A request has been presented concerning whether an employee (the Requestor) in the Finance Office of the Community Development Administration (CDA) may receive a rehabilitation loan under a CDA program.
The Requestor is employed in CDA's Finance Office. She is also the owner, with another individual, of a piece of property on the Eastern Shore in Maryland. With her co-owner she has applied to CDA for a loan of $6,000--7,000 under the agency's Housing Rehabilitation Program (MHRP). She indicates that the purpose of the loan is to put up siding and make general repairs to the porch of the property. The Requestor indicates that, though the original intention was to live in the property, the co-owners are currently leasing each of its two units. The application was rejected by the Director of the Home Improvement Division, based on her employment with the Department of Economic and Community Development (DECD) and the investment character of the property.
The Housing Rehabilitation Program is one of several DECD/CDA programs designed to increase the State's supply of affordable housing. These programs are discussed in detail in our Opinion No. 83-27,1 which addressed the general issue of DECD employees' participation in agency financing programs, and which is the basis of agency action in this particular request. Basically, they include mortgage loan programs for owner-occupiers of single family homes, mortgage loans for developers and investors in multi-family or commercial property, an energy loan program available as to both single family and other properties, and the rehabilitation program, also available as to both single and multi-family properties.
Most of the programs are funded by revenue bonds issued by CDA, though some, including the rehabilitation loans, are funded by General Obligation bonds issued by the State. The mortgage loan programs are managed by separate divisions, depending on the program, and all the home improvement programs, including both the rehabilitation and energy programs, are managed by the Administration's Home Improvement Division. The funding for MHRP tends to be lower than the other programs (about $5,000,000 per year), but according to CDA's Director the more limiting eligibility requirements make it one of CDA's slower moving programs.
The Requestor's duties in CDA involve work with several revenue bond financing programs, which basically involve three major steps. A bond issuance is developed primarily by agency bond counsel working with the underwriter. Neither the Requestor nor her office are a part of this process. Once a bond is sold and money is available, decisions as to its distribution by loans to applicants are processed through the agency's program offices in accordance with relevant statutory and other criteria. After a loan is made for a particular project, it is serviced by personnel in the Office of Finance. The Requestor becomes involved at this point, having loan servicing responsibilities in five areas: multi-family programs, single family programs, energy loans, line-of-credit actions, and bond anticipation activities.
The Requestor has accountant/bookkeeper training, and holds a position of responsibility in the Finance Office, though she is not a CPA. She has been with CDA for eight years, where she has developed significant experience in revenue bond financing. She states that she prepares financial statements and balance sheets and works with the agency's New York auditors. She authorizes draw-downs on funds available for projects and participates in investment decisions regarding monies in the Administration's accounts, and reviews projects to ensure that funding is consistent with the bond certificate. Her duties also include working with construction people to put through final closing, and monitoring projects to make sure that they comply with the closing documents.
The Rehabilitation Program under which the Requestor has applied is funded by General Obligation bonds, which are handled solely by the State Comptroller with input from DECD's Finance Office. The loans, once made, are not serviced by the CDA Finance Office or otherwise within CDA, but by a private contractor. According to the Requestor and her supervisor, the Assistant Director for Finance, the office does not have any involvement at all with the MHRP. Both the Office in general, and the Requestor in particular, however, have duties regarding energy loans that are processed within the same CDA program division as the rehabilitation loan for which she is applying.
This request basically involves application and interpretation of our Opinion No.83-27. This Opinion was in response to a request from DECD's Assistant Secretary for Housing and Community Development for general advice regarding Public Ethics Law (Article 40A, §3-103(a), Annotated Code of Maryland, the Ethics Law) application, particularly §3-103(a), to Departmental employees wishing to participate in CDA loan programs. Section 3-103(a)(1)(i) of the Law prohibits an employee or official from being employed by or having an interest in an entity that is subject to the authority of or has contractual dealings with his agency. We concluded in Opinion No. 83-27 that financing for personal residences does not as a general matter involve an interest or employment in an entity, and loan relationships involving personal residences would not be absolutely barred by the strict outside employment and financial interest prohibitions of §3-103(a). The Department was advised, however, that borrowing activities relating to investment property would involve an interest or employment with an entity, bringing §3-103(a) into play. Reference was made to our exception regulations and the need for more particularized review for exception purposes, and application of the other provisions of the Law (even as to personal residence loans) was discussed.
It was also noted in Opinion No.83-27 that the Department could adopt internal guidelines taking into account the principles in the Opinion, as well as any other agency concerns. Consistent with this advice, CDA prepared and distributed a memorandum to its employees generally setting forth the guidelines of the Opinion and advising them that loans to CDA employees for investment property would generally not be allowed. It was this memo that was the basis of the denial of the Requestor's application. The property at issue here is rental property, though the Requestor does not see herself or her partner as "in the property business." This type of ownership relationship is one, however, that we have consistently viewed as involving an interest or employment in an entity. (See, for example, in addition to Opinion No. 83-27, Opinions No. 83-32 and No. 82-27.) Since a loan agreement as to this property would result in a contractual relationship between the Requestor on behalf of the entity, and her agency, this situation would be barred by §3-103(a)(1)(i), unless an exception is allowed.
Our exception regulations as to outside employment and financial interests are set forth in COMAR 19A.02.01 and 19A.02.02, respectively. They implement the provision in §3-103(a) of the Law that its prohibitions apply, "except as permitted by regulation of the Commission where such interest is disclosed or where such employment does not create a conflict of interest or appearance of conflict." The regulations set forth various guidepost criteria that are designed to evaluate whether the private interest or employment relationships are sufficiently remote from the employee's duties and agency program that a conflict of interest or appearance of conflict is unlikely. They include evaluation of the relationships of the individual's job and particular agency program to the outside affiliation, and review of the nature of the private duties and interests and how they interact with the employee's agency. The regulations also provide for a general evaluation of the total circumstances of the situation in view of the statutory criteria regarding conflicts and appearances of conflict. (See our Opinion No. 83-34 for a more detailed discussion of the exception regulations.)
In reviewing the circumstances of this request, we have concluded that granting an exception here would not be appropriate. In applying the specific regulatory criteria, we note that issues do not appear to be raised based on the Requestor's State duties, since they do not involve the program under which she is applying. Other aspects of the criteria could raise issues, however, since the Requestor would be a primary person responsible in negotiating and implementing the loan, and also given the amount of the proposed loan and the extent of her investment in the property. We are especially concerned, however, in view of our mandate to evaluate the circumstances of this situation in view of the statutorily defined criteria, and the fact that the Requestor has significant substantive responsibilities in her office, and works on a regular basis with employees in the Home Improvement Division who are reviewing her loan application.
We do not question the Requestor's integrity or doubt her assurances that she would not use her relationships with other CDA employees to advance her own loan interests. We are concerned, however, about the appearance of conflict to a member of the public, who sees only the organizational relationships of a CDA employee to a CDA program office that is in a position to award a loan on highly beneficial terms (long term, at well below market interest rates). We believe that this public concern over the apparent ability of State employees to use their "insider" position to their own benefit was the very issue intended to be addressed when §3-103(a) was originally drafted to apply to affiliations with entities having relationships anywhere in an employee's agency.
We therefore conclude that the Requestor's position in CDA, and her relationships with the program office responsible for her loan application, raise appearance of conflict issues under §3-103(a) that cannot be overcome by our exception regulations. In our view, the agency's action in implementing our earlier Opinion reflects an accurate interpretation of our general concern that employees in CDA should not be involved in CDA loan programs where they are acting on behalf of private commercial or investment interests. While we do not wish to state flatly that no exception would ever be available for such employees, we believe that the circumstances of this request present an example of the types of problems that can arise under the Ethics Law that make application of an exception to the general prohibition difficult.
Herbert J. Belgrad, Chairman
Reverend John Wesley Holland
Betty B. Nelson
Barbara M. Steckel
Thomas D. Washburne
Date: November 7, 1984
1 Except as expressly cited to the Maryland Register, Opinion citations are to Commission Opinions published in COMAR Title 19A.