Two More HUD/City Loan Conflict Cases

 A few days ago, I wrote a blog post about how several government officials in Wausau mishandled a conflict situation involving the purchase of property fixed up with an interest-free loan from HUD. Yesterday's The State of South Carolina covers two other HUD loan conflict situations in Columbia, which are being handled only a bit better.

In the first case, a HUD loan, administered by the city of Columbia (via an empowerment zone), was used by the mother of a Columbia council member to purchase an office building. Part or all of the building was rented to the council member's law firm. It was HUD that discovered the problem when it looked into how the loan was used.

Here's the empowerment zone's conflict of interest policy:

Any interested parties, including employees, committee members, and borrowers, may not receive any direct or indirect financial or personal benefits in connection with the approval and awarding of a loan.

Note that that very important "direct or indirect financial or personal benefit" language is there. That's the way it should be written. Otherwise, there are many ways to get around a conflict rule.

The mother says she got an informal opinion from a staff member of the state ethics commission that there was no conflict. It's good that the mother sought advice, but the daughter should have told her that the EC staff member would probably not know about the empowerment zone policy. Did the mother or council member give the EC staff member this information? In any event, disclosure to the empowerment zone itself would have been preferable. The loan committee would have looked at the conflict of interest policy and, hopefully, refused to make the loan.

The mother says she will repay the loan even though she does not believe it was improper. This is good. But what she says in her defense is not: "This has nothing to do with who we know or who we're related to. We're citizens of Columbia. ... and it didn't have anything to do with our daughter." Even if this were true, there's no one who would believe it. A council member's immediate family are not just citizens, and with a lawyer/councillor for a daughter, it's hard to believe the mother would have proceeded without consulting her.

The response of the city administration was on target:  all empowerment zone personnel will be fully trained in the conflict policy, and loan committee members and staff will have to sign a form verifying that they understand the requirements and will adhere to them. The city should have added that all applicants for loans must fill out a conflict form and promise to ask the staff if there is any doubt about a possible conflict.

As with the Wausau case, HUD wants the city to pay back the loan, in this case for the additional reason that it was not used for its primary purpose: to create jobs.

In the second case, discussed at less length in the article, it appears that another HUD loan was given to a company to purchase a restaurant, presumably to preserve the jobs there. The restaurant was purchased from another Columbia council member. Soon after, the company filed for bankruptcy and the empowerment zone lost the balance of the loan.

The council member disputes that there was a conflict of interest, because at the time the restaurant purchase closed, the purchasing company did not yet have the loan. Timing is everything in many parts of life, but much less so when it comes to conflicts. Without more facts, there's no way of telling, but it's hard to believe the council member knew nothing about the loan when he made the sale.

Again, sadly, it appears that no jobs were created, or even saved.

Robert Wechsler
Director of Research-Retired, City Ethics

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