okay I just found this info on: http://www.medschool.lsuhsc.edu/pathology/cytopathology/Instructions for physicians.pdf
It applies to LSU but looks like it's across all residency programs.
Applicant Who Does Not Take and Pass USMLE Step 3
The applicant who does not take and pass the USMLE Step 3 may apply
for a PGY2 permit for up to 12 months. This has the effect of providing
applicants with a 24-month period during the PGY1 and PGY2 years to
take and pass the USMLE Step 3. The applicant who has not taken and
passed the USMLE Step 3 prior to the expiration of the PGY1 or PGY2
permit may not be licensed by the LSBME until such time that the
applicant has taken and passed the USMLE Step 3. The LSBME does not
issue a PGY3 permit in these cases. As such, there is generally no permit
or license issued and immediately available to the applicant who has not
taken and passed the USMLE Step 3 when the PGY2 permit expires.
Four Strikes and You’re Out (applies to USMLE Steps 2 and 3)
Applicants are limited to 4 attempts to take and pass the USMLE Step 2.
Applicants are limited to 4 attempts to take and pass the USLME Step 3.
An applicant who fails USMLE Step 3 after the third attempt must take 6
months of approved training before permitted to take Step 3 for the fourth
and final time. This applies to all examinations (FLEX, SPEX, NBME,
NBOME, COMLEX-USA, or a combination thereof).
SO in effect you hold up your whole program by not passing step 3. Your PD will have trouble accepting new residents until you pass it and move on. It makes them look bad and can also kill the residency program. I've concluded that what I need to do is study very hard, take and pass Step 3 before applying again.