85.03

OPINION NO. 85-3

An opinion has been requested concerning whether the Public Ethics Law (Article 40A, Annotated Code of Maryland, the Ethics Law) would apply: 1) to prohibit a transaction where the buyer of a residential property wishes to use Community Development Administration (CDA) funding and one of the sellers is the Department of Economic and Community Development's (DECD) Assistant Secretary for Housing, or, 2) to prohibit a homeowner from participating in CDA's energy loan program where the holder of the first mortgage on the property is DECD's Assistant Secretary for Housing.

This request was presented by DECD's Assistant Secretary for Housing and Community Development, and involves two separate issues arising from transactions involving two pieces of real property with which she and her spouse are connected. These transactions would involve the Community Development Administration and the Maryland Housing Fund (MHF or the Fund), both units of DECD that are within the jurisdiction of the Assistant Secretary for Housing. 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, including several housing programs.

The CDA is part of DECD and is the State's housing finance agency. It 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 Maryland Housing Fund was established in 1971 and is the Department's insurance entity for its housing and community development programs. The Fund has as its reserves $42 million in State General Obligation Bonds and Appropriations, and is generally charged "to insure mortgages accepted by the Department..., or to insure bonds or notes used to finance any project that is eligible for insurance" as set forth in the Fund's enabling law. (Article 41, §257K, Annotated Code of Maryland.)

According to the Requestor, both pieces of property involved in this request are held personally by her and her spouse as investment property. The first issue presented involves the proposed sale by the Requestor and her spouse of a small residence in Severna Park, Maryland. The property has been held by them for several years and is in the same block as their own personal residence. According to the Requestor, the property was never formally placed on the market. Their general intention to sell the property became known in the neighborhood, and an offer was made by an individual who was familiar with the property. A contract of sale for a price of $50,000 was executed, contingent upon the buyer obtaining financing within the period specified in the contract. The buyer of the property sought financing through a private mortgage company under the Mortgage Purchase Program (MPP), a low interest loan program administered by CDA. The Requestor indicates that she learned of potential CDA involvement when she and her spouse were requested to complete and submit the Seller's Affidavit (discussed below in more detail).

The Mortgage Purchase Program is a joint effort of the State and private lending institutions to assist limited income families in purchasing homes when they would be financially unable to do so otherwise. The program is funded through the issuance of revenue bonds, and includes several eligibility requirements. Applicants must be U.S. citizens, 18 years of age or over, and not (with a few limited exceptions) own any real property. There are also maximum purchase price limits as well as family income limits and income eligibility and credit-worthiness standards. Properties purchased with the proceeds of a loan must also meet certain eligibility standards. For example, they must be single-family residences (including modular homes and condominium units), they must be homes of "modest means that *are* safe and adequate for a family's current needs," and they must include certain minimum square feet of living space and meet or exceed extensive and detailed minimum property standards.

Both sellers and buyers must submit affidavits certifying to compliance with the various requirements of the Program. The Seller's Affidavit deals with the prior use of the property solely as a residence, certifies as to the contract price and that there are no other contract arrangements as to sale of the property, agrees to surrender possession to the buyer within sixty days of closing, and makes certain required representations as to payment of fees and commissions. The CDA explanatory materials describe the purpose of the Affidavit as "to ensure compliance with applicable federal and State law relating to the issuance of the bonds and the financing of the Mortgage Loan." Sellers also agree to pay at least one point in fees at closing. Loans are for thirty years, at a fixed interest rate usually significantly lower than would otherwise be available.

Loans are initiated by the buyer's direct application to a participating lending institution. In processing MPP loans, the lender does all of the underwriting of the loan, including acquiring an independent appraisal, evaluating the applicant's income eligibility and credit-worthiness, and reviewing for compliance with the Mortgage Purchase Program's requirements. If approved by the lender, the loan package is transmitted to MHF for review. As the "pool" insurer of the mortgages that are security for the Administration's revenue bonds, MHF is responsible for evaluating the transaction for its compliance with program requirements and to ensure that it does not present an unacceptable risk for the mortgage program. The Fund does not commit CDA to buy the loan, though the Director of Single Family Programs indicates that a Fund approval usually means that CDA will purchase the loan, since the Fund's criteria include those established by CDA.

After MHF approval, the lender will approve the loan and go to settlement. The lender at this point has committed its own funds and the seller at this point is out of the transaction. Within thirty to sixty days after completion of the transaction, the note is presented to CDA for purchase, which will be made if the program requirements are met. The buyer's obligation is to CDA, though the loan may be serviced by the lender or a private loan servicing entity acting as CDA's agent. The Program Director says that her organization does not view itself as a mortgage underwriter. She views CDA's role as involving: issuance of revenue bonds, establishment of program guidelines consistent with the bond and the statute, deciding waiver requests, and monitoring private lender activities in connection with reviews for purchase of particular loans. She indicates that the agency does not re-underwrite (that is, re-review and re-investigate) each loan. She states that determinations as to particular loans are made in her office or may be considered by the Director of CDA. They are seldom, if ever, escalated to the Assistant Secretary. The Requestor also indicates that she does not see particular loan transactions, though she has general line supervisory authority over those who make these decisions.

The second issue raised by the Requestor deals with a residential property sold by her and her spouse in 1980. The property had been held as a rental unit; it was sold to the tenant, and the Requestor and her spouse took back a twenty-year mortgage. The current owner has recently applied to Baltimore Gas & Electric for a low-interest loan for energy-related improvements to the property. The Requestor and her spouse became aware of this when BG&E requested them, as holders of the first mortgage, to submit a Verification of Mortgage Form, and to agree to a second mortgage. The application was submitted under CDA's Home and Energy Loan Program (HELP), which provides financing for below-market interest rate loans for home and energy conservation improvements in owner-occupied homes with one to four units. Loans can be from $2,000 to $15,000, and are at an interest rate of 10 percent plus 1/2 percent insurance premium. The maximum loan term is fifteen years. This program is a revenue bond funded program, and according to the Deputy Director of the Home Improvements Division, the current program is based on a $9.1 million bond issue of last summer, of which $8.4 million is currently available.

Customers of BG&E may apply through this entity for loans to do certain specified energy work on their homes. In this situation, BG&E investigates and processes the application, and may service the loans. Unlike the MPP, however, in the HELP program, BG&E acts as CDA's agent only, as CDA is the lender through the whole process. The staff of CDA's Home Improvements Division reviews the application for compliance with program requirements, as does the MHF. Loans must be only for covered energy improvements and, together with the first mortgage and any other secured encumbrances, may not exceed 95 percent of the market value of the property. Applications must include a work proposal from a licensed home improvement contractor and a list of materials from suppliers. Work must be completed within six months of closing and a completion certificate submitted. All projects where the work is done by the homeowner are inspected, and there is a random inspection of 10 percent of the remainder.

The Deputy Director indicates that loan approval authority resides in her office. Specific loan decisions do not generally reach beyond the Division, and she is not aware of any such action involving the Assistant Secretary. She has been notified of this transaction by a DECD Assistant Attorney General, and advised not to act on the application until the ethics issue is resolved. She does not believe others in the Division or CDA know of it, or would be expected to know of it. First mortgage holders, such as the Requestor and her spouse, are involved in the loan making process to the extent that they verify information about the first mortgage as part of the credit review, and to the extent that they may refuse to agree to an additional encumbrance on the property. The first mortgage has precedence over other encumbrances, though the agency and the first mortgagor could interact if the HELP loan proceeds, since foreclosure action by any lender would impact on others.

This request raises issues primarily under the outside employment and interest provisions of the Ethics Law. Section 3-103(a) of the Law bars an official or employee from having a financial interest in or being employed by an entity that is under his own or his agency's authority, or that has or is negotiating contracts with the agency (subsection (a)(1)(i)). It also prohibits any other employment that would impair the individual's impartiality or independence of judgment (subsection (a)(1)(ii)). While we believe that the Requestor's involvement with these investment properties would give rise to interest and employment relationships as contemplated by §3-103(a),1 it is our view that the circumstances presented here would not bring these transactions within either of the prohibitions of §3-103(a).

Thus, as to the sale transaction under the MPP Program, though the Requestor may be viewed as having an interest and employment relationship with an "entity" holding investment property, and as having an interest in the property itself until it is transferred, we do not believe that the entity or property is subject to the authority of or contracts with her agency. The final loan contract is clearly between the buyer and CDA, and the loan is not actually purchased by CDA until after closing and the seller is out of the picture. Nor is there an authority relationship here, even though the investment property entity is a party to this total transaction. The benefits of the program are directed primarily at the purchaser, and the seller of property is only indirectly subject to agency requirements.

In considering application of the Ethics Law to the HELP loan situation presented in the second inquiry, we note as a preliminary matter that individuals who hold mortgages as a result of real property sales have been advised, for disclosure purposes, that they hold a continuing real property interest in the property. Thus, the Requestor and her spouse would be viewed as having an interest in this property. Here again, however, it is our conclusion that this is not an interest in an entity that contracts with or is under the authority of her agency. Though the contract here would result in an encumbrance on the property that could potentially bring the Requestor into a relationship with her agency, the person who is a party to the contract and is bound to comply with agency requirements is the current owner of the property, an individual who holds it purely for a personal residence. In our view, this transaction does not result in a violation of §3-103(a)(1)(i) because the Requestor's interest and employment relationships are too remote, and they are in the entity that has the mortgage interest, and not an entity that is a party to the loan.

Nor do we believe that the Requestor's general involvement in these transactions presents an employment relationship that would be prohibited by the more general inconsistent employment provision of §3-103(a)(1)(ii). The transactions could be barred under this section if they result in a relationship that is viewed as impairing her impartiality or independence of judgment. In generally applying this section, we have not necessarily looked for actual existing conflicts of interest, but we have considered an individual's duties to determine whether there are any that would be expected to be impacted by private interests. In this regard, we note that the Requestor here does not get involved directly in loan decisions such as those that are presented or are likely to arise in these types of transactions.

Moreover, the Requestor actually holds a declining number of properties, and does not seem to be involved in a continuing way in any substantial real estate business. In fact, she has expressed the view that these sales are part of a process of closing out her real estate activities. We therefore conclude that the Requestor's real estate business is not so significant, nor her program involvement in loan transactions so substantial as to be viewed as inconsistent employment, and that these activities do not involve relationships that raise clear and serious concerns of an actual or apparent conflict of interest, as prohibited under §3-103(a)(1)(ii).

We also note that the Requestor has not been in any way involved in her official capacity in either of these transactions or discussed them with personnel in her Department. Nor has she used agency information or otherwise been involved in the private side of these transactions. The beneficiaries and primary parties in these situations are both private individuals not in any way connected to the Department, or apparently benefited in any way by the Requestor's official position in the agency. Under all of these circumstances, we advise the Requestor that the conclusion of these transactions would not result in a violation under the outside employment provisions of the Ethics Law. Nor would the situation as described to us raise issues under the disqualification, prestige or information provisions of the Law (§§3-101, 3-104 and 3-107). The Requestor, of course, should be aware that a HELP loan foreclosure could present a different set of circumstances that would require additional review, as she and her spouse (as holders of a first mortgage) could be more directly involved with the Department should the borrower default.

Herbert J. Belgrad, Chairman
   Reverend John Wesley Holland
   Betty B. Nelson
   Barbara M. Steckel
   Thomas D. Washburne

Date: January 29, 1985

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1 See our Opinions No. 84-27 and No. 83-27 for a discussion of our conclusion that property held for investment and commercial purposes results in an entity in which the individual may have both an employment and financial interest.