An opinion has been requested concerning whether and to what extent Department of Economic and Community Development (DECD) employees may participate in the Department's mortgage loan and bond issuance programs.

This request was presented by the DECD Assistant Secretary for Housing and Community Development, and concerns whether Departmental employees may obtain mortgage or other loans from the Community Development Administration (CDA or the Administration) or purchase revenue bonds issued by CDA. The DECD was established in 1970 pursuant to Chapter 527, Acts of 1970, with the mandate "to create and preserve optimal job and income opportunities for Marylanders and to protect and enhance the social, economic, cultural, and fiscal viability of the State's communities." The Department has more than 20 programs. Some of them, such as the industrial development, small business development, tourism and industrial training programs, focus on economic development financing and marketing. Other programs deal with housing and community development and historical preservation and cultural programs. Units in the Department include, for example, the Administration, the Division of Local and Regional Development, the Maryland Historical Trust, the Maryland Housing Fund, the St. Mary's City Commission and the Maryland Arts Council.

The Department has a variety of funding mechanisms. Many of its programs are funded through grants or contracts out of appropriated State or Federal funds. Other programs, such as the Maryland Industrial Development Financing Authority program, involve loans or loan guarantees that reflect either Department funding or cooperative efforts with private lending institutions. The CDA is the State's housing finance agency, and is charged with increasing the supply of housing for the elderly, handicapped and those with limited income; its mandate also includes stimulation of the construction industry Statewide, and fostering sound community development. The Administration has several funding programs that can be grouped into two categories: 1) single family residential programs, and 2) multi-family and commercial programs.

The single family programs sponsored by the CDA include the Homeownership Development Program, the Mortgage Purchase Program, and the Maryland Home Financing Program. All of these programs involve financing for owner-occupied single family residences for families of limited income. They involve long-term loans at better than commercial interest rates and may have down payment levels that are also not generally available in the private mortgage market. In all of these programs, the borrower must meet certain minimum income criteria and be adjudged to be a good credit risk. The programs tend to have certain limitations regarding property use, refinancing, titling and other restrictions. The differences in the several single family programs relate to the source and nature of the funding, and also to the nature of the property being financed.

The Homeownership Development Program is directed to stimulating new housing construction and involves purchases of newly constructed homes in designated subdivisions. This program is funded by the sale of tax-exempt revenue bonds and in the past has involved loans made directly from CDA to the homeowner. For direct loan programs credit checks and standard loan processing work are actually done by the agency. This particular program, however, is gradually being converted to one involving private lenders. The Mortgage Purchase Program involves financing primarily for existing homes. This program is also funded by tax-exempt revenue bonds, but the loans are generally made through participating lending institutions. In this program the loan processing and qualifying process is generally handled solely by the private lender and the loan is then purchased by CDA. The agency, though it may occasionally spot check the papers for a particular loan, does not generally redo the approval process, or re-underwrite the loan. Once the loan is purchased, of course, the CDA becomes the creditor and a party to the transaction.

The Home Financing Program is also directed to purchases of existing homes, and is a direct loan program without an intervening private lending institution. This program is funded by State General Obligation bonds, however, and for this reason is not generally used. Since acquiring revenue bonding authority, the CDA has tended to fund its housing program primarily through this virtually unlimited source. Under this process a bond issue is offered and purchased by investors. The revenue is then used until it is gone and then a new issue is made. The CDA Administrator indicates that the agency generally believes that the revenue bond funding approach can be relied upon to meet the demand for low to moderate income housing, and that this is not a situation where prospective homeowners are competing with each other for part of a limited amount of funds.

A second group of CDA programs includes funding operations that are available for non-single family residences and for other commercial projects. These include the multi-family program, the Maryland Housing Rehabilitation Program (MHRP), and the Home and Energy Loan Program (HELP). Though two of these (MHRP and HELP) may involve single family projects, these programs may also involve individuals or business entities that are seeking funding for investment or rental property, and MHRP loans are available for some commercial properties. While the programs may have requirements regarding income limits for tenants, they do not generally establish income limitations for borrowers. Nor are there always limits on the size of the loan available. The multi-family program is directly financed by CDA through construction notes and tax-exempt revenue bonds and may involve construction loans, permanent financing or a combination of these two. The MHRP and HELP programs deal with renovations to existing property for rehabilitation or energy conservation purposes. Both involve direct CDA loans and have been funded by General Obligation bonds, though the intention is to fund future HELP loans with revenue bonds. The HELP program is available to anyone in the State and energy conservation loans under this program are the first CDA program to have no income limits.

The Department has just over 400 employees, approximately 90 of which are CDA employees. Even recognizing that the loan programs' income limits apply to total family income, it is likely the many DECD employees would qualify for CDA programs. According to Department of Personnel print-outs provided to the Ethics Commission, DECD has only 40 employees whose annual salary exceeds $33,000, and 45 employees having salaries between $28,000 and $33,000. The Assistant Secretary indicates that, with the exception of the HELP program, DECD employees that qualify for various programs have been allowed to participate. The Department has not distinguished between loans made for a personal residence or for rental or commercial property. Employees have not been permitted to participate in the HELP program, since it has had no income limits, and because it was funded with General Obligation funds.

Several provisions of the Public Ethics Law (Article 40A, Annotated Code of Maryland, the Ethics Law) are relevant to this request. First, the inquiry raises financial interest and possible outside employment issues under §3-103(a) of the Law. Subsection (a)(1)(i) of this section prohibits employees from being employed by or having a financial interest in an entity that has or is negotiating a contract with their agency. A primary preliminary issue is whether these loan relationships involve employment or a financial interest in an entity. The Commission has generally said that the ownership and management of income producing property results in both an ownership and employment interest that is disclosable on the financial disclosure statement. (See Title 4 of the Ethics Law.) We have also applied this principle in considering application of §3-103(a). In our Opinion No. 82-27, for example, we considered ownership of real property by tax assessors.1 We concluded there that property owned for commercial and investment purposes could result in ownership of an interest in an entity, but that owner-occupied residential property would probably not give rise to such a relationship.

Following this approach, we believe that a distinction may be made between loans sought by DECD employees under programs dealing with owner-occupied single-family residences and those sought on behalf of an "entity" that is involved in commercial or investment activity. We believe that our approach to personal residences as not being entities is appropriate here, and that single-family residential loans under any of these programs are not subject to the absolute bar of §3-103(a)(1)(i).2 In our view, however, the prohibition of §3-103(a)(1)(i) must be applied to bar an employee's having or negotiating a loan contract with his agency if the employee's investment or commercial interest exceeds $1,000 (as set forth in the definition of "financial interest," §1-201(m) of the Ethics Law), and because he is viewed as having an employment relationship with the commercial or investment entity.

Though Department employees wishing to contract with their agency on behalf of private endeavors may be eligible for exception under our outside employment and financial interest exception criteria (see COMAR 19A. 02.01 and 19A.02.02), exceptions may be granted only on a case-by-case basis after review of the specific situation. Exception may be possible under the criteria (issued pursuant to the introductory language of §3-103(a)), where the facts show that the relationship between an employee's private activities and his agency is so remote that the possibility of a conflict of interest or the appearance of conflict is unlikely.

Even if participation in one of the Department's loan programs is not absolutely barred by §3-103(a), employees' activities are restricted by other provisions of the Ethics Law. Section 3-101, for example, prohibits official non-ministerial participation in matters in which an employee or certain relatives have an interest or which involve as a party an entity with which the employee or his relatives are affiliated. Employees of CDA thus would be proscribed under this provision from participating in loan decisions involving their own or their relatives' applications, even for single-family residential properties or where there is an exception regarding commercial or investment property. Also, §3-104 of the Law prohibits public officials and employees from using the prestige of their office for their own economic benefit or that of another. Thus DECD employees, in CDA or elsewhere, may not seek to influence Department co-workers in the loan process, or take any actions on State time to further their applications.

Section 3-107 of the Ethics Law could also be of concern to DECD participants in the loan programs. This section prohibits employees from using confidential information gained in the course of their duties for their own benefit or that of another. Employees would therefore have to take care, for example, to avoid submitting applications or taking other action based on their own advance knowledge of agency plans. Neither §3-107 nor the provisions discussed above would appear to absolutely bar participation by DECD, or even CDA, employees in the Department's loan programs. They do, however, establish certain constraints on employees designed to assure that they cannot use their official positions improperly to benefit themselves or others.

The Department should be careful to ensure that employees applying for loans are aware of these constraints. It may wish, in fact, to establish guidelines addressing these issues, as well as any other areas of particular concern to the Department.3 These guidelines could take into account, for example, whether an employee works, directly or otherwise, in a CDA program affecting his application, whether the loan is directly with CDA or through a private lender that makes the approval decisions, whether the funding source is the more limited to General Obligation Bonds or the open-ended revenue bonds, and the existence and extent of income limits under the particular program. Ethics Commission staff would, of course, be available to assist in development of guidelines if the Department wishes.

A second question raised by the Assistant Secretary has to do with application of the Ethics Law to the purchase by DECD employees of revenue bonds issued by CDA. The documentation of each bond issue describes the bonds as "special obligations of the Administration." Sections 3-103(a) deals with interests in "entities." We have, consistent with our predecessor Board of Ethics, held that State agencies are not entities intended to be covered by this section. (See, for example, our Opinions No. 82-32, No. 82-15, and No. 81-7.) Thus, even if a government revenue bond were to be viewed as an interest,4 where the issuing entity is a State agency, the interest would not be within the scope of §3-103(a). We therefore advise the Department that §3-103(a) of the Ethics Law does not proscribe ownership by Departmental employees and officials of revenue bonds issued by the Department or its administrations.

Herbert J. Belgrad, Chairman
    Jervis E. Finney
    Reverend John Wesley Holland
    Betty B. Nelson
    Barbara M. Steckel

Date: August 18, 1983


1 Except as otherwise expressly cited to the Maryland Register, Opinion citations are to Commission Opinions published in COMAR Title 19A.

2 It should also be noted that we have generally taken the position that a mortgage loan does not result in an interest of the borrower in the lending institution. Opinion 81-1. Thus, the existence of a mortgage would not, in itself, bring these transactions within §3-103(a)(1)(i).

3 Note that the Ethics Law at §1-103 recognizes that agencies may have more restrictive provisions governing employee conduct.

4 We have consistently said, primarily in the financial disclosure context (Title 4 of the Ethics Law), that the concept of an interest in a business entity does not include bonds or similar investments in government entities. Disclosure filers have thus been advised that Series E Bonds and municipal bonds, for example, need not be listed on any Schedules of the Financial Disclosure Statement.