Economic Opportunities for Low- and Very Low-Income Persons

SUMMARY: This interim rule amends part 135 to implement the

comprehensive changes made to section 3 of the Housing and Urban

Development Act of 1968 by the Housing and Community Development Act of

1992. Section 3, as amended, requires that economic opportunities

generated by certain HUD financial assistance for housing (including

public and Indian housing) and community development programs shall, to

the greatest extent feasible, be given to low- and very low-income

persons, particularly those who are recipients of government assistance

for housing, and to businesses that provide economic opportunities for

these persons.

DATES: Effective date: August 1, 1994, through June 30, 1995.

Comments due date: August 29, 1994.

ADDRESSES: Interested persons are invited to submit comments regarding

this interim rule to the Office of General Counsel, Rules Docket Clerk,

Room 10276, Department of Housing and Urban Development, 451 Seventh

Street, SW., Washington, DC 20410. Communications should refer to the

above docket number and title. A copy of each communication submitted

will be available for public inspection and copying on weekdays between

7:30 a.m. and 5:30 p.m. at the above address.

FOR FURTHER INFORMATION CONTACT: Maxine B. Cunningham, Director, Office

of Economic Opportunity, Room 5232, Department of Housing and Urban

Development, 451 Seventh Street, SW., Washington, DC 20410, telephone

(202) 708-2251 (voice/TDD). (This is not a toll-free number.)

SUPPLEMENTARY INFORMATION:

I. Paperwork Reduction Act Statement

The information collection requirements contained in this interim

rule have been reviewed by the Office of Management and Budget for

review under the Paperwork Reduction Act of 1980, and assigned OMB

control number 2529-0043.

II. Procedural Information

The regulations contained in this interim rule are based on the

proposed rule published on October 8, 1993, and take into consideration

public comment received on the proposed rule. The Department has made a

number of changes to the section 3 regulations in response to public

comment. Because of the changes made to the October 8, 1993 proposed

rule, the Department is publishing the new section 3 regulations as an

interim rule, rather than a final rule. Although the interim rule will

be effective 30 days from the date of publication, as would a final

rule, the Department solicits additional public comment, and public

comment will be taken into consideration in development of the final

rule.

Elsewhere in today's edition of the Federal Register, the

Department has published a final rule that makes conforming amendments

to several parts in title 24 of the Code of Federal Regulations that

include reference, or should include reference, to the part 135

regulations. The section 3 ``conforming amendments'' proposed rule was

published in the Federal Register on October 8, 1993. No comments were

received on that proposed rule, and no additional comments are

solicited. Accordingly, the conforming amendments rule is published as

a final rule.

In accordance with the Department's policy on interim rules, the

amendments made to part 135 by this interim rule will expire on the

twelve-month anniversary date of publication of this interim rule

unless extended by notice published in the Federal Register or adopted

by a final rule published on or before the twelve-month anniversary

date of publication of the interim rule.

III. Background--Proposed Rule

On October 8, 1993 (58 FR 52534), the Department published a

proposed rule that would implement section 3 of the Housing and Urban

Development Act of 1968 (section 3) (12 U.S.C. 1701u), as amended by

the Housing and Community Development Act of 1992 (1992 Act).

Since its enactment, section 3 has been a statutory basis for

promoting the award of jobs and contracts, generated from projects

receiving HUD financial assistance, to, respectively, low-income

residents and businesses of the areas where the projects to be assisted

are located. Although the 1992 Act significantly revised section 3, it

did not alter the objective of section 3--to provide economic

opportunities to low-income persons. The 1992 Act strengthens the

section 3 mandate by clarifying the types of HUD financial assistance,

activities, and recipients subject to the requirements of section 3;

identifying the specific individuals and businesses who are the

intended beneficiaries of the economic opportunities generated from

HUD-assisted activities; and establishing the order of priority in

which these individuals and businesses should be recruited and

solicited for the employment and other economic opportunities generated

from HUD-assisted activities.

Consistent with the comprehensive changes made to section 3 by the

1992 Act, the October 8, 1993 rule proposed to amend part 135 in its

entirety. The October 8, 1993 proposed rule provided for implementation

of section 3 in each of HUD's three principal program areas: (1) Public

and Indian housing; (2) housing; and (3) community development. The

proposed rule specified the types of efforts to be undertaken in these

three programs to comply with the training, employment and contracting

preferences required by section 3, and the responsibilities imposed on

recipients to ensure compliance with the section 3 requirements in

their own operations and the operations of their contractors and

subcontractors.

The comment period for the October 8, 1993 proposed rule expired on

December 8, 1993, but comments were accepted through December 31, 1993.

By this date, 63 comments were received. The commenters included

housing authorities, units of government of State and local

jurisdictions, non-profit organizations, legal organizations, and

organizations representing public housing residents and other low-

income persons.

The majority of the commenters were critical of one or more aspects

of the rule. Housing authorities and State and local jurisdictions

criticized the rule for being overly burdensome, and for failing to

appreciate the administrative time and cost involved in undertaking the

efforts required to provide training, employment and contracting

opportunities to low-income persons. Legal organizations and other

organizations representing low-income residents stated that the rule

failed to provide clear standards and requirements by which recipients

and contractors could achieve compliance with section 3, and as a

result, economic opportunities would not be directed to low- and very

low-income persons as required by section 3. Several commenters

submitted lengthy comments on the proposed rule. Almost all commenters

offered suggestions and recommendations on how implementation of

section 3 should be conducted. The suggestions, recommendations, issues

and questions submitted by commenters are discussed in Sections V and

VI of the preamble.

IV. Clarification of Purpose and Applicability of Section 3--Providing

Preference When Economic Opportunities Are Generated

Before discussion of the issues and suggestions raised by

commenters, the Department wants to clarify the purpose and

applicability of section 3. Certain questions and issues raised by

several commenters made the Department aware that there is some

confusion about the purpose of section 3 and when the training,

employment and contracting preferences of section 3 are applicable.

Several commenters stated that they did not have the funds to

initiate job training and apprenticeship programs, and they did not

need to employ additional personnel or contract for work. Section 3

does not require the creation of economic opportunities for low- and

very low-income persons, or for anyone, simply for the sake of creating

economic opportunities. Section 3 requires that when employment or

contract opportunities are generated because a project or activity

undertaken by a recipient of HUD financial assistance necessitates the

employment of additional personnel through individual hiring or the

awarding of contracts for work, the recipient must give preference in

hiring to low- and very low-income persons, and must give preference in

contracting to businesses owned by these persons or that substantially

employ low- and very low-income persons.

When the need to employ additional personnel or to contract for

work occurs (which is frequently the case when HUD financial assistance

is expended), the recipient or contractor will be recruiting

individuals, and soliciting contractors, for these economic

opportunities. Section 3 requires that recipients not only include low-

and very low-income persons in these recruitment and solicitation

efforts, but that, in fact, extra or greater efforts be undertaken to

make these persons aware of the existence of the economic

opportunities, encourage their application for these opportunities, and

facilitate the employment of, or award of contracts to, these persons.

If, however, the section 3 covered assistance is awarded and the

recipient has no need for additional employees or trainees, or the

recipient has no need to contract for work, then the section 3

preference requirements are not triggered because the recipient is not

recruiting any individuals for jobs, or soliciting any business

concerns for contracts. Again, the section 3 preference requirements

are triggered by the need for new hires (whether individual employees

or contractors or subcontractors) for work on a project or activity

assisted by HUD financial assistance covered by section 3.

V. Overview of the Interim Rule and Discussion of Public Comments

This section of the preamble provides a summary of the significant

changes made to the October 8, 1993 proposed rule by this interim rule

in response to public comment, and discusses the public comments that

prompted these changes. This section also discusses those provisions of

the proposed rule for which substantial comments were received

requesting change, and for which the Department declined to adopt the

recommended change.

Simplification of Rule

Several commenters stated that the rule was unnecessarily lengthy

and complex, and contained sections and subparts that seemed simply to

duplicate the same information. Other commenters stated that one of the

reasons for the complexity of the rule was that uniform standards were

not applied to all recipients and contractors. The commenters stated

that, under the October 8, 1993 proposed rule, the standards imposed on

recipients and contractors depended upon the program source of HUD

funds received. These commenters stated that the distinction of effort

required to be undertaken by recipients on the basis of the source of

the HUD financial assistance was inappropriate, and that all HUD

recipients and contractors should be required, as the statute mandates,

to provide, to the greatest extent feasible, economic opportunities to

low- and very low-income persons. Other commenters stated that the rule

was lengthened by the long list of examples of efforts that recipients

may, but were not required to, undertake to comply with the section 3

preference requirements. The commenters stated that the rule should

provide for the minimum requirements that recipients and contractors

must meet, and that options, suggestions, and recommendations should be

provided in a notice, handbook, or other form of guidance, but not in

the rule. The Department agrees with all of the above commenters, and

has made changes to the proposed section 3 regulations in response to

these comments.

Consolidation of Rule Sections

The Department has eliminated the separate subparts for

implementing section 3 in public and Indian housing programs, housing

programs, and community development programs. The Department agrees

with the commenters that much of the information in these three

subparts was duplicative. The interim rule provides one subpart that

addresses the implementation of section 3 in all covered programs, and

this subpart makes distinctions for individual program features or

requirements where such distinctions are necessary.

Application of One ``Effort'' Standard to All Recipients and

Contractors

The interim rule requires the same level of effort to be undertaken

by all recipients and contractors, regardless of the source of HUD

financial assistance, to comply with the section 3 preference

requirements. That level of effort is one consistent with the statute's

``to the greatest extent feasible'' requirement.

The distinction in effort in the proposed rule imposed on public

and Indian housing recipients on the one hand, and recipients of funds

from ``other'' programs (i.e., housing and community development

programs) on the other hand, was based on statutory terminology. The

Congress used two different terms in describing the level of effort to

be undertaken in each of these two broad categories of HUD programs.

The Congress used the term ``best efforts'' in connection with the

efforts required of public and Indian housing authorities, and

``greatest extent feasible'' in connection with the efforts required of

recipients of ``other program'' assistance. The different use of terms

raised a presumption that the terms have different meanings. However,

on further consideration, the Department recognizes that there is very

little difference in the common meaning of these terms. Additionally,

the Department determined that the statute contemplates that every

recipient and contractor that generates economic opportunities from the

expenditure of section 3 covered assistance, regardless of the HUD

program from which the assistance is derived, must provide these

economic opportunities to low- and very low-income persons to the

greatest extent feasible.

Removal of Examples of ``Best Efforts'' and ``Good Faith Efforts''

Because the list of efforts in each of the three subparts in the

proposed rule were examples of efforts that could be undertaken by a

recipient or contractor to comply with section 3, and not efforts

required to be undertaken, the Department has removed these efforts

from the interim rule. The Department agrees that the inclusion of

these efforts added to the length of the interim rule and gave the

appearance that the regulations are more cumbersome than they are. The

list of efforts has been moved to an appendix that accompanies the

interim rule, and therefore remain an available source of guidance to

those recipients and contractors that found the list of efforts

helpful.

Several commenters provided examples of additional activities that

may be helpful in soliciting the participation of low- and very low-

income persons in the job application and procurement processes, and

these activities have been included in the appendix to part 135. A few

commenters stated that as certain efforts or activities undertaken by

recipients, and not currently included in the list of examples, prove

to be successful, the Department should add the activity or activities

to the list of examples. The Department will amend the appendix from

time to time to include additional activities, or publish a notice in

the Federal Register or in an industry trade periodical to advise of

activities that a recipient or recipients have determined to be

successful in encouraging and facilitating the participation of low-

and very low-income persons in the job application or procurement

process.

Removal of Procurement Procedures Required of Housing Authorities (HAs)

In addition to removal of the list of efforts that may be

undertaken by recipients and contractors, the interim rule removes the

provision in the proposed rule concerning procurement procedures that

HAs were required to follow in implementing the section 3 contracting

preference for each of the competitive procurement methods authorized

in 24 CFR 85.36(d). As will be discussed in more detail later in this

preamble, the Department has moved from a ``process'' oriented rule to

a ``results'' oriented rule. That is, the Department is more concerned

with the results of a recipient's efforts to comply with the section 3

preference requirements than with each specific effort undertaken to

achieve those results.

The procurement procedures set forth in the proposed rule are

included in the appendix to the interim rule, and thus remain an option

that HAs may use if they find these procedures helpful. Because of the

removal of the required procurement procedures from the rule, the

concerns and issues raised by several housing authority commenters

about negotiation of best efforts before the award of a contract, and

other issues that were specific to the procurement procedures set forth

in the proposed rule are no longer relevant, and need not be addressed.

However, the Department emphasizes that the removal of the procurement

procedures from the text of the rule does not relieve recipients and

contractors (regardless of the type of section 3 covered assistance

involved, i.e., public or Indian housing assistance, community

development assistance, etc.) of the responsibility to ensure that, to

the greatest extent feasible, the procurement practices selected to

award contracts provide for preference for section 3 business concerns.

Retention of Tiers of Low-Income Persons and Business Concerns To Which

Preference Is To Be Given

A few commenters stated that the multi-tier preference categories

for residents and business concerns create an overly complex system,

and should be removed from the rule. The multi-tier preference

categories are established by statute, and the regulation reflects the

statutory requirement to provide preference for low-income persons and

business concerns in the order set forth in the statute. In recruiting

low- and very low-income persons, the Congress was very clear that in

directing economic opportunities to low- and very low-income persons,

recipients are to target first those low- and very low-income persons

residing in public housing developments (when public and Indian housing

assistance is involved) or those residing closest to the project (in

the service area or neighborhood) for which the section 3 covered

assistance is expended (when housing assistance and community

development assistance are involved).

In contrast to commenters requesting removal of the tiers of

preference categories were commenters that sought to increase the

numbers of preference categories. With respect to the preference

categories for individuals, two commenters suggested dividing the tiers

to provide preference first to very low-income persons in each of the

categories provided by statute, followed by low-income persons. Other

commenters suggested including preferences for welfare recipients, JTPA

graduates, and women and minorities who are low- and very low-income

persons before other low- and very low-income persons. With respect to

the preference categories for business concerns, the commenters

suggested providing preference for resident-owned businesses owned by

women or minorities, or providing preference for resident-owned

businesses outside the metropolitan area or non-metropolitan county

before opening up competition to all businesses, when there are no

eligible resident-owned businesses within the metropolitan area or non-

metropolitan county. The statute provides no authority for the

Department to adopt additional preference categories.

Results Oriented Rule: The Establishment of Numerical Goals

The interim rule provides for numerical hiring and contracting

goals to demonstrate compliance with section 3. As discussed in this

section, the numerical standards constitute a ``safe harbor'' for

compliance with section 3 and are not absolute numerical requirements.

The Department acknowledges that in the preamble to the proposed

rule, the Department specifically declined to adopt numerical goals

despite suggestions from members of the public to the contrary. The

suggestions to adopt numerical goals were made at meetings held at HUD

Headquarters before publication of the proposed rule. As part of

development of the proposed rule, the Department held two meetings on

section 3 at HUD Headquarters, and invited to these meetings various

housing authorities, industry groups, representatives of public housing

residents and other low-income residents. (These meetings and the

listing of some of the individuals and groups that attended these

meetings were discussed in the preamble to the proposed rule at 58 FR

52535-52536.) At these meetings, several of the meeting participants

suggested, as did commenters on the proposed rule, that the section 3

rule provide for numerical goals as goals that recipients and

contractors should strive to meet, and as a means of measuring

compliance with section 3.

In the proposed rule, the Department declined to adopt numerical

goals stating that the establishment of numerical goals was not

consistent with the objectives of section 3. The Department stated:

Section 3 provides that to the greatest extent feasible, and

consistent with existing Federal, State and local laws and

regulations, economic opportunities generated by the expenditure of

HUD financial assistance should be given to low- and very low-income

persons. This means that, if feasible and if consistent with

existing Federal, State and local laws and regulations, all economic

opportunities generated by HUD financial assistance must be given to

low- and very low-income persons. Generally, however, this will not

be feasible in every case. For example, with respect to employment

opportunities, it is unlikely that in every hiring situation low-

and very low-income persons will be qualified for every job

opportunity generated from the expenditure of HUD financial

assistance. Therefore, it is not possible to measure compliance with

section 3 in terms of a numerical result, because numerical results

will vary dependent upon the circumstances of the hiring, e.g., the

types of jobs offered, the skills required for these jobs, and the

qualifications of the low- and very low-income persons (residing

within the metropolitan area, or non-metropolitan county) to fill

these jobs. Although every job may not be filled by a low-or a very

low-income person, section 3 requires that efforts must be made to

hire as many low- and very low-income persons to the greatest extent

feasible. (58 FR 52536)

While the Department continues to recognize that numerical results

will vary depending upon the circumstances surrounding the hiring or

contract award, the Department was persuaded by comments on the

proposed rule that broadly established numerical ``goals'' (i.e.,

hiring or contracting levels likely to be achieved in most employment

and contracting situations) better serve the objectives of section 3,

and better assist recipients and contractors in complying with section

3, than a listing of various types of outreach efforts that recipients

and contractors may undertake.

The commenters on the proposed rule expressed concern about the

number of low- and very low-income persons hired, and the numbers of

contracts awarded to section 3 business concerns that would be

considered by the Department to be in compliance with section 3. The

commenters stated that the proposed rule required recipients to report

annually on the numbers of training and employment opportunities

provided to low- and very low-income persons, and the number of

contracting opportunities awarded to section 3 business concerns, but

failed to provide any indication about what hiring and contracting

results would be considered in compliance with section 3. A few

commenters stated that a focus on efforts, and not results, would make

recipients overly concerned with the process, and not with the outcome

of the process; that is, recipients would be too concerned whether

efforts undertaken matched those in the regulation, without serious

analysis of whether those efforts were appropriate for achieving the

desired results. In a similar vein, a few commenters stated that the

Department's role was to focus on the results, and the role of the

recipients and contractors is to determine how best to achieve those

results.

In response to these comments, Sec. 135.30 of the interim rule

establishes numerical goals (stated in terms of percentages) for

training and employment, and for contracting. The Department will not

repeat in the preamble, the entire text of this section, but will note

some key features of this section.

The goals in Sec. 135.30 apply to the entire amount of the section

3 covered assistance awarded to a recipient in any Federal Fiscal Year

commencing with the first Federal Fiscal Year (FY) following the

effective date of this rule.

The goals in Sec. 135.30 apply to ``new hires'' (i.e., that is

person in new employment opportunities generated from the expenditure

of section 3 covered assistance). The interim rule defines ``new

hires'' to mean full-time positions that are permanent, temporary or

seasonal. The interim rule makes clear that the employment

opportunities with which the numerical goal concept is concerned are

those full-time positions generated from the expenditure of section 3

covered assistance. The Department recognizes that the expenditure of

section 3 covered assistance may generate part-time employment

opportunities, either of a permanent, temporary or seasonal nature, and

these opportunities are addressed in Sec. 135.40, entitled ``Providing

Other Economic Opportunities.''

Section 135.30 provides for the goals to increase in percentage

over a period of three years. For example, for FY 1995, recipients of

section 3 covered public and Indian housing assistance must commit to

employ low- and very low-income persons as 10 percent of the aggregate

number of new hires they make. This percentage increases to 20 percent

in FY 1996, and to 30 percent in FY 1997 and thereafter.

Section 135.30 also provides that a recipient that meets the

minimum numerical goals set forth in this section will be considered to

have complied with the section 3 preference requirements, absent

evidence to the contrary. The following provides an example of how a

recipient may meet the minimum numerical goals, but found not to be in

compliance with the section 3 preference requirements. A recipient

meets the 10 percent minimum goals by employing section 3 residents in

new entry level positions that the recipient has available in

connection with work on a section 3 covered project. However, the

recipient made no effort to employ, and does not employ, section 3

residents in more skilled positions that the recipient also had

available. That is, the recipient made no effort to make section 3

residents aware that these positions were available, or to encourage

section 3 residents to apply for these positions. Again, section 3

requires that, to the greatest extent feasible, recipients and

contractors will give all employment opportunities generated from the

expenditure of section 3 covered assistance to section 3 residents.

The efforts to employ section 3 residents applies to all new

employment opportunities, at all levels. The efforts to award contracts

to section 3 business concerns applies to all contracts to be awarded.

In the example provided above, if the recipient that met the 10 percent

numerical goal, strived, to the greatest extent feasible, to provide

all available employment opportunities to section 3 residents, and if

the skills, previous work experience, or education of the those

residents who applied for the jobs only met the qualifications for

entry-level positions, then there is no evidence contradicting that the

recipient is in compliance with section 3.

Section 135.30 also provides that in evaluating compliance with

section 3 as provided in subpart D (which addresses both the

Department's compliance reviews, and complaints filed by section 3

residents or section 3 business concerns), a recipient that has not met

the numerical goals has the burden of demonstrating why it was not

feasible to meet the goals. Such justification would include not only a

description of actions taken to hire or contract with low- and very

low-income persons, but also impediments encountered despite efforts

undertaken. In demonstrating why it was not feasible to meet the

numerical goals, a recipient or contractor also can indicate other

economic opportunities provided to section 3 residents or section 3

business concerns, as addressed in Sec. 135.40 (other economic

opportunities provided to residents and business concerns in an effort

to comply with section 3 and the requirements of this part).

The inclusion of numerical goals, and the removal of the various

types of best effort and good faith effort activities from the rule,

respond to commenters' concerns about little flexibility in

implementation of section 3, and the uncertainty about what constitutes

compliance with section 3. The interim rule increases flexibility by

allowing recipients and contractors to determine the procedures,

efforts and activities that work for them in meeting the section 3

preference requirements. The interim rule reduces uncertainty about

what constitutes compliance with section 3 by providing recipients and

contractors with safe harbor levels.

The Department emphasizes that the numerical goals in the interim

rule are exactly that--``goals'' that recipients and contractors should

strive to reach. The goals are not to be construed as requirements,

quotas, set-asides or a cap on hiring or contracting with low- and very

low-income persons (e.g., recipients and contractors are not to set

aside or reserve ten percent of available jobs for low- and very low-

income persons). Consistent with the greatest extent feasible

requirement, the Department hopes that recipients and contractors will

exceed these goals. The goals, if met, constitute a safe harbor for

recipients and contractors on the issue of compliance with section 3

(absent evidence to the contrary, as discussed above). The goals, if

not met, do not automatically trigger sanctions against the recipient

or contractor. However, if challenged on the issue of compliance with

section 3, the recipient or contractor should be ready to demonstrate

that it strived, but was unable, to reach the safe harbor levels.

The establishment of numerical goals is the principal reason that

the Department is issuing this rule as an interim rule. The Department

believes that the low percentage goals that are targets to be met for

FY 1995 are achievable by the majority of recipients that will

undertake hiring or contracting as a result of the expenditure of

section 3 covered assistance.

The final section 3 rule, which will be based on additional public

comment, will be issued before the goals for FY 1996 are applicable.

The Department specifically requests comment from the public on the

numerical goals set forth in Sec. 135.30.

Retention of Thresholds for Recipients of Section 3 Covered Housing or

Community Development Assistance; Increased Threshold Amounts; Removal

of HUD Share and Project Cost

In addition to promoting one ``effort'' standard that would be

applicable to all recipients, several commenters stated that the issue

of thresholds also should be treated uniformly. The commenters stated

that the thresholds should be applied to all recipients and

contractors, or none at all. Eight commenters stated that a threshold

requirement is inconsistent with the statute's ``greatest extent

feasible'' requirement. Seven commenters stated that a dollar threshold

for housing authorities is not inconsistent with a greatest extent

feasible requirement. Nine commenters representing units of local

government stated that the dollar threshold for recipients of housing

and community development assistance was too low, and should be raised.

Other commenters stated that in lieu of a dollar threshold, the rule

should establish a population threshold so that small and rural

communities which sustain few businesses, and must advertise regionally

(rather than locally) to fill economic opportunities, would be exempt

from compliance with section 3.

The Department carefully considered all comments on the issue of

thresholds, and determined to retain the proposed rule's position on

this issue, which is to provide no dollar thresholds for HAs and their

contractors and subcontractors, and to provide dollar thresholds for

recipients of housing or community development, and their contractors

and subcontractors.

No Thresholds for HAs, and Their Contractors and Subcontractors

The Department continues to maintain that a dollar threshold in

section 3 covered public and Indian housing programs is not consistent

with the statute. Section 3 applies to public and Indian housing

operating assistance, development assistance and modernization

assistance, which covers virtually all HA projects and activities.

Additionally, the statute is very specific about the residents and

business concerns to which HAs and their contractors and subcontractors

must give preference. These residents and business concerns are tied to

the housing development for which the assistance is expended, or

another development owned by the HA. The Department believes that the

statute's expansive coverage of public and Indian housing projects and

activities indicates that any attempt to diminish the coverage would be

inconsistent with the statute.

Thresholds for Other Recipients and Their Contractors and

Subcontractors

In contrast to public and Indian housing programs, section 3

coverage in housing and community development programs is limited to

housing and community development assistance expended for housing

rehabilitation, housing construction and other public construction. The

Department continues to maintain that the limited section 3 coverage in

housing and community development programs makes thresholds in housing

and community development programs acceptable, and not inconsistent

with the statute. Additionally, on further consideration, and as

discussed below in the section on ``HUD share,'' the Department has

determined to raise the thresholds to twice the amount set forth in the

proposed rule.

Removal of HUD Share and Project Cost

Related to the issue of thresholds is the concept of ``HUD share''

because, under the proposed rule, the threshold was based on the HUD

share of project cost.

The commenters were divided on the issue of HUD share. Eight

commenters stated that in determining whether the dollar threshold is

met, the entire project and total dollar amount should be considered,

and not solely the HUD share of this total dollar amount. These

commenters stated that the use of HUD share creates excessive

paperwork. Ten commenters stated that using HUD share to determine the

dollar threshold was correct. These commenters stated that to peg the

threshold to total development cost would not appropriately tie section

3 responsibility to Federal assistance.

The Department agreed with the commenters who stated that the use

of HUD share and calculation of the project cost makes the rule

cumbersome, and creates additional paperwork. Accordingly, the interim

rule provides for the threshold to be based on the amount of the award

of assistance--an amount by which responsibility to comply with the

section 3 preference requirements is more easily determined. Because

the interim rule removes the HUD share and project cost calculations

for determining the threshold (a process which excluded certain costs

of the recipient), the Department determined that it is appropriate to

raise the dollar thresholds.

The interim rule provides that the requirements of part 135 apply

to recipients of covered section 3 housing and community development

assistance for which the amount of the assistance exceeds $200,000; and

these requirements apply to contractors and subcontractors performing

work on projects funded by housing and community development assistance

for which the recipient's award exceeds $200,000, and the contract or

subcontract exceeds $100,000. If the recipient's award of assistance

exceeds $200,000, but the contracts and subcontracts do not exceed

$100,000, then only the recipient is subject to the section 3

preference requirements. The recipient's responsibility includes

awarding contracts, to the greatest extent feasible, to section 3

business concerns.

Clarification of Range of Economic Opportunities ``Arising in

Connection With'' Section 3 Covered Housing and Community Development

Assistance

When the Congress amended section 3, it narrowed the type of

activity to which the statute would apply in housing and community

development programs to three types of construction projects: housing

rehabilitation (including reduction and abatement of lead-based paint

hazards); housing construction; and other public construction projects.

A few commenters stated that the proposed rule's implication that

``covered opportunities'' in housing and community development programs

were limited to construction-type jobs (e.g., heavy labor, trade jobs)

was incorrect. The commenters stated that the statute applies to

employment and training opportunities ``arising in connection with''

these three types of construction projects, and that jobs arising in

connection with these projects are not only the construction jobs, but

also, management, maintenance, clerical and administrative jobs that

come into existence because of the construction project.

The commenters are correct that management, maintenance and

administrative jobs created to undertake work in connection with the

construction or rehabilitation project are covered by section 3, and

the interim rule clarifies this coverage. However, management,

maintenance or administrative jobs generated from the expenditure of

housing assistance (excluding public and Indian housing assistance) or

community development assistance, but which assistance is not expended

for rehabilitation, construction, or other public construction (and

thus is not section 3 covered assistance), are not subject to the

section 3 preference requirements.

To determine whether employment opportunities generated from the

expenditure of HUD financial assistance are subject to the section 3

preference requirements, a determination must first be made if the HUD

assistance is covered by section 3. As discussed previously, section 3

applies to the following public and Indian housing assistance:

operating assistance, development assistance, and modernization

assistance. All employment opportunities generated by the expenditure

of this assistance are subject to the section 3 preference

requirements. With respect to assistance other than public and Indian

housing assistance, section 3 applies to housing assistance and

community development assistance expended for housing rehabilitation

(including reduction and abatement of lead-based paint hazards),

housing construction or other public construction project. Thus, the

section 3 preference requirements only apply to employment

opportunities ``arising in connection with'' housing rehabilitation,

housing construction or other public construction project.

Therefore, HUD housing assistance that is expended for project

operations (i.e., assistance that is operating assistance, but not

operating assistance pursuant to section 9 of the 1937 Act) is not

covered by section 3. Accordingly, a maintenance supervisory position

that becomes available as a result of the expenditure of this

assistance is not subject to the section 3 preference requirements. A

maintenance supervisory position that becomes available as a result of

work in connection with housing rehabilitation is subject to the

section 3 preference requirements.

Defining ``Employment Opportunities Generated From Section 3 Covered

Assistance''

The interim rule provides a definition of ``employment generated by

section 3 covered assistance'' to address the various types of

employment opportunities that may arise in connection with the

expenditure of section 3 covered assistance.

Defining ``Other HUD Programs''

Additionally, the interim rule provides a definition of ``other HUD

programs'' to distinguish between HUD public and Indian housing

programs covered by section 3 and other HUD programs covered by section

3. The other HUD programs covered by section 3 are those that provide

housing or community development assistance for housing rehabilitation,

housing construction, or other public construction project.

Clarification That in Covered Housing and Community Development

Programs, ``Housing Rehabilitation'' Does Not Include Routine

Maintenance and Repair

In addition to clarifying the types of jobs that are covered by the

statutory phrase ``arising in connection with,'' the interim rule also

clarifies what constitutes ``housing rehabilitation.'' Routine

maintenance and repair do not constitute ``housing rehabilitation.''

The parenthetical statement in the statute which follows the term

``housing rehabilitation'' provides that housing rehabilitation

includes reduction and abatement of lead-based paint hazards. This

language indicates that something more than routine maintenance and

repair or replacement is contemplated by the term ``housing

rehabilitation.'' As discussed in the preceding section, the Department

notes that maintenance and repair undertaken in connection with housing

rehabilitation (e.g., clean-up after rehabilitation has been performed)

are covered by section 3.

Clarification of Range of Economic Opportunities That May Be Generated

by Section 3 Covered Public and Indian Housing Assistance

A few commenters stated that the proposed rule placed a heavy

emphasis on construction jobs, which may be appropriate in the context

of housing and community development assistance (given the limited

section 3 coverage), but is inappropriate in the context of section 3

covered public and Indian housing assistance. The commenters stated

that, in public and Indian housing programs, the statute covers

opportunities generated by development assistance, modernization, and

operating assistance, and that all jobs generated from the expenditure

of these major sources of funding for HAs should be covered.

The commenters are correct that all jobs, whether administrative,

clerical, managerial, or construction related, generated from the

expenditure of operating assistance, development assistance or

modernization assistance are subject to the section 3 preference

requirements and the interim rule makes this clarification.

Clarification That Section 3 Applies to Section 8 Project-Based

Assistance in Limited Circumstances

A few commenters stated that the Department erred in its broad

exclusion of section 8 assistance from section 3 coverage. The

commenters are correct with respect to section 8 project-based

assistance. Although section 8 project-based assistance currently does

not often finance rehabilitation and construction projects, where

section 8 project-based assistance is expended for housing

rehabilitation or construction, the assistance is covered by section 3.

Retention of Proposed Rule's Interpretation of ``Section 3 Covered

Contract''

Thirteen commenters stated that the Department should interpret

``section 3 covered contracts'' to include contracts for the purchase

of materials, supplies, or equipment, where no installation is

involved.

Exclusion of Contracts for the Purchase of Materials and Supplies

The Department declines to adopt this interpretation. The

Department believes that the phrase ``for work'' which accompanies the

term ``contract'' throughout the statute indicates that the

requirements of section 3 were not intended to apply to contractors who

only furnish materials or supplies, and do not undertake work, as in

the installation of the material or equipment. The Department, however,

encourages the purchase of materials and supplies from section 3

business concerns as a means of providing economic opportunities other

than those connected with section 3 covered assistance (see

Sec. 135.40).

Coverage or Professional Service Contracts

The term ``section 3 covered contract'' however does include

professional service contracts provided that the work to be performed

by the professionals is for work generated by the expenditure of

section 3 covered public and Indian housing assistance, or for work

arising in connection with a section 3 covered project (i.e., housing

rehabilitation, housing construction, or other public construction

project).

Clarification of Exclusion of HUD Procurement Contracts

The interim rule also clarifies that ``section 3 covered

contracts'' do not include contracts awarded under HUD's procurement

programs. These contracts are governed by the Federal Acquisition

Regulation System.

Continuation of Extension of Section 3 Coverage to Private, For-Profit

Businesses Receiving HUD Assistance

In the proposed rule, the Department defined ``section 3 covered

project'' to clarify that ``other public construction project''

included buildings or improvements, regardless of ownership, assisted

with housing or community development assistance. The Department

specifically requested comment from the public on this proposal to

extend section 3 coverage though the definition of ``section 3 covered

project'' to all private, for-profit entities that receive HUD housing

or community development assistance for a section 3 covered project,

including private, for-profit businesses receiving Community

Development Block Grant (CDBG) funding for economic development

projects. Fifteen commenters supported this proposal, stating that it

was important that section 3 apply to private, for-profit entities

receiving HUD financial assistance. Six commenters opposed the

proposal, stating that the Economic Development portion of the CDBG

program is already designed to hire low- and very low-income persons,

and to extend section 3 coverage to economic development projects is

redundant and confusing.

The Department was not persuaded by the commenters in opposition to

the proposal. Although the Economic Development portion of the CDBG

program supports the employment of low- and very low-income persons,

the employment of these persons is not triggered in the same manner as

provided by section 3. For example, an economic development project may

involve the building of a widget factory. When construction of the

factory is complete, there is a commitment to employ a certain

percentage of low- and very low-income persons as factory workers.

However, there is no requirement for the developer or builder of the

factory to employ low- or very low-income persons in the construction

of the factory. Section 3 would cover the job opportunities created at

this stage of the economic development project.

Introduction of New Term--``Section 3 Residents''

Using ``Section 3 Residents'' to Refer Collectively to ``Low-Income

and Very Low-Income Persons.'' Several commenters expressed their

dissatisfaction with the proposed rule's use of ``low-income person''

to refer to both ``low- and very low-income persons.'' The commenters

expressed concern that the use of ``low-income persons'' to refer to

both low- and very low-income persons would result in oversight of the

need to direct recruitment and solicitation efforts to very low-income

persons. Instead of selecting one of the statutory terms to refer to

both income groups, the interim rule uses the term ``section 3

residents'' to refer to both low- and very low-income residents.

Clarification That ``Section 3 Resident'' Includes Public Housing

Residents. A few commenters stated that some public housing residents

do not meet the low-income or very low-income qualifications

established by section 3, but noted that the statute indicates that all

public housing residents are eligible for the priority consideration

established by section 3 for public housing resident in employment and

training opportunities. The commenters requested that the Department

resolve this contradiction by explicitly including public housing

residents in the definition of ``section 3 resident.'' The Department

agrees with the commenters that the definition of ``section 3

resident'' should include all public housing residents. Section 915 of

the 1992 Act (the section that amended section 3), provides that it is

``the policy of the Congress and the purpose of section 3'' that

economic opportunities generated by HUD financial assistance be

directed toward low- and very low-income persons, ``particularly [to]

those who are recipients of government assistance for housing.'' The

inclusion of ``public housing resident'' in the definition of ``section

3 resident'' is consistent with Congressional policy and statutory

intent.

Definitions of Low-Income and Very Low-Income Are Statutory. Many

commenters suggested alternative definitions for low-income person and

very low-income person. The commenters wanted the definitions to

specifically include participants in programs under the Job Training

Partnership Act (JTPA), welfare recipients, and welfare eligible

applicants, or to base the income level on household income, not

individual income, or to base the income level on a percentage of the

median of the majority income, and not an all inclusive median income.

Section 915 of the 1992 Act, which amended section 3, specifically

provides that ``low-income person'' and ``very low-income person''

shall have the meanings provided these terms in section 3(b)(2) of the

U.S. Housing Act of 1937 (1937 Act). Accordingly, the definitions are

taken from this section of the 1937 Act.

Proof of Status as Section 3 Resident Is the Responsibility of the

Individual. A few commenters raised questions concerning the form of

certification or other evidence they were required to obtain or accept

from individuals to verify their status as a section 3 resident. A few

other commenters stated that questions about a person's income were an

invasion of privacy.

The interim rule does not mandate (nor did the proposed rule) that

the recipient, contractor or subcontractor require certification or

evidence of a person's section 3 status. However, if verification of

status is requested, it is the responsibility of the individual seeking

the preference in employment provided by section 3, to present evidence

that the person is a low-income or very low-income person. The

Department does not prescribe any special form of certification.

Acceptable documentation or evidence may include evidence of a person's

residency in a public housing development, or evidence of section 8

certificate or voucher assistance, or other evidence of participation

in a HUD or other Federally assisted program such as JTPA, AFDC, or

JOBS, or evidence of participation in a State or local assistance

program, or receipt of welfare assistance.

On the subject of invasion of privacy, one commenter stated that an

individual who applies for a job should not have to disclose his or her

income. If an individual wants to take advantage of the preference

provided by section 3, the individual must be willing to make such

disclosure, or as noted earlier, present other evidence of

participation in a program that assists low- or very low-income

persons. It is not unusual for programs that provide preference for

certain groups (e.g., elderly persons, young persons of a certain age

group, minorities) to require the persons claiming the preference to

support eligibility for the preference.

Revision to the Definition of ``Section 3 Business Concern''

Several commenters suggested alternative definitions for ``section

3 business concern.'' The proposed rule defined a section 3 business

concern three different ways. To be eligible for the section 3

preference, a business concern would only have to meet one of the three

definitions.

First Definition Is Unchanged. Four commenters criticized the first

definition, which requires 51 percent or more ownership of the business

by low- or very low-income persons. The commenters stated that this

definition was totally unrealistic. The commenters stated that if a

business concern is sufficiently capitalized to bid on construction

projects of substantial size and complexity, then in all likelihood the

owners were not low-income or very low-income persons.

The first definition is derived from the statute which calls for

majority ownership by low-income or very low-income persons. The

Department acknowledges that there is a small percentage of these types

of business concerns. These business concerns exist primarily in public

housing developments, and therefore are business concerns to which

housing authorities have access for contract work.

In several public housing developments across the nation, residents

have organized to form small businesses that are engaged in lawn care,

building maintenance, and even small manufacturing work, and provide

these services for the development in which they reside or for other

developments owned by the housing authority. The commenters are correct

that generally resident-owned businesses are not the business concerns

that are capable of bidding and performing work as the primary

contractor for a major construction or rehabilitation project.

Nevertheless, because this definition is statutory, and has meaning

within the public housing industry, the first definition is retained by

the interim rule, and remains unchanged from the definition in the

proposed rule.

Some Revision to Second Definition. The second definition in the

proposed rule, which is also derived from the statute, provided that a

section 3 business concern also includes a business concern that

employs a substantial number of section 3 residents for the type of

activity in which the business concern is engaged. Commenters stated

that this definition was more realistic than the first definition, but

requested that the rule provide more guidance about the meaning of

``substantial.'' Several commenters suggested that this term be

quantified, and submitted suggestions ranging from 20 percent to 75

percent of the employees of the business.

In response to public comment, the second definition has been

revised in the interim rule to mean a ``business concern whose

permanent, full-time employees consist of persons, at least 30 percent

of whom are section 3 residents'' (or who were section 3 residents at

the time of their initial employment.) The Department believes that the

30 percent figure represents a reasonable interpretation of

``substantial'' in this context. A figure of 30 percent is not so high

as to significantly limit the number of business concerns that could

meet this standard, nor so low as to make the preference for a business

concern that employs a substantial number of low- or very low-income

persons to be irrelevant.

In response to several commenters who stated that employers should

receive credit for hiring persons who were formerly low-income or very

low-income persons, this second definition of ``section 3 business

concern'' provides for this credit. This second definition of section 3

business concern provides that in determining which business concerns

meet this second definition, consideration is give to business concerns

that employ a substantial number (30 percent) of low or very low-income

persons who were low- or very low-income persons at the time the

persons were employed by the business, but whose incomes now exceed the

income level of a low- or very low-income person, and the date of first

employment by the business concern has not exceeded a period of three

years. The Department wants to give preference to business concerns who

employed low- and very low-income persons, and provided for their

advancement from that income level.

New Third Definition. In the proposed rule, the third definition

for ``section 3 business concern'' referred to a business concern that

is substantially owned, but less than 51 percent owned, by low-income

persons or very low-income persons and employs these persons in key

management positions. This definition was soundly criticized by a

number of commenters as being unrealistic, and promoting fraud and

abuse by allowing less than 51 percent ownership by low- and very low-

income persons.

In response to public comment, this definition has been removed in

the interim rule and replaced with the following: ``a business concern

that provides evidence of a commitment to subcontract, in excess of 25

percent of the dollar amount of all subcontracts to be awarded, to

business concerns that meet either the first or second definition of

section 3 business concern.'' Through this definition, a preference in

contracting will be provided to business concerns that are neither

owned by low- or very low-income persons, nor employ (as their own

employees) a substantial number (30 percent) of low- or very low-income

persons, but that actively seek and award subcontracts to businesses

owned by low- or very low-income persons, or businesses that

substantially employ low- and very low-income persons. The purpose of

this definition is to provide a preference to primary contractors that

have a successful record of subcontracting with section 3 business

concerns.

Proof of Status as Section 3 Business Concern Is the Responsibility

of the Business Concern. A few commenters raised questions about

verifying the status of a section 3 business concern. Again,

verification or certification is not mandated by this interim rule. If

requested, it is the responsibility of the business concern that wants

to take advantage of the preference provided by section 3 to produce

acceptable support or documentation that it qualifies as a section 3

business concern.

Revision to NOFA and Bonus Points Provision

The Department received many comments on the proposal in the

October 8, 1993 rule to provide in a notice of funding availability

(NOFA) for the award of bonus points to applicants who have past

experience and achievements in providing economic opportunities to low-

and very low-income persons.

A few commenters stated that the award of bonus points for

applicants who have successfully complied with section 3 was a good

idea, but that the rule should place a limit on the number of points to

be awarded to avoid abuse. Other commenters stated that bonus points

should be awarded for past performance only if the applicant's current

proposal, submitted in response to the NOFA, demonstrates a commitment

to undertake section 3 efforts consistent with past performance. Two

commenters stated that bonus points should be awarded on the basis of

efforts made, and not results achieved, because many recipients make

good faith efforts without achieving significant results. Three

commenters stated that the proposal favored large housing authorities

(over small housing authorities) that have active resident management

corporations and resident councils. The commenters stated that as a

result of these active resident groups, large housing authorities would

more often be eligible for the bonus points and edge out small housing

authorities for awards made under a NOFA. Six commenters stated that

the bonus points proposal was inappropriate, and should be removed

because it is unrelated to funding need, and further stated that it

would be difficult for the Department to verify ``claimed'' past

success under section 3.

In response to these comments, the Department revised this

regulatory section. Section 135.9 of the interim rule, which addresses

this issue, provides the following. First, for competitively awarded

assistance in which the grants are for activities administered by an

HA, and those activities as described in the NOFA are anticipated by

the Department to generate significant training, employment or

contracting opportunities, the NOFA must include a statement that one

of the purposes of the assistance is to give, to the greatest extent

feasible, and consistent with existing Federal, State and local laws

and regulations, job training, employment, contracting, and other

economic opportunities generated from the expenditure of this

assistance to section 3 residents and section 3 business concerns.

Second, this same statement must be included in NOFAs for competitively

awarded assistance involving housing rehabilitation, housing

construction, or other public construction, where the amount of the

award to the applicant is anticipated to exceed $200,000. Third, this

section provides that in the evaluation of applications for the award

of assistance under the NOFAs discussed above, consideration will be

given to the extent to which the applicant demonstrates that it will

train and employ section 3 residents and contract with section 3

business concerns for economic opportunities generated in connection

with the project/activity assisted. The evaluation criteria to be

utilized and the rating points to be assigned will be specified in the

NOFA.

Absence of Listing of Existing Federal, State, and Local Laws and

Regulations That Are Inconsistent or in Conflict With Section 3

Several commenters raised questions about the statutory requirement

that implementation of section 3 (i.e., compliance with the preference

requirements) must be consistent with existing Federal, State and local

laws and regulations that are inconsistent with section 3. A few of the

commenters requested that the rule provide a list of all existing laws

and regulations that are inconsistent with section 3. Other commenters

stated that the rule should expressly provide for the preemption of

other laws that are inconsistent with section 3. Another commenter

asked that the rule clarify who will make the determination of whether

there is a conflict between section 3 and an existing Federal, State or

local law. As discussed in this section, the Department does not agree

that there is a need for a list of other laws and regulations

inconsistent with section 3, or that there is a need to expressly

preempt inconsistent laws.

Other Laws that Provide Preference. The section 3 preference in

hiring for low- and very low-income persons, and in contracting for

businesses owned by these persons was not created by the 1992 Act.

Section 3, when originally enacted in 1968, provided for this

preference. The 1992 Act amends section 3 to require that in providing

preference to low and very low-income persons, recipients, contractors,

and subcontractors must first target for job opportunities smaller

groups within the broad category of low-income persons, such as public

housing residents. Since its enactment in 1968, the Department is not

aware, or has not been made aware of any existing Federal, State, or

local law or regulation that is expressly in conflict with the section

3 preference requirements.

The rule of statutory construction is to interpret statutes to give

meaning to all and to avoid conflicts. For example, section 7(b) of the

Indian Self-Determination and Educational Assistance Act provides a

preference for training and employment opportunities and contracting

for Native Americans. Where both the preference for Native Americans

and the section 3 preference for local residents cannot be met, the

preference for Native Americans takes priority. However, it is possible

that the two preferences can work together so that the intent of both

statutes is met.

The consideration given to utilization of women's business

enterprises (WBEs) and minority business enterprises (MBEs) in HUD

programs is also not necessarily at odds with the section 3 preference,

as believed by some commenters. The preference required by section 3 is

neither gender specific nor race, nor ethnic origin specific. The

preference required by section 3 is one of income (to be eligible for

the preference, the person's income may not exceed a certain level) and

one of location (the preference is for low-income and very low-income

persons residing in proximity to the project or activity where the HUD

financial assistance is being expended). This is a very broad

preference category, and can encompass preferences promoted by other

statutes and regulations, such as preferences for WBEs, MBEs, and other

socially and economically disadvantaged businesses (i.e., business for

which are 51 percent or more owned by socially and economically

disadvantaged individuals). The Department anticipates that section 3

and similar preference laws will serve to support, rather than

obstruct, the preferences specified by each.

Preemption. On the issue of preemption, generally, Federal law may

preempt the enforcement of a State or local law if: (1) The Federal

statute expressly preempts State or local law; (2) the Federal statute

does not contain an express preemption provision, but it is clear that

the Congress intended to preempt by occupying an entire field of

regulation, and has thereby left no room for the State to supplement

Federal law; or (3) compliance with both Federal and State law is

impossible, or State law stands as an obstacle to the accomplishment

and execution of the full purposes and objectives of the Congress.

Under the third test, Federal preemption must reflect a reasonable

accommodation of conflicting policies that were committed to the

agency's care by statute. (See Capital Cities Cable, Inc. v. Crisp, 467

U.S. 691, 699 (1984).

The first two tests do not apply because section 3 contains no

express preemption provision, and there is no clear indication of

Congressional intent to preempt. In fact, the statute specifically

provides that a recipient's efforts to employ section 3 residents and

award contracts to section 3 business concerns shall be ``consistent

with existing Federal, State, and local laws and regulations.''

Therefore, any claim of Federal preemption would have to be based on

the third test, and the Department would have to determine that

compliance with both section 3 and State or local law is impossible, or

that State or local law stands as an obstacle to the accomplishment and

execution of the full purposes and objectives of section 3.

The inclusion of the phrase ``consistent with existing Federal,

State, and local laws and regulations'' indicates that the Congress did

not envision that State or local law would make compliance with Section

3 impossible or that State or local law would be an obstacle to

compliance with section 3. Again, as discussed earlier in this

preamble, the preference provided by section 3 is sufficiently broad

that there should be little conflict with State or local laws. However,

the section 3 preference requirements would prevail over a permissive

(not mandatory) State or local law provision that has the potential to

conflict with section 3.

Determining if There Is a Conflict in Laws. The issue of conflict

between part 135 and an existing Federal, State, or local law would

only arise if a recipient or contractor failed to comply with the

requirements of part 135, and asserted the position that the failure

was based upon conflicting Federal, State, or local law. The Department

would consider the recipient's assertion of conflicting laws (e.g., a

local legal opinion) when the Department determined that the recipient

or contractor failed to meet the requirements of part 135 and that

there was a reasonable basis for the Department to take sanctions based

on that failure. (The Department notes that some program statutes or

regulations (e.g., the Community Development Block Grant and HOME

Investment Partnership programs) may require notice and opportunity for

a hearing before an administrative law judge before sanctions are

imposed. Accordingly, the Department would have to convince the

administrative law judge of the Department's determination regarding

failure to comply with section 3, including the Department's

determination regarding the conflict of other law with part 135.)

New Section on Compliance With Other Applicable Laws

On the subject of the relationship of section 3 to other related

laws, the interim rule contains a new section (Sec. 135.11) that

references other laws that are applicable to job training, employment,

and contracting. These laws include program statutes that require

payment of prevailing wages determined under the Davis-Bacon Act or (in

the case of public and Indian housing) determined by HUD to be

prevailing. These laws also include reference to Executive Order 11246

(which requires affirmative action to ensure that employees or

applicants are treated without regard to their race, color, religion,

sex, or national origin), and regulations governing approved

apprenticeship programs. This section also references the procurement

procedures of 24 CFR 85.36.

A few commenters raised questions about the relationship of the

procurement procedures of 24 CFR 85.36 to section 3. The requirements

in Sec. 85.36 are not inconsistent with part 135. Rather provisions in

Sec. 85.36 can facilitate actions by the recipients to meet part 135.

For example, Sec. 85.36(c)(2) expressly prohibits the use of local

geographic preferences in the evaluation of bids or proposals, except

in the cases where applicable Federal statutes expressly mandate or

encourage geographic preference. Section 3 is such a statute

encouraging geographic preference. Additionally, the Department notes

that neither the section 3 statute nor the part 135 interim rule

supersedes the general requirement of 24 CFR 85.36(c) that all

procurement transactions be conducted in a competitive manner.

Reduced Monitoring Responsibilities of Recipients

Several housing authority commenters objected to the requirement in

the rule that they must monitor the operations of their contractors and

subcontractors to ensure compliance with section 3. They stated that

this requirement imposes a significant administrative burden on

recipients, and the rule provided no guidance on how recipients should

undertake this monitoring function.

The interim rule removes the provision in the proposed rule that

required recipients to ``monitor'' the operations of their contractors

and subcontractors to ensure compliance with section 3. While the

interim rule continues to require that recipients ``ensure'' that their

contractors and subcontractors comply with section 3, the rule (see

Sec. 135.32) clarifies that this responsibility to ``ensure

compliance'' means that a recipient: (1) Should refrain from

contracting with contractors for which the recipient has received

notice or has knowledge that the contractor has been found in violation

of the regulations in part 135; (2) should respond to complaints made

to the recipient by section 3 residents or section 3 business concerns

that a contractor or subcontractor is not in compliance with the part

135 regulations; and (3) must cooperate with the Department in

obtaining the compliance of contractors and subcontractors when

allegations are made and supported that the recipient's contractors and

subcontractors are not in compliance with the regulations of part 135.

Revisions to Enforcement Section

Several commenters criticized the enforcement provisions in the

proposed rule. The commenters either found the enforcement provisions

too weak, or too severe for a statute that requires recipients,

contractors, and subcontractors to make a good faith effort to employ

section 3 residents, and contract with section 3 business concerns.

The Department believes that the interim rule provides for an

enforcement process that promotes compliance with section 3, provides

relief to complainants where appropriate, encourages resolution at the

lowest possible level (i.e., resolutions among the parties involved in

the complaint), strives for an informal resolution whenever possible,

and when necessary, provides for the Assistant Secretary for Fair

Housing and Equal Opportunity to impose a resolution on the parties

involved, which resolution will be effective unless it is appealed

within 15 days of notice of the imposed resolution. The interim rule

continues to provide for the referral of the complaint for resolution

under the procedures and sanctions provided in the regulations

governing the section 3 covered assistance.

Reduced Recordkeeping Requirements

The majority of the commenters complained that the proposed rule

was unduly burdensome with respect to recordkeeping requirements. As

discussed in this section, the interim rule substantially reduces those

requirements.

For HAs, the interim rule removes the regulatory provision that

required HAs to undertake specific procurement procedures which

required the recipient to negotiate and agree upon, and to document the

``best efforts'' to be undertaken by a contractor before the award of

the contract to the contractor. For HAs, the interim rule removes the

requirement to amend HA personnel policies to include a statement that

the HA's personnel practices provide preference for low- and very low-

income persons in training and employment opportunities. For all

recipients, the interim rule removes the requirement to amend any

written procurement policies to include a statement that the

recipient's procurement practices provide preference for section 3

business concerns. For all recipients, the interim rule also removes

the requirement to document the mechanism by which the recipient

ensured that its contractors and subcontractors complied with the

section 3 preference requirements.

Additionally, the information that the Department does require is

largely information that the recipient, contractor, or subcontractor

already maintains. Recipients, contractors, and subcontractors engaged

in hiring, or in contracting are already required by other statutes and

regulations to maintain information on the number of new hires, the

names and addresses of these employees, the race, ethnic origin and

gender of the employees, and the positions for which they were

employed, and the salary provided. For contracts, the number of

contracts awarded, the party to whom the contract was awarded, the

nature of the contract and dollar value are data recorded by the

recipient or contractor. The additional information that this interim

rule requires is the income level of the employees hired (this

information is needed to determine if they are section 3 residents) and

the status of the business concern as a section 3 business concern. The

income level of the employees is information that the Department must

have to fulfill its responsibilities under section 3. The statute

requires the Secretary of HUD to ensure that economic opportunities are

being directed to low- and very low-income persons.

Solicitation of Additional Public Comment

The foregoing presents the significant changes made to the October

8, 1993 proposed rule by this interim rule. The Department solicits

comments on these changes, additional suggestions for implementation of

section 3, and such other issues as the commenters believe that the

Department should consider before publication of the final rule.

VI. Discussion of Additional Public Comments

This section discusses additional issues raised by the commenters,

and the Department's response to these issues. These comments may have

prompted additional, but less significant, changes to the rule. The

discussion begins with comments of general applicability, and is

followed by a discussion of comments received on specific sections of

the rule. This section does not discuss comments that were either

generally laudatory or generally critical of the proposed rule, either

of style or substantive comment, or that offered editorial suggestions,

or suggestions regarding format that would not affect the meaning of

the regulatory provisions.

General Comments

Comment. One commenter stated that the proposed rulemaking

procedure did not provide adequate participation by residents and

resident organizations, that the informal meetings held at the

Department in March were strictly for the benefit of industry

associations.

Response. Residents and resident organizations were invited, and

attended the two informal meetings held in March 1993. The preamble to

the proposed rule did not include a complete listing of all individuals

and organizations attending the March meetings. Individuals and

organizations representing residents and other low- and very low-income

persons that attended these meetings included the National Housing Law

Project, the Kenilworth Parkside Resident Management Corporation, the

National Association of Resident Management Corporations, and Bromley

Heath Tenant Management Corporation.

Comment. Three commenters asked why section 3 is administered by

the Office of Fair Housing and Equal Opportunity. The commenters stated

that since section 3 is actually implemented in public and Indian

housing, and housing, and community development programs, it should be

administered by the offices for these programs.

Response. The Secretary has delegated the functions and

responsibilities of the Secretary under section 3 to the Assistant

Secretary for Fair Housing and Equal Opportunity (FHEO). The delegation

of authority to the Assistant Secretary for FHEO dates back to the

issuance of the first regulations for part 135 in 1973. One of the

reasons for delegating responsibility to the Assistant Secretary for

FHEO is that, nationally, a disproportionate number of low- and very

low-income persons residing in family public housing developments, and

in neighborhoods receiving housing and community development

assistance, are racial and ethnic minorities, a group that has been

subject to discrimination in employment, housing, financing and other

areas. Since section 3 specifically pertains to matters of employment

(whether individual hiring or through the award of contracts) FHEO is

the office with expertise in addressing matters of discrimination in

employment. This expertise will be beneficial in addressing complaints

of recipient or contractor noncompliance with section 3.

Comment. Twenty-eight commenters stated that the rule imposes a

tremendous administrative burden on recipients and a costly one. The

commenters stated that additional Federal funding is needed to

undertake the monitoring and reporting and recordkeeping required by

the rule.

Response. The Department acknowledges that compliance with section

3 is not without cost or burden to recipients and contractors, but that

burden, in large part, is imposed by statute. The statute requires

recipients, their contractors, and subcontractors, to provide, to the

greatest extent feasible, economic opportunities to low- and very low-

income persons. To meet this statutory requirement, recipients,

contractors, and subcontractors must undertake certain actions and

efforts to make low- and very low-income persons aware of economic

opportunities generated from the expenditure of HUD financial

assistance, and to encourage their application for these opportunities.

The statute requires the Secretary of HUD to ensure that economic

opportunities generated from the expenditure of HUD financial

assistance are being directed, to the greatest extent feasible, to low-

and very low-income persons. To meet this statutory requirement, the

Secretary of HUD must solicit certain information from recipients to

ensure that they are undertaking the actions and efforts required by

statute. The Department, however, has made every effort to minimize the

burden on recipients and contractors.

In response to comments on the proposed rule, staff from the Office

of Fair Housing and Equal Opportunity invited various groups

representative of recipients, contractors, and residents for an

informal meeting held at HUD Headquarters on February 23, 1994, to

discuss the monitoring, reporting and recordkeeping requirements

proposed to be imposed on recipients by the October 8, 1993 rule. (A

summary of the meeting's discussion, and a list of the attendees at the

meeting is part of the docket file for this rule.) Following

consideration of comments at this meeting, in addition to comments

received on the proposed rule, the Department has revised the rule. The

interim rule reduces, to the greatest extent possible, the

administrative burden on recipients from that set forth in the October

8, 1993 proposed rule. The ways in which the administrative burden has

been reduced were discussed in Section V of the preamble.

Comment. A few commenters stated that the Department must commit to

working closely with housing authorities to implement and comply with

the new section 3 regulations.

Response. The Office of Fair Housing and Equal Opportunity (FHEO)

has announced a 30-site technical assistance initiative beginning in FY

1995 to help recipients understand their section 3 responsibilities and

to help them design and implement effective programs and procedures to

make training, employment and contracts available to section 3

residents. FHEO is planning to provide further guidance through

participation in conferences with associations representing recipients

and contractors. With support from the private sector, FHEO is

developing detailed guidance material that will assist recipients and

residents with understanding section 3, and the responsibilities

imposed on recipients. Additionally, the FY 1995 legislative proposal

would make expenses associated with implementation of section 3

eligible costs under section 3 covered programs. Further, the FY 1995

Budget includes a request for funding to establish ``economic

opportunity centers'' that will link low-income persons with jobs and

contracts generated by HUD-assisted projects and activities. These

centers will provide technical and financial assistance to qualified

residents, as well as assistance to HUD recipients in recruiting,

training and hiring of low-income persons.

Comment. Other commenters stated that the rule should require

recipients to provide training and other supportive services to low-

and very low-income persons to ensure that these persons will be

qualified for employment opportunities that become available through

section 3 efforts.

Response. As stated in Section V of this preamble, section 3 does

not require recipients or contractors to create training programs for

low- and very low-income persons, or to create or provide any other

services to low- and very low-income persons solely for the sake of

providing opportunity programs for low- or very low-income persons.

Section 3 requires that where section 3 covered assistance will

generate economic opportunities (i.e., not out of necessity to serve

low- or very low-income persons, but out of necessity to serve the

employment or contracting needs of the recipient or contractor), these

opportunities must be directed to section 3 residents and section 3

business concerns.

Comment. Several commenters offered suggestions on implementation

of section 3, including establishing section 3 target zones in which

individuals residing in those zones would be given the section 3

preference; maintaining the affirmative action plan that is currently

required in the codified part 135 regulations; providing a financial

reward to recipients and contractors that exceed minimum section 3

requirements; providing for ``first source'' agreements with resident

councils and community organizations; and establishing permanent

section 3 committees in each jurisdiction to oversee the planning and

implementation of section 3 within the jurisdiction.

Response. The Department is appreciative of all these suggestions

and others that were offered by commenters. The statute does not permit

the Department to adopt many of the suggestions made by the commenters.

The Department believes that the streamlined procedures and increased

flexibility provided in the interim rule will make for effective

implementation of section 3.

Assistance/Program Covered

Comment. One commenter stated that section 3 should apply to

programs that serve purposes similar to programs funded by sections 5,

9, and 14 of the U.S. Housing Act of 1937. The commenter specifically

cited the Urban Revitalization Demonstration Program, which is similar

to the section 14 modernization grant program.

Response. Although the statute is very specific concerning the

types of public and Indian housing assistance covered by section 3, to

the extent that any HUD housing or community development assistance is

expended for housing rehabilitation, housing construction or other

public construction, the HUD assistance is covered by section 3, and

that would include assistance provided under the Urban Revitalization

Demonstration Program.

Comment. One commenter stated that section 3 should apply to

housing and community development programs administered by other

Federal Agencies. The commenter noted that the Department of

Agriculture has not only the Farmers Home Administration rental and

homeownership programs for low-income people, but water and sewer

community development programs, and the Department of Commerce

administers a number of programs designed to stimulate small businesses

and other investments that promote the development of communities.

Response. The statute is very clear that application of section 3

only extends to HUD housing and community development programs.

Comment. A few commenters requested that the rule include a list of

HUD programs to which section 3 applies.

Response. Because programs to which section 3 applies may change

over time (new programs are created, existing programs are terminated),

the Department declines to include in the regulation a list of section

3 covered programs. HUD programs that are covered by section 3 will

contain reference to applicability of section 3 in their program

regulations, guidelines, or notices of funding availability.

Additionally, FHEO will attempt to publish annually, at the beginning

of each Federal Fiscal Year, a notice in the Federal Register of HUD

programs subject to section 3.

Comment. One commenter asked that the rule clarify the relationship

between part 135 and part 963.

Response. Part 963 entitled ``Contracting with Resident-Owned

Businesses'' was created before the recent amendments to section 3 by

the 1992 Act. Section 3, before the 1992 amendments, while providing a

preference for low-income persons, did not give priority consideration

to residents of public housing, or to businesses owned by residents of

public housing. Accordingly, the purpose of the part 963 program, at

the time of creation, was to encourage (not require) PHAs, in their

contracting, to award contracts to section 3 business concerns.

To a large extent, the new section 3 regulations supersede part

963. Part 135 requires (consistent with section 3) that PHAs give

preference in contracting to resident-owned businesses. Part 963 does

not require preference in contracting with resident-owned businesses

because part 963 is not based on statutory authority that mandates this

preference. Part 963 is totally voluntary. Part 963 imposes a monetary

cap on the amount of contract that can be awarded to a resident-owned

business. (This amount is being increased from $500,000 to $1,000,000

in the conforming amendment rule being published under a separate rule

in this edition of the Federal Register.) No monetary cap is imposed by

part 135. Contracts covered by part 963 include contracts for the

purchase of materials and supplies. Covered contracts under part 135,

as discussed earlier in this preamble, do not include contracts for the

purchase of materials and supplies because the section 3 statute uses

the term ``contract for work.'' Part 963 complements section 3, and

provides an effective means by which the section 3 contracting

preference can be implemented.

Definitions

Comment. One commenter stated that the definition of ``business

concern'' should include nonprofit enterprises. The commenter stated

that nonprofit enterprises frequently are major sources of employment

for low-income persons, particularly public housing residents.

Response. The Department believes that one of the principal

purposes of section 3 is to promote the growth of ``profit-making''

enterprises owned by low-income persons, and that substantially employ

low-income persons, and to encourage business concerns that are not

major sources of employment for low-income persons to increase their

employment of these persons.

Comment. One commenter stated that the definition of ``contractor''

was not consistent with the statutory language. The commenter stated

that section 915 of the 1992 Act makes clear that section 3 covered

contractors are contractors employed by public and Indian housing

authorities and by units of local government receiving Federal

financial assistance. The commenter stated that the definition for this

term should be revised to state that a contractor ``is any entity

employed by a public housing authority or a unit of local government to

perform work on a section 3 covered project.''

Response. The Department declines to adopt the change recommended

by the commenter. The statute does not limit contractors to those

employed by HAs or units of local government. The requirements of

section 3 attach to covered HUD assistance. The definition for

``contractor'' provided in the rule is consistent with the statute.

Comment. One commenter stated that the definition of metropolitan

area is too geographically broad and will impede the effectiveness of

section 3.

Response. The definition of ``metropolitan area'' is the standard

definition for this term used in all, or if not all, the majority of

Federal regulations. The statute recognized that ``metropolitan area''

covers a broad geographical area, which is why the statute directs

recipients to first give preferences to low- and very low-income

residents and businesses within smaller geographical areas. For HAs,

these smaller geographical areas are housing developments; and for

other recipients, these smaller geographical areas are the service area

or neighborhood in which the section 3 covered project is located.

Comment. Four commenters objected to the inclusion of ``soft

costs'' in the definition of ``project cost.'' Soft costs are costs

associated with the financing and development of the project and

relocation costs and land acquisition costs. The commenters stated that

these costs which refer to costs such as accounting, architectural, and

engineering are ``unrealistic.''

Response. The definition of ``project cost'' is no longer in the

regulation. By ``unrealistic,'' the Department assumes that the

commenters mean that recipients or contractors will be unable to

identify section 3 residents or section 3 business concerns that have

skills in the areas of accounting, architecture, engineering, and

related professions (professional opportunities that may be covered by

section 3 depending upon the project or activity for which section 3

covered assistance is expended). The recent closing of military bases,

and factories, and major industry plants have left many skilled

professionals unemployed. Therefore, it is not totally unrealistic that

low- or very low-income persons may have skills in the professions

identified above.

Comment. Four commenters stated that the definition of ``service

area'' covered too broad a geographical area, and should be limited.

Response. The proposed rule defined ``service area'' to mean the

geographical area in which the persons benefitting from the section 3

covered project reside, but which shall not extend beyond the unit of

general local government in which the section 3 covered assistance is

expended. The Department recognizes that this definition allows

recipients to define the service area narrowly or broadly. The

Department prefers to give recipients the flexibility to define the

applicable service area, and declines at this stage to impose further

limitations on recipients' assessment of the applicable service area.

The Department anticipates that recipients will make a good faith

effort to determine a realistic service area.

Section 3 Clause

Comment. Several commenters submitted comments on the section 3

clause. One commenter requested that the clause be eliminated. Another

commenter requested that the clause be used as model or advisory

language, but not made mandatory for all section 3 covered contracts. A

few commenters stated that the clause should include the penalties to

be imposed for violation of the part 135 regulations, or it should list

the minimum efforts to be undertaken by contractors. Other commenters

offered a number of editorial suggestions.

Response. The Department declines to eliminate the clause or to

make it only advisory. The Department has made a number of editorial

changes, but the clause is substantially the same as that set forth in

the October 8, 1993 proposed rule.

Apprenticeship Programs

Comment. A few commenters expressed concern about language in the

proposed rule that stated that participation in an approved

apprenticeship program does not, in and of itself, demonstrate

compliance with the regulations of part 135. The commenters stated that

such language may discourage HAs from investing the time necessary to

set up apprenticeship programs.

Response. The Department's intent was not to discourage

participation by HAs in establishing apprenticeship programs, but to

advise that participation in training programs in which the extent of

an HA's participation is limited to referral of residents to the

training program does not constitute compliance with section 3. The

HA's participation must be more active, and provide for training and

employment.

Comment. Nine commenters stated that the rule does not address

Davis-Bacon wage rate requirements or how to obtain exemptions from

these requirements.

Response. The interim rule addresses the Davis-Bacon wage rate

requirements, but not exemptions from these requirements. Section 3

does not provide a legal basis for exemption from Davis-Bacon

requirements where they are otherwise applicable to section 3 covered

projects.

Employment Opportunities

Comment. Two commenters asked whether residents that are already in

the employ of the HA may participate in decisions on the employment of,

or award of contracts to, other residents.

Response. This decision is one that rests with the housing

authority. The housing authority, however, should take measures to

ensure that there is no conflict of interest in hiring decisions and in

the award of contracts involving other residents. For example, a

resident employed by the PHA and that has a financial interest in a

resident-owned business should not be involved in the HA's decisions

awarding contracts to resident-owned businesses.

Comment. One commenter asked how an HA, in employing a public

housing resident, will deal with issues such as workers' compensation

insurance.

Response. The Department expects an HA to address this issue as it

would in employing anyone, whether the individual is a public housing

resident or not. Most individuals do not seek employment with workers'

compensation already in place.

Comment. Four commenters stated that efforts to recruit low- and

very low-income residents should be required to be undertaken in

languages other than English as appropriate for the community served by

the HA.

Response. The Department declines to impose this as a requirement

on HAs, but notes that HAs that serve populations that contain

substantial numbers of persons for whom English is not their first

language have been sensitive to providing information in languages

other than English.

Comment. One commenter asked that an HA that works with other

organizations to assist residents in locating job opportunities or

improving their job opportunities should be found to be in compliance

with section 3.

Response. An HA that undertakes such action, which is commendable,

may very well be in compliance with section 3. The Department

emphasizes, however, that the requirements of section 3 are triggered

by economic opportunities generated by the expenditure of certain HUD

assistance. A housing authority that uses funds, other than section 3

covered assistance, to improve the economic situation of their

residents deserves commendation and credit. However, the fact that the

HA may be locating economic opportunities for their residents through

such means, does not relieve the HA of the responsibility imposed by

section 3 to recruit low- and very low-income residents, or to solicit

section 3 business concerns for economic opportunities arising from the

expenditure of section 3 covered activity. The fact that economic

opportunities are generated from section 3 covered assistance triggers

the applicability of section 3.

Comment. One commenter stated that the rule should require

recipients and contractors to provide long-term employment

opportunities, and not simply seasonal or temporary employment.

Response. The Department cannot dictate the types of jobs for which

recipients and contractors must give preference to low-income and very

low-income persons. Again, section 3 is not a job creation program. The

economic opportunities that are available to low and very low-income

persons are those that the recipient or contractor has determined are

necessary for the project or activity funded by section 3 covered

assistance and that would be available on the job or contract market

with or without section 3. However, the objective of section 3 is to

provide low- and very low-income persons, especially those on

government assistance, with the types of economic opportunities that

will allow them to become self-sufficient.

Comment. A few commenters stated that the rule should emphasize

that section 3 does not mandate the employment of any low-income person

who is not qualified for job for which he or she applied.

Response. This statement is made in the text of the regulation, and

the Department believes this statement clarifies this point without

further elaboration.

Monitoring by Recipients

Comment. A majority of the commenters raised objections to the

requirement in the proposed rule that recipients must monitor the

operations of their contractors and subcontractors to ensure compliance

with the regulations of part 135, and questioned how recipients were to

perform this monitoring function.

Response. As discussed in the response to the fourth comment under

the ``General Comments'' section, while the interim rule continues to

require recipients to ensure that their contractors and subcontractors

are in compliance with section 3, this responsibility is not the same

as the ``monitoring'' responsibility imposed on recipients by the

proposed rule.

VII. Other Matters

Environmental Impact

A Finding of No Significant Impact with respect to the environment

was made in accordance with HUD regulations at 24 CFR part 50, which

implements section 102(2)(C) of the National Environmental Policy Act

of 1969 (NEPA) at the time of development of the proposed rule. This

Finding remains applicable to this interim rule, and is available for

public inspection between 7:30 a.m. and 5:30 p.m. weekdays in the

Office of the Rules Docket Clerk, Office of the General Counsel,

Department of Housing and Urban Development, Room 10276, 451 Seventh

Street, SW, Washington, DC 20410.

Executive Order 12866

This interim rule was reviewed by the Office of Management and

Budget under Executive Order 12866 as a significant regulatory action.

Any changes made in this interim rule as a result of that review are

clearly identified in the docket file, which is available for public

inspection in the Office of HUD's Rules Docket Clerk, Room 10276, 451

Seventh St. SW, Washington, DC.

Impact on Small Entities

The Secretary, in accordance with the Regulatory Flexibility Act (5

U.S.C. 605(b)), has reviewed and approved this interim rule, and, in so

doing, certifies that the interim rule would not have a significant

economic impact on a substantial number of small entities. Recipients

and contractors that receive HUD financial assistance subject to the

requirements are currently required, to the greatest extent feasible,

to give economic opportunities generated by such assistance to low-

income persons, and to businesses owned by or that substantially employ

low-income persons. This interim rule, which implements the amendments

made to section 3 by the 1992 Act, provides greater guidance on how the

requirements of section 3 may be met, and decreases the administrative

burden on recipients from that contained in the existing part 135

regulations. The interim rule eliminates much of the recordkeeping and

reporting requirements in the proposed rule, and provides recipients

and contractors with greater flexibility in complying with section 3.

While the Department anticipates that the interim rule will

increase the number of small businesses that will benefit from the

implementation of amended section 3, the Department also anticipates

that the lower dollar threshold in HUD's housing and community

development programs (lower than that provided in the previous codified

part 135 regulations), and the absence of a dollar threshold in HUD's

public and Indian housing programs, may increase the number of small

business concerns that will be subject to compliance with the part 135

regulations. However, as with those small businesses expected to

benefit from the revised part 135 regulations, the increase in the

number of small businesses that may be made subject to compliance with

part 135 is not considered so great as to constitute a significant

economic impact on a substantial number of small entities.

Federalism Impact

The General Counsel, as the Designated Official under section 6(a)

of Executive Order No. 12611, Federalism, has determined that this

interim rule would not have a substantial, direct effect on the States

or on the relationship between the Federal government and the States,

or on the distribution of power or responsibilities among the various

levels of government. The interim rule provides, consistent with

section 3, that the preference requirements of section 3 are to be

carried out consistent with existing Federal, State, and local laws and

regulations.

Impact on the Family

The General Counsel, as the Designated Official under Executive

Order 12606, The Family, has determined that the interim rule may have

the potential to promote family formation, maintenance, and general

well-being. If the revised part 135 regulations, implemented by this

interim rule, contribute to successful implementation of section 3, an

increased number of low-income persons will be employed which may

promote family unification and general well-being. Since the impact of

this interim rule is anticipated to be beneficial, no further review

under the Order is necessary.

Regulatory Agenda

This interim rule was listed as sequence number 1669 in the

Department's Semiannual Agenda of Regulations published on April 25,

1994 (59 FR 20424, 20466), under Executive Order 12826 and the

Regulatory Flexibility Act.

List of Subjects in 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.

Accordingly, 24 CFR part 135, consisting of Secs. 135.1 through

135.92 and Appendix to part 135, is revised to read as follows:

PART 135--ECONOMIC OPPORTUNITIES FOR LOW- AND VERY LOW-INCOME

PERSONS

Subpart A--General Provisions

Sec.

135.1 Purpose.

135.2 Effective date of regulation.

135.3 Applicability.

135.5 Definitions.

135.7 Delegation of authority.

135.9 Requirements applicable to HUD NOFAs for section 3 covered

programs.

135.11 Other laws governing training, employment, and contracting.

Subpart B--Economic Opportunities for Section 3 Residents and Section 3

Business Concerns

135.30 Numerical goals for meeting the greatest extent feasible

requirement.

135.32 Responsibilities of the recipient.

135.34 Preference for section 3 residents in training and

employment opportunities.

135.36 Preference for section 3 business concerns in contracting

opportunities.

135.38 Section 3 clause.

135.40 Providing other economic opportunities.

Subpart C--[Reserved]

Subpart D--Complaint and Compliance Review

135.70 General.

135.72 Cooperation in achieving compliance.

135.74 Section 3 compliance review procedures.

135.76 Filing and processing complaints.

Subpart E--Reporting and Recordkeeping

135.90 Reporting.

135.92 Recordkeeping and access to records.

Appendix to Part 135

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

Subpart A--General Provisions

Sec. 135.1 Purpose.

(a) Section 3. The purpose of section 3 of the Housing and Urban

Development Act of 1968 (12 U.S.C. 1701u) (section 3) is to ensure that

employment and other economic opportunities generated by certain HUD

financial assistance shall, to the greatest extent feasible, and

consistent with existing Federal, State and local laws and regulations,

be directed to low- and very low-income persons, particularly those who

are recipients of government assistance for housing, and to business

concerns which provide economic opportunities to low- and very low-

income persons.

(b) Part 135. The purpose of this part is to establish the

standards and procedures to be followed to ensure that the objectives

of section 3 are met.

Sec. 135.2 Effective date of regulation.

The regulations of this part will expire on June 30, 1995, unless

adopted by a final rule published on or before this date.

Sec. 135.3 Applicability.

(a) Section 3 covered assistance. Section 3 applies to the

following HUD assistance (section 3 covered assistance):

(1) Public and Indian housing assistance. Section 3 applies to

training, employment, contracting and other economic opportunities

arising from the expenditure of the following public and Indian housing

assistance:

(i) Development assistance provided pursuant to section 5 of the

U.S. Housing Act of 1937 (1937 Act);

(ii) Operating assistance provided pursuant to section 9 of the

1937 Act; and

(iii) Modernization assistance provided pursuant to section 14 of

the 1937 Act;

(2) Housing and community development assistance. Section 3 applies

to training, employment, contracting and other economic opportunities

arising in connection with the expenditure of housing assistance

(including section 8 assistance, and including other housing assistance

not administered by the Assistant Secretary of Housing) and community

development assistance that is used for the following projects;

(i) Housing rehabilitation (including reduction and abatement of

lead-based paint hazards, but excluding routine maintenance, repair and

replacement);

(ii) Housing construction; and

(iii) Other public construction.

(3) Thresholds--(i) No thresholds for section 3 covered public and

Indian housing assistance. The requirements of this part apply to

section 3 covered assistance provided to recipients, notwithstanding

the amount of the assistance provided to the recipient. The

requirements of this part apply to all contractors and subcontractors

performing work in connection with projects and activities funded by

public and Indian housing assistance covered by section 3, regardless

of the amount of the contract or subcontract.

(ii) Thresholds for section 3 covered housing and community

development assistance--(A) Recipient thresholds. The requirements of

this part apply to recipients of other housing and community

development program assistance for a section 3 covered project(s) for

which the amount of the assistance exceeds $200,000.

(B) Contractor and subcontractor thresholds. The requirements of

this part apply to contractors and subcontractors performing work on

section 3 covered project(s) for which the amount of the assistance

exceeds $200,000; and the contract or subcontract exceeds $100,000.

(C) Threshold met for recipients, but not contractors or

subcontractors. If a recipient receives section 3 covered housing or

community development assistance in excess of $200,000, but no contract

exceeds $100,000, the section 3 preference requirements only apply to

the recipient.

(b) Applicability of section 3 to entire project or activity funded

with section 3 assistance. The requirements of this part apply to the

entire project or activity that is funded with section 3 covered

assistance, regardless of whether the section 3 activity is fully or

partially funded with section 3 covered assistance.

(c) Applicability to Indian housing authorities and Indian tribes.

Indian housing authorities and tribes that receive HUD assistance

described in paragraph (a) of this section shall comply with the

procedures and requirements of this part to the maximum extent

consistent with, but not in derogation of, compliance with section 7(b)

of the Indian Self-Determination and Education Assistance Act (25

U.S.C. 450e(b)). (See 24 CFR part 905.)

(d) Other HUD assistance and other Federal assistance. Recipients,

contractors and subcontractors that receive HUD assistance, not listed

in paragraph (a) of this section, or other Federal assistance, are

encouraged to provide, to the greatest extent feasible, training,

employment, and contracting opportunities generated by the expenditure

of this assistance to low- and very low-income persons, and business

concerns owned by low- and very low-income persons, or which employ

low- and very low-income persons.

Sec. 135.5 Definitions.

As used in this part:

Annual Contributions Contract (ACC) means the contract under the

U.S. Housing Act of 1937 (1937 Act) between HUD and the PHA, or between

HUD and the IHA, that contains the terms and conditions under which HUD

assists the PHA or the IHA in providing decent, safe, and sanitary

housing for low income families. The ACC must be in a form prescribed

by HUD under which HUD agrees to provide assistance in the development,

modernization and/or operation of a low income housing project under

the 1937 Act, and the PHA or IHA agrees to develop, modernize and

operate the project in compliance with all provisions of the ACC and

the 1937 Act, and all HUD regulations and implementing requirements and

procedures. (The ACC is not a form of procurement contract.)

Applicant means any entity which makes an application for section 3

covered assistance, and includes, but is not limited to, any State,

unit of local government, public housing agency, Indian housing

authority, Indian tribe, or other public body, public or private

nonprofit organization, private agency or institution, mortgagor,

developer, limited dividend sponsor, builder, property manager,

community housing development organization (CHDO), resident management

corporation, resident council, or cooperative association.

Assistant Secretary means the Assistant Secretary for Fair Housing

and Equal Opportunity.

Business concern means a business entity formed in accordance with

State law, and which is licensed under State, county or municipal law

to engage in the type of business activity for which it was formed.

Business concern that provides economic opportunities for low- and

very low-income persons. See definition of ``section 3 business

concern'' in this section.

Contract. See the definition of ``section 3 covered contract'' in

this section.

Contractor means any entity which contracts to perform work

generated by the expenditure of section 3 covered assistance, or for

work in connection with a section 3 covered project.

Department or HUD means the Department of Housing and Urban

Development, including its Field Offices to which authority has been

delegated to perform functions under this part.

Employment opportunities generated by section 3 covered assistance

means all employment opportunities generated by the expenditure of

section 3 covered public and Indian housing assistance (i.e., operating

assistance, development assistance and modernization assistance, as

described in Sec. 135.3(a)(1)). With respect to section 3 covered

housing and community development assistance, this term means all

employment opportunities arising in connection with section 3 covered

projects (as described in Sec. 135.3(a)(2)), including management and

administrative jobs connected with the section 3 covered project.

Management and administrative jobs include architectural, engineering

or related professional services required to prepare plans, drawings,

specifications, or work write-ups; and jobs directly related to

administrative support of these activities, e.g., construction manager,

relocation specialist, payroll clerk, etc.

Housing authority (HA) means, collectively, public housing agency

and Indian housing authority.

Housing and community development assistance means any financial

assistance provided or otherwise made available through a HUD housing

or community development program through any grant, loan, loan

guarantee, cooperative agreement, or contract, and includes community

development funds in the form of community development block grants,

and loans guaranteed under section 108 of the Housing and Community

Development Act of 1974, as amended. Housing and community development

assistance does not include financial assistance provided through a

contract of insurance or guaranty.

Housing development means low-income housing owned, developed, or

operated by public housing agencies or Indian housing authorities in

accordance with HUD's public and Indian housing program regulations

codified in 24 CFR Chapter IX.

HUD Youthbuild programs mean programs that receive assistance under

subtitle D of Title IV of the National Affordable Housing Act, as

amended by the Housing and Community Development Act of 1992 (42 U.S.C.

12899), and provide disadvantaged youth with opportunities for

employment, education, leadership development, and training in the

construction or rehabilitation of housing for homeless individuals and

members of low- and very low-income families.

Indian housing authority (IHA) has the meaning given this term in

24 CFR part 905.

Indian tribes shall have the meaning given this term in 24 CFR part

571.

JTPA means the Job Training Partnership Act (29 U.S.C. 1579(a)).

Low-income person. See the definition of ``section 3 resident'' in

this section.

Metropolitan area means a metropolitan statistical area (MSA), as

established by the Office of Management and Budget.

Neighborhood area means:

(1) For HUD housing programs, a geographical location within the

jurisdiction of a unit of general local government (but not the entire

jurisdiction) designated in ordinances, or other local documents as a

neighborhood, village, or similar geographical designation.

(2) For HUD community development programs, see the definition, if

provided, in the regulations for the applicable community development

program, or the definition for this term in 24 CFR 570.204(c)(1).

New hires mean full-time employees for permanent, temporary or

seasonal employment opportunities.

Nonmetropolitan county means any county outside of a metropolitan

area.

Other HUD programs means HUD programs, other than HUD public and

Indian housing programs, that provide housing and community development

assistance for ``section 3 covered projects,'' as defined in this

section.

Public housing agency (PHA) has the meaning given this term in 24

CFR part 941.

Public housing resident has the meaning given this term in 24 CFR

part 963.

Recipient means any entity which receives section 3 covered

assistance, directly from HUD or from another recipient and includes,

but is not limited to, any State, unit of local government, PHA, IHA,

Indian tribe, or other public body, public or private nonprofit

organization, private agency or institution, mortgagor, developer,

limited dividend sponsor, builder, property manager, community housing

development organization, resident management corporation, resident

council, or cooperative association. Recipient also includes any

successor, assignee or transferee of any such entity, but does not

include any ultimate beneficiary under the HUD program to which section

3 applies and does not include contractors.

Secretary means the Secretary of Housing and Urban Development.

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 a business concern, as defined in

this section--

(1) That is 51 percent or more owned by section 3 residents; or

(2) Whose permanent, full-time employees include persons, at least

30 percent of whom are currently section 3 residents, or within three

years of the date of first employment with the business concern were

section 3 residents; or

(3) That provides evidence of a commitment to subcontract in excess

of 25 percent of the dollar award of all subcontracts to be awarded to

business concerns that meet the qualifications set forth in paragraphs

(1) or (2) in this definition of ``section 3 business concern.''

Section 3 clause means the contract provisions set forth in

Sec. 135.38.

Section 3 covered activity means any activity which is funded by

section 3 covered assistance public and Indian housing assistance.

Section 3 covered assistance means: (1) Public and Indian housing

development assistance provided pursuant to section 5 of the 1937 Act;

(2) Public and Indian housing operating assistance provided

pursuant to section 9 of the 1937 Act;

(3) Public and Indian housing modernization assistance provided

pursuant to section 14 of the 1937 Act;

(4) Assistance provided under any HUD housing or community

development program that is expended for work arising in connection

with:

(i) Housing rehabilitation (including reduction and abatement of

lead-based paint hazards, but excluding routine maintenance, repair and

replacement);

(ii) Housing construction; or

(iii) Other public construction project (which includes other

buildings or improvements, regardless of ownership).

Section 3 covered contract means a contract or subcontract

(including a professional service contract) awarded by a recipient or

contractor for work generated by the expenditure of section 3 covered

assistance, or for work arising in connection with a section 3 covered

project. ``Section 3 covered contracts'' do not include contracts

awarded under HUD's procurement program, which are governed by the

Federal Acquisition Regulation System (see 48 CFR, Chapter 1).

``Section 3 covered contracts'' also do not include contracts for the

purchase of supplies and materials. However, whenever a contract for

materials includes the installation of the materials, the contract

constitutes a section 3 covered contract. For example, a contract for

the purchase and installation of a furnace would be a section 3 covered

contract because the contract is for work (i.e., the installation of

the furnace) and thus is covered by section 3.

Section 3 covered project means the construction, reconstruction,

conversion or rehabilitation of housing (including reduction and

abatement of lead-based paint hazards), other public construction which

includes buildings or improvements (regardless of ownership) assisted

with housing or community development assistance.

Section 3 joint venture. See Sec. 135.40. Section 3 resident means:

(1) A public housing resident; or

(2) An individual who resides in the metropolitan area or

nonmetropolitan county in which the section 3 covered assistance is

expended, and who is:

(i) A low-income person, as this term is defined in section 3(b)(2)

of the 1937 Act (42 U.S.C. 1437a(b)(2)). Section 3(b)(2) of the 1937

Act defines this term to mean families (including single persons) whose

incomes do not exceed 80 per centum of the median income for the area,

as determined by the Secretary, with adjustments for smaller and larger

families, except that the Secretary may establish income ceilings

higher or lower than 80 per centum of the median for the area on the

basis of the Secretary's findings that such variations are necessary

because of prevailing levels of construction costs or unusually high or

low-income families; or

(ii) A very low-income person, as this term is defined in section

3(b)(2) of the 1937 Act (42 U.S.C. 1437a(b)(2)). Section 3(b)(2) of the

1937 Act (42 U.S.C. 1437a(b)(2)) defines this term to mean families

(including single persons) whose incomes do not exceed 50 per centum of

the median family income for the area, as determined by the Secretary

with adjustments for smaller and larger families, except that the

Secretary may establish income ceilings higher or lower than 50 per

centum of the median for the area on the basis of the Secretary's

findings that such variations are necessary because of unusually high

or low family incomes.

(3) A person seeking the training and employment preference

provided by section 3 bears the responsibility of providing evidence

(if requested) that the person is eligible for the preference.

Section 8 assistance means assistance provided under section 8 of

the 1937 Act (42 U.S.C. 1437f) pursuant to 24 CFR part 882, subpart G.

Service area means the geographical area in which the persons

benefitting from the section 3 covered project reside. The service area

shall not extend beyond the unit of general local government in which

the section 3 covered assistance is expended. In HUD's Indian housing

programs, the service area, for IHAs established by an Indian tribe as

a result of the exercise of the tribe's sovereign power, is limited to

the area of tribal jurisdiction.

Subcontractor means any entity (other than a person who is an

employee of the contractor) which has a contract with a contractor to

undertake a portion of the contractor's obligation for the performance

of work generated by the expenditure of section 3 covered assistance,

or arising in connection with a section 3 covered project.

Very low-income person. See the definition of ``section 3

resident'' in this section.

Youthbuild programs. See the definition of ``HUD Youthbuild

programs'' in this section.

Sec. 135.7 Delegation of authority.

Except as may be otherwise provided in this part, the functions and

responsibilities of the Secretary under section 3, and described in

this part, are delegated to the Assistant Secretary for Fair Housing

and Equal Opportunity. The Assistant Secretary is further authorized to

redelegate functions and responsibilities to other employees of HUD;

provided however, that the authority to issue rules and regulations

under this part, which authority is delegated to the Assistant

Secretary, may not be redelegated by the Assistant Secretary.

Sec. 135.9 Requirements applicable to HUD NOFAs for section 3 covered

programs.

(a) Certification of compliance with part 135. All notices of

funding availability (NOFAs) issued by HUD that announce the

availability of funding covered by section 3 shall include a provision

in the NOFA that notifies applicants that section 3 and the regulations

in part 135 are applicable to funding awards made under the NOFA.

Additionally the NOFA shall require as an application submission

requirement (which may be specified in the NOFA or application kit) a

certification by the applicant that the applicant will comply with the

regulations in part 135. (For PHAs, this requirement will be met where

a PHA Resolution in Support of the Application is submitted.) With

respect to application evaluation, HUD will accept an applicant's

certification unless there is evidence substantially challenging the

certification.

(b) Statement of purpose in NOFAs. (1) For competitively awarded

assistance in which the grants are for activities administered by an

HA, and those activities are anticipated to generate significant

training, employment or contracting opportunities, the NOFA must

include a statement that one of the purposes of the assistance is to

give to the greatest extent feasible, and consistent with existing

Federal, State and local laws and regulations, job training,

employment, contracting and other economic opportunities to section 3

residents and section 3 business concerns.

(2) For competitively awarded assistance involving housing

rehabilitation, construction or other public construction, where the

amount awarded to the applicant may exceed $200,000, the NOFA must

include a statement that one of the purposes of the assistance is to

give, to the greatest extent feasible, and consistent with existing

Federal, State and local laws and regulations, job training,

employment, contracting and other economic opportunities to section 3

residents and section 3 business concerns.

(c) Section 3 as NOFA evaluation criteria. Where not otherwise

precluded by statute, in the evaluation of applications for the award

of assistance, consideration shall be given to the extent to which an

applicant has demonstrated that it will train and employ section 3

residents and contract with section 3 business concerns for economic

opportunities generated in connection with the assisted project or

activity. The evaluation criteria to be utilized, and the rating points

to be assigned, will be specified in the NOFA.

Sec. 135.11 Other laws governing training, employment, and

contracting.

Other laws and requirements that are applicable or may be

applicable to the economic opportunities generated from the expenditure

of section 3 covered assistance include, but are not necessarily

limited to those listed in this section.

(a) Procurement standards for States and local governments (24 CFR

85.36)--(1) General. Nothing in this part 135 prescribes specific

methods of procurement. However, neither section 3 nor the requirements

of this part 135 supersede the general requirement of 24 CFR 85.36(c)

that all procurement transactions be conducted in a competitive manner.

Consistent with 24 CFR 85.36(c)(2), section 3 is a Federal statute that

expressly encourages, to the maximum extent feasible, a geographic

preference in the evaluation of bids or proposals.

(2) Flexible Subsidy Program. Multifamily project mortgagors in the

Flexible Subsidy Program are not required to utilize the methods of

procurement in 24 CFR 85.36(d), and are not permitted to utilize

methods of procurement that would result in their award of a contract

to a business concern that submits a bid higher than the lowest

responsive bid. A multifamily project mortgagor, however, must ensure

that, to the greatest extent feasible, the procurement practices it

selects provide preference to section 3 business concerns.

(b) Procurement standards for other recipients (OMB Circular No. A-

110). Nothing in this part prescribes specific methods of procurement

for grants and other agreements with institutions of higher education,

hospitals, and other nonprofit organizations. Consistent with the

requirements set forth in OMB Circular No. A-110, section 3 is a

Federal statute that expressly encourages a geographic preference in

the evaluation of bids or proposals.

(c) Federal labor standards provisions. Certain construction

contracts are subject to compliance with the requirement to pay

prevailing wages determined under Davis-Bacon Act (40 U.S.C. 276a--

276a-7) and implementing U.S. Department of Labor regulations in 29 CFR

part 5. Additionally, certain HUD-assisted rehabilitation and

maintenance activities on public and Indian housing developments are

subject to compliance with the requirement to pay prevailing wage

rates, as determined or adopted by HUD, to laborers and mechanics

employed in this work. Apprentices and trainees may be utilized on this

work only to the extent permitted under either Department of Labor

regulations at 29 CFR part 5 or for work subject to HUD-determined

prevailing wage rates, HUD policies and guidelines. These requirements

include adherence to the wage rates and ratios of apprentices or

trainees to journeymen set out in ``approved apprenticeship and

training programs,'' as described in paragraph (d) of this section.

(d) Approved apprenticeship and trainee programs. Certain

apprenticeship and trainee programs have been approved by various

Federal agencies. Approved apprenticeship and trainee programs include:

an apprenticeship program approved by the Bureau of Apprenticeship and

Training of the Department of Labor, or a State Apprenticeship Agency,

or an on-the-job training program approved by the Bureau of

Apprenticeship and Training, in accordance with the regulations at 29

CFR part 5; or a training program approved by HUD in accordance with

HUD policies and guidelines, as applicable. Participation in an

approved apprenticeship program does not, in and of itself, demonstrate

compliance with the regulations of this part.

(e) Compliance with Executive Order 11246. Certain contractors

covered by this part are subject to compliance with Executive Order

11246, as amended by Executive Order 12086, and the Department of Labor

regulations issued pursuant thereto (41 CFR chapter 60) which provide

that no person shall be discriminated against on the basis of race,

color, religion, sex, or national origin in all phases of employment

during the performance of Federal or Federally assisted construction

contracts.

Subpart B--Economic Opportunities for Section 3 Residents and

Section 3 Business Concerns

Sec. 135.30 Numerical goals for meeting the greatest extent feasible

requirement.

(a) General. (1) Recipients and covered contractors may demonstrate

compliance with the ``greatest extent feasible'' requirement of section

3 by meeting the numerical goals set forth in this section for

providing training, employment, and contracting opportunities to

section 3 residents and section 3 business concerns.

(2) The goals established in this section apply to the entire

amount of section 3 covered assistance awarded to a recipient in any

Federal Fiscal Year (FY), commencing with the first FY following the

effective date of this rule.

(3) For recipients that do not engage in training, or hiring, but

award contracts to contractors that will engage in training, hiring,

and subcontracting, recipients must ensure that, to the greatest extent

feasible, contractors will provide training, employment, and

contracting opportunities to section 3 residents and section 3 business

concerns.

(4) The numerical goals established in this section represent

minimum numerical targets.

(b) Training and employment. The numerical goals set forth in

paragraph (b) of this section apply to new hires. The numerical goals

reflect the aggregate hires. Efforts to employ section 3 residents, to

the greatest extent feasible, should be made at all job levels.

(1) Numerical goals for section 3 covered public and Indian housing

programs. Recipients of section 3 covered public and Indian housing

assistance (as described in Sec. 135.5) and their contractors and

subcontractors may demonstrate compliance with this part by committing

to employ section 3 residents as:

(i) 10 percent of the aggregate number of new hires for the one

year period beginning in FY 1995;

(ii) 20 percent of the aggregate number of new hires for the one

period beginning in FY 1996;

(iii) 30 percent of the aggregate number of new hires for one year

period beginning in FY 1997 and continuing thereafter.

(2) Numerical goals for other HUD programs covered by section 3.

(i) Recipients of section 3 covered housing assistance provided under

other HUD programs, and their contractors and subcontractors (unless

the contract or subcontract awards do not meet the threshold specified

in Sec. 135.3(a)(3)) may demonstrate compliance with this part by

committing to employ section 3 residents as 10 percent of the aggregate

number of new hires for each year over the duration of the section 3

project;

(ii) Where a managing general partner or management agent is

affiliated, in a given metropolitan area, with recipients of section 3

covered housing assistance, for an aggregate of 500 or more units in

any fiscal year, the managing partner or management agent may

demonstrate compliance with this part by committing to employ section 3

residents as:

(A) 10 percent of the aggregate number of new hires for the one

year period beginning in FY 1995;

(B) 20 percent of the aggregate number of new hires for the one

year period beginning in FY 1996;

(C) 30 percent of the aggregate number of new hires for the one

year period beginning in FY 1997, and continuing thereafter.

(3) Recipients of section 3 covered community development

assistance, and their contractors and subcontractors (unless the

contract or subcontract awards do not meet the threshold specified in

Sec. 135.3(a)(3)) may demonstrate compliance with the requirements of

this part by committing to employ section 3 residents as:

(i) 10 percent of the aggregate number of new hires for the one

year period beginning in FY 1995;

(ii) 20 percent of the aggregate number of new hires for the one

year period beginning in FY 1996; and

(iii) 30 percent of the aggregate number of new hires for the one

year period beginning in FY 1997 and continuing thereafter.

(c) Contracts. Numerical goals set forth in paragraph (c) of this

section apply to contracts awarded in connection with all section 3

covered projects and section 3 covered activities. Each recipient and

contractor and subcontractor (unless the contract or subcontract awards

do not meet the threshold specified in Sec. 135.3(a)(3)) may

demonstrate compliance with the requirements of this part by committing

to award to section 3 business concerns:

(1) At least 10 percent of the total dollar amount of all section 3

covered contracts for building trades work for maintenance, repair,

modernization or development of public or Indian housing, or for

building trades work arising in connection with housing rehabilitation,

housing construction and other public construction; and

(2) At least three (3) percent of the total dollar amount of all

other section 3 covered contracts.

(d) Safe harbor and compliance determinations. (1) In the absence

of evidence to the contrary, a recipient that meets the minimum

numerical goals set forth in this section will be considered to have

complied with the section 3 preference requirements.

(2) In evaluating compliance under subpart D of this part, a

recipient that has not met the numerical goals set forth in this

section has the burden of demonstrating why it was not feasible to meet

the numerical goals set forth in this section. Such justification may

include impediments encountered despite actions taken. A recipient or

contractor also can indicate other economic opportunities, such as

those listed in Sec. 135.40, which were provided in its efforts to

comply with section 3 and the requirements of this part.

Sec. 135.32 Responsibilities of the recipient.

Each recipient has the responsibility to comply with section 3 in

its own operations, and ensure compliance in the operations of its

contractors and subcontractors. This responsibility includes but may

not be necessarily limited to:

(a) Implementing procedures designed to notify section 3 residents

about training and employment opportunities generated by section 3

covered assistance and section 3 business concerns about contracting

opportunities generated by section 3 covered assistance;

(b) Notifying potential contractors for section 3 covered projects

of the requirements of this part, and incorporating the section 3

clause set forth in Sec. 135.38 in all solicitations and contracts.

(c) Facilitating the training and employment of section 3 residents

and the award of contracts to section 3 business concerns by

undertaking activities such as described in the Appendix to this part,

as appropriate, to reach the goals set forth in Sec. 135.30.

Recipients, at their own discretion, may establish reasonable numerical

goals for the training and employment of section 3 residents and

contract award to section 3 business concerns that exceed those

specified in Sec. 135.30;

(d) Assisting and actively cooperating with the Assistant Secretary

in obtaining the compliance of contractors and subcontractors with the

requirements of this part, and refraining from entering into any

contract with any contractor where the recipient has notice or

knowledge that the contractor has been found in violation of the

regulations in 24 CFR part 135.

(e) Documenting actions taken to comply with the requirements of

this part, the results of actions taken and impediments, if any.

(f) A State or county which distributes funds for section 3 covered

assistance to units of local governments, to the greatest extent

feasible, must attempt to reach the numerical goals set forth in 135.30

regardless of the number of local governments receiving funds from the

section 3 covered assistance which meet the thresholds for

applicability set forth at 135.3. The State or county must inform units

of local government to whom funds are distributed of the requirements

of this part; assist local governments and their contractors in meeting

the requirements and objectives of this part; and monitor the

performance of local governments with respect to the objectives and

requirements of this part.

Sec. 135.34 Preference for section 3 residents in training and

employment opportunities.

(a) Order of providing preference. Recipients, contractors and

subcontractors shall direct their efforts to provide, to the greatest

extent feasible, training and employment opportunities generated from

the expenditure of section 3 covered assistance to section 3 residents

in the order of priority provided in paragraph (a) of this section.

(1) Public and Indian housing programs. In public and Indian

housing programs, efforts shall be directed to provide training and

employment opportunities to section 3 residents in the following order

of priority:

(i) Residents of the housing development or developments for which

the section 3 covered assistance is expended (category 1 residents);

(ii) Residents of other housing developments managed by the HA that

is expending the section 3 covered housing assistance (category 2

residents);

(iii) Participants in HUD Youthbuild programs being carried out in

the metropolitan area (or nonmetropolitan county) in which the section

3 covered assistance is expended (category 3 residents);

(iv) Other section 3 residents.

(2) Housing and community development programs. In housing and

community development programs, priority consideration shall be given,

where feasible, to:

(i) Section 3 residents residing in the service area or

neighborhood in which the section 3 covered project is located

(collectively, referred to as category 1 residents); and

(ii) Participants in HUD Youthbuild programs (category 2

residents).

(iii) Where the section 3 project is assisted under the Stewart B.

McKinney Homeless Assistance Act (42 U.S.C. 11301 et seq.), homeless

persons residing in the service area or neighborhood in which the

section 3 covered project is located shall be given the highest

priority;

(iv) Other section 3 residents.

(3) Recipients of housing assistance programs administered by the

Assistant Secretary for Housing may, at their own discretion, provide

preference to residents of the housing development receiving the

section 3 covered assistance within the service area or neighborhood

where the section 3 covered project is located.

(4) Recipients of community development programs may, at their own

discretion, provide priority to recipients of government assistance for

housing, including recipients of certificates or vouchers under the

Section 8 housing assistance program, within the service area or

neighborhood where the section 3 covered project is located.

(b) Eligibility for preference. A section 3 resident seeking the

preference in training and employment provided by this part shall

certify, or submit evidence to the recipient contractor or

subcontractor, if requested, that the person is a section 3 resident,

as defined in Sec. 135.5. (An example of evidence of eligibility for

the preference is evidence of receipt of public assistance, or evidence

of participation in a public assistance program.)

(c) Eligibility for employment. Nothing in this part shall be

construed to require the employment of a section 3 resident who does

not meet the qualifications of the position to be filled.

Sec. 135.36 Preference for section 3 business concerns in contracting

opportunities.

(a) Order of providing preference. Recipients, contractors and

subcontractors shall direct their efforts to award section 3 covered

contracts, to the greatest extent feasible, to section 3 business

concerns in the order of priority provided in paragraph (a) of this

section.

(1) Public and Indian housing programs. In public and Indian

housing programs, efforts shall be directed to award contracts to

section 3 business concerns in the following order of priority:

(i) Business concerns that are 51 percent or more owned by

residents of the housing development or developments for which the

section 3 covered assistance is expended, or whose full-time, permanent

workforce includes 30 percent of these persons as employees (category 1

businesses);

(ii) Business concerns that are 51 percent or more owned by

residents of other housing developments or developments managed by the

HA that is expending the section 3 covered assistance, or whose full-

time, permanent workforce includes 30 percent of these persons as

employees (category 2 businesses); or

(iii) HUD Youthbuild programs being carried out in the metropolitan

area (or nonmetropolitan county) in which the section 3 covered

assistance is expended (category 3 businesses).

(iv) Business concerns that are 51 percent or more owned by section

3 residents, or whose permanent, full-time workforce includes no less

than 30 percent section 3 residents (category 4 businesses), or that

subcontract in excess of 25 percent of the total amount of subcontracts

to business concerns identified in paragraphs (a)(1)(i) and (a)(1)(ii)

of this section.

(2) Housing and community development programs. In housing and

community development programs, priority consideration shall be given,

where feasible, to:

(i) Section 3 business concerns that provide economic opportunities

for section 3 residents in the service area or neighborhood in which

the section 3 covered project is located (category 1 businesses); and

(ii) Applicants (as this term is defined in 42 U.S.C. 12899)

selected to carry out HUD Youthbuild programs (category 2 businesses);

(iii) Other section 3 business concerns.

(b) Eligibility for preference. A business concern seeking to

qualify for a section 3 contracting preference shall certify or submit

evidence, if requested, that the business concern is a section 3

business concern as defined in Sec. 135.5.

(c) Ability to complete contract. A section 3 business concern

seeking a contract or a subcontract shall submit evidence to the

recipient, contractor, or subcontractor (as applicable), if requested,

sufficient to demonstrate to the satisfaction of the party awarding the

contract that the business concern is responsible and has the ability

to perform successfully under the terms and conditions of the proposed

contract. (The ability to perform successfully under the terms and

conditions of the proposed contract is required of all contractors and

subcontractors subject to the procurement standards of 24 CFR 85.36

(see 24 CFR 85.36(b)(8)).) This regulation requires consideration of,

among other factors, the potential contractor's record in complying

with public policy requirements. Section 3 compliance is a matter

properly considered as part of this determination.

Sec. 135.38 Section 3 clause.

All section 3 covered contracts shall include the following clause

(referred to as the section 3 clause):

A. The work to be performed under this contract is subject to

the requirements of section 3 of the Housing and Urban Development

Act of 1968, as amended, 12 U.S.C. 1701u (section 3). The purpose of

section 3 is to ensure that employment and other economic

opportunities generated by HUD assistance or HUD-assisted projects

covered by section 3, shall, to the greatest extent feasible, be

directed to low- and very low-income persons, particularly persons

who are recipients of HUD assistance for housing.

B. The parties to this contract agree to comply with HUD's

regulations in 24 CFR part 135, which implement section 3. As

evidenced by their execution of this contract, the parties to this

contract certify that they are under no contractual or other

impediment that would prevent them from complying with the part 135

regulations.

C. The contractor agrees to send to each labor organization or

representative of workers with which the contractor has a collective

bargaining agreement or other understanding, if any, a notice

advising the labor organization or workers' representative of the

contractor's commitments under this section 3 clause, and will post

copies of the notice in conspicuous places at the work site where

both employees and applicants for training and employment positions

can see the notice. The notice shall describe the section 3

preference, shall set forth minimum number and job titles subject to

hire, availability of apprenticeship and training positions, the

qualifications for each; and the name and location of the person(s)

taking applications for each of the positions; and the anticipated

date the work shall begin.

D. The contractor agrees to include this section 3 clause in

every subcontract subject to compliance with regulations in 24 CFR

part 135, and agrees to take appropriate action, as provided in an

applicable provision of the subcontract or in this section 3 clause,

upon a finding that the subcontractor is in violation of the

regulations in 24 CFR part 135. The contractor will not subcontract

with any subcontractor where the contractor has notice or knowledge

that the subcontractor has been found in violation of the

regulations in 24 CFR part 135.

E. The contractor will certify that any vacant employment

positions, including training positions, that are filled (1) after

the contractor is selected but before the contract is executed, and

(2) with persons other than those to whom the regulations of 24 CFR

part 135 require employment opportunities to be directed, were not

filled to circumvent the contractor's obligations under 24 CFR part

135.

F. Noncompliance with HUD's regulations in 24 CFR part 135 may

result in sanctions, termination of this contract for default, and

debarment or suspension from future HUD assisted contracts.

G. With respect to work performed in connection with section 3

covered Indian housing assistance, section 7(b) of the Indian Self-

Determination and Education Assistance Act (25 U.S.C. 450e) also

applies to the work to be performed under this contract. Section

7(b) requires that to the greatest extent feasible (i) preference

and opportunities for training and employment shall be given to

Indians, and (ii) preference in the award of contracts and

subcontracts shall be given to Indian organizations and Indian-owned

Economic Enterprises. Parties to this contract that are subject to

the provisions of section 3 and section 7(b) agree to comply with

section 3 to the maximum extent feasible, but not in derogation of

compliance with section 7(b).

Sec. 135.40 Providing other economic opportunities.

(a) General. In accordance with the findings of the Congress, as

stated in section 3, that other economic opportunities offer an

effective means of empowering low-income persons, a recipient is

encouraged to undertake efforts to provide to low-income persons

economic opportunities other than training, employment, and contract

awards, in connection with section 3 covered assistance.

(b) Other training and employment related opportunities. Other

economic opportunities to train and employ section 3 residents include,

but need not be limited to, use of ``upward mobility'', ``bridge'' and

trainee positions to fill vacancies; hiring section 3 residents in

management and maintenance positions within other housing developments;

and hiring section 3 residents in part-time positions.

(c) Other business related economic opportunities. (l) A recipient

or contractor may provide economic opportunities to establish,

stabilize or expand section 3 business concerns, including micro-

enterprises. Such opportunities include, but are not limited to the

formation of section 3 joint ventures, financial support for

affiliating with franchise development, use of labor only contracts for

building trades, purchase of supplies and materials from housing

authority resident-owned businesses, purchase of materials and supplies

from PHA resident-owned businesses and use of procedures under 24 CFR

part 963 regarding HA contracts to HA resident-owned businesses. A

recipient or contractor may employ these methods directly or may

provide incentives to non-section 3 businesses to utilize such methods

to provide other economic opportunities to low-income persons.

(2) A section 3 joint venture means an association of business

concerns, one of which qualifies as a section 3 business concern,

formed by written joint venture agreement to engage in and carry out a

specific business venture for which purpose the business concerns

combine their efforts, resources, and skills for joint profit, but not

necessarily on a continuing or permanent basis for conducting business

generally, and for which the section 3 business concern:

(i) Is responsible for a clearly defined portion of the work to be

performed and holds management responsibilities in the joint venture;

and

(ii) Performs at least 25 percent of the work and is contractually

entitled to compensation proportionate to its work.

Subpart C--[Reserved]

Subpart D--Complaint and Compliance Review

Sec. 135.70 General.

(a) Purpose. The purpose of this subpart is to establish the

procedures for handling complaints alleging noncompliance with the

regulations of this part, and the procedures governing the Assistant

Secretary's review of a recipient's or contractor's compliance with the

regulations in this part.

(b) Definitions. For purposes of this subpart:

(1) Complaint means an allegation of noncompliance with

regulations of this part made in the form described in Sec. 135.76(d).

(2) Complainant means the party which files a complaint with the

Assistant Secretary alleging that a recipient or contractor has failed

or refused to comply with the regulations in this part.

(3) Noncompliance with section 3 means failure by a recipient or

contractor to comply with the requirements of this part.

(4) Respondent means the recipient or contractor against which a

complaint of noncompliance has been filed. The term ``recipient'' shall

have the meaning set forth in Sec. 135.7, which includes PHA and IHA.

Sec. 135.72 Cooperation in achieving compliance.

(a) The Assistant Secretary recognizes that the success of ensuring

that section 3 residents and section 3 business concerns have the

opportunity to apply for jobs and to bid for contracts generated by

covered HUD financial assistance depends upon the cooperation and

assistance of HUD recipients and their contractors and subcontractors.

All recipients shall cooperate fully and promptly with the Assistant

Secretary in section 3 compliance reviews, in investigations of

allegations of noncompliance made under Sec. 135.76, and with the

distribution and collection of data and information that the Assistant

Secretary may require in connection with achieving the economic

objectives of section 3.

(b) The recipient shall refrain from entering into a contract with

any contractor after notification to the recipient by HUD that the

contractor has been found in violation of the regulations in this part.

The provisions of 24 CFR part 24 apply to the employment, engagement of

services, awarding of contracts or funding of any contractors or

subcontractors during any period of debarment, suspension or otherwise

ineligible status.

Sec. 135.74 Section 3 compliance review procedures.

(a) Compliance reviews by Assistant Secretary. The Assistant

Secretary shall periodically conduct section 3 compliance reviews of

selected recipients and contractors to determine whether these

recipients are in compliance with the regulations in this part.

(b) Form of compliance review. A section 3 compliance review shall

consist of a comprehensive analysis and evaluation of the recipient's

or contractor's compliance with the requirements and obligations

imposed by the regulations of this part, including an analysis of the

extent to which section 3 residents have been hired and section 3

business concerns have been awarded contracts as a result of the

methods undertaken by the recipient to achieve the employment,

contracting and other economic objectives of section 3.

(c) Where compliance review reveals noncompliance with section 3 by

recipient or contractor. Where the section 3 compliance review reveals

that a recipient or contractor has not complied with section 3, the

Assistant Secretary shall notify the recipient or contractor of its

specific deficiencies in compliance with the regulations of this part,

and shall advise the recipient or contractor of the means by which

these deficiencies may be corrected. HUD shall conduct a follow-up

review with the recipient or contractor to ensure that action is being

taken to correct the deficiencies.

(d) Continuing noncompliance by recipient or contractor. A

continuing failure or refusal by the recipient or contractor to comply

with the regulations in this part may result in the application of

sanctions specified in the contract through which HUD assistance is

provided, or the application of sanctions specified in the regulations

governing the HUD program under which HUD financial assistance is

provided. HUD will notify the recipient of any continuing failure or

refusal by the contractor to comply with the regulations in this part

for possible action under any procurement contract between the

recipient and the contractor. Debarment, suspension and limited denial

of participation pursuant to HUD's regulations in 24 CFR part 24, where

appropriate, may be applied to the recipient or the contractor.

(e) Conducting compliance review before the award of assistance.

Section 3 compliance reviews may be conducted before the award of

contracts, and especially where the Assistant Secretary has reasonable

grounds to believe that the recipient or contractor will be unable or

unwilling to comply with the regulations in this part.

(f) Consideration of complaints during compliance review.

Complaints alleging noncompliance with section 3, as provided in

Sec. 135.76, may also be considered during any compliance review

conducted to determine the recipient's conformance with regulations in

this part.

Sec. 135.76 Filing and processing complaints.

(a) Who may file a complaint. The following individuals and

business concerns may, personally or through an authorized

representative, file with the Assistant Secretary a complaint alleging

noncompliance with section 3:

(1) Any section 3 resident on behalf of himself or herself, or as a

representative of persons similarly situated, seeking employment,

training or other economic opportunities generated from the expenditure

of section 3 covered assistance with a recipient or contractor, or by a

representative who is not a section 3 resident but who represents one

or more section 3 residents;

(2) Any section 3 business concern on behalf of itself, or as a

representative of other section 3 business concerns similarly situated,

seeking contract opportunities generated from the expenditure of

section 3 covered assistance from a recipient or contractor, or by an

individual representative of section 3 business concerns.

(b) Where to file a complaint. A complaint must be filed with the

Assistant Secretary for Fair Housing and Equal Opportunity, Department

of Housing and Urban Development, Washington, D.C., 20410.

(c) Time of filing. (1) A complaint must be received not later than

180 days from the date of the action or omission upon which the

complaint is based, unless the time for filing is extended by the

Assistant Secretary for good cause shown.

(2) Where a complaint alleges noncompliance with section 3 and the

regulations of this part that is continuing, as manifested in a number

of incidents of noncompliance, the complaint will be timely if filed

within 180 days of the last alleged occurrence of noncompliance.

(3) Where a complaint contains incomplete information, the

Assistant Secretary shall request the needed information from the

complainant. In the event this information is not furnished to the

Assistant Secretary within sixty (60) days of the date of the request,

the complaint may be closed.

(d) Contents of complaint--(1) Written complaints. Each complaint

must be in writing, signed by the complainant, and include:

(i) The complainant's name and address;

(ii) The name and address of the respondent;

(iii) A description of the acts or omissions by the respondent that

is sufficient to inform the Assistant Secretary of the nature and date

of the alleged noncompliance.

(iv) A complainant may provide information to be contained in a

complaint by telephone to HUD or any HUD Field Office, and HUD will

reduce the information provided by telephone to writing on the

prescribed complaint form and send the form to the complainant for

signature.

(2) Amendment of complaint. Complaints may be reasonably and fairly

amended at any time. Such amendments may include, but are not limited

to, amendments to cure, technical defects or omissions, including

failure to sign or affirm a complaint, to clarify or amplify the

allegations in a complaint, or to join additional or substitute

respondents. Except for the purposes of notifying respondents, amended

complaints will be considered as having been made as of the original

filing date.

(e) Resolution of complaint by recipient. (1) Within ten (10) days

of timely filing of a complaint that contains complete information (in

accordance with paragraphs (c) and (d) of this section), the Assistant

Secretary shall determine whether the complainant alleges an action or

omission by a recipient or the recipient's contractor that if proven

qualifies as noncompliance with section 3. If a determination is made

that there is an allegation of noncompliance with section 3, the

complaint shall be sent to the recipient for resolution.

(2) If the recipient believes that the complaint lacks me

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