 continues to read as follows:

    Authority:  12 U.S.C. 1701x, 1701 x-1; 42 U.S.C. 3535(d) and 
5301-5320.


Sec.  574.600  [Amended]

0
23. Amend Sec.  574.600 by adding ``and part 75'' after the phrase ``24 
CFR part 5''.

PART 576--EMERGENCY SOLUTIONS GRANTS PROGRAM

0
24. The authority citation for part 576 continues to read as follows:

    Authority:  12 U.S.C. 1701x, 1701 x-1; 42 U.S.C. 11371 et seq., 
42 U.S.C. 3535(d).

[[Page 61568]]

 Sec.  576.407   [Amended]

0
25. Amend Sec.  576.407(a) by removing ``24 CFR part 135'' and adding 
in its place ``24 CFR part 75''.

PART 578--CONTINUUM OF CARE PROGRAM

0
26. The authority citation for part 578 continues to read as follows:

    Authority:  12 U.S.C. 1701x, 1701 x-1; 42 U.S.C. 11381 et seq., 
42 U.S.C. 3535(d).


Sec.  578.99  [Amended]

0
27. Amend Sec.  578.99 by removing ``federal'' in the section heading 
and adding in its place ``Federal'' and removing ``24 CFR part 135'' in 
paragraph (i) and adding in its place ``24 CFR part 75''.

PART 905--THE PUBLIC HOUSING CAPITAL FUND PROGRAM

0
28. The authority citation for part 905 continues to read as follows:

    Authority:  42 U.S.C. 1437g, 42 U.S.C. 1437z-2, 42 U.S.C. 1437z-
7, and 3535(d).


Sec.  905.308  [Amended]

0
29. Amend Sec.  905.308(b)(10) by removing ``24 CFR part 135'' and 
adding in its place ``24 CFR part 75''.

PART 964--TENANT PARTICIPATION AND TENANT OPPORTUNITIES IN PUBLIC 
HOUSING

0
30. The authority citation for part 964 continues to read as follows:

    Authority:  42 U.S.C. 1437d, 1437g, 1437r, 3535(d).


0
31. Revise Sec.  964.320 to read as follows:


Sec.  964.320  HUD Policy on training, employment, contracting and 
subcontracting of public housing residents.

    In accordance with Section 3 of the Housing and Urban Development 
Act of 1968 and the implementing regulations at 24 CFR part 75, PHAs, 
their contractors and subcontractors shall make best efforts, 
consistent with existing Federal, State, and local laws and 
regulations, to give low and very low-income persons the training and 
employment opportunities generated by Section 3 covered assistance (as 
this term is defined in 24 CFR 75.3) and to give Section 3 business 
concerns the contracting opportunities generated by Section 3 covered 
assistance.

PART 983--PROJECT-BASED VOUCHER (PBV) PROGRAM

0
32. The authority citation for part 983 continues to read as follows:

    Authority:  42 U.S.C. 1437f and 3535(d).


Sec.  983.4  [Amended]

0
33. Amend Sec.  983.4 by removing the definition of ``Section 3--
Training, employment and contracting opportunities in development''.


Sec.  983.154  [Amended]

0
34. Amend Sec.  983.154 by removing (c) introductory text and paragraph 
(c)(1) and redesignating paragraph (c)(2) as paragraph (c).

PART 1000--NATIVE AMERICAN HOUSING ACTIVITIES

0
35. The authority citation for part 1000 continues to read as follows:

    Authority:  25 U.S.C. 4101 et seq.; 42 U.S.C. 3535(d).


0
36. Revise Sec.  1000.42 to read as follows:


Sec.  1000.42  Are the requirements of Section 3 of the Housing and 
Urban Development Act of 1968 applicable?

    No. Recipients shall comply with Indian preference requirements of 
Section 7(b) of the Indian Self-Determination and Education Assistance 
Act (25 U.S.C. 5307(b)), or employment and contract preference laws 
adopted by the recipient's tribe in accordance with Section 101(k) of 
NAHASDA.

Benjamin S. Carson, Sr.,
Secretary.
[FR Doc. 2020-19185 Filed 9-28-20; 8:45 am]
BILLING CODE 4210-67-P