IX. Gift Rule Provisions Applicable to Loans to Members, Officers, and Employees[1]

May 23, 1997

MEMORANDUM FOR ALL MEMBERS, OFFICERS, AND EMPLOYEES

FROM: Committee on Standards of Official Conduct
James V. Hansen, Chairman
Howard L. Berman, Ranking Democratic Member

Questions have arisen as to whether – under the gift rule that took effect on January 1, 1996 [currently clause 5 of House Rule 25] – Members and staff may accept loans from persons other than financial institutions, and if so, on what terms. The purpose of this memorandum is to advise that the Committee interprets the gift rule to allow the acceptance of a loan from a person other than a financial institution, provided that the loan is made in a commercially reasonable manner, including requirements that the loan be repaid, and that a reasonable rate of interest be paid.

Background. The reason that loans are a concern under the gift rule is quite obvious: depending on the terms, a transaction labeled as a loan may in fact constitute an impermissible gift to a Member, officer or employee, in whole or in part.[2] However, at least from the late 1970’s through 1995, the standard in effect in the House regarding loans to Members and staff was quite clear: a loan was not deemed a gift to the official provided that it was made in a commercially reasonable manner, including requirements for repayment and a reasonable interest rate. This standard, which included no restriction on the source of loans, was stated in an advisory opinion of the House Select Committee on Ethics issued on May 9, 1977, and it is stated as well in the most recent edition of the House Ethics Manual (102d Cong., 2d Sess. (April 1992)), on p. 32.

However, the gift rule that took effect on January 1, 1996 has created some uncertainty on this matter, because it does not explicitly incorporate the standard on loans set forth above. Instead, the rule defines the term “gift” to include any loan (clause 5(a)(2)(A)), and it provides that Members, officers and employees may accept

[o]pportunities and benefits that are in the form of loans from banks and other financial institutions on terms generally available to the public [clause 5(a)(3)(R)(v)].

The rule also includes a provision which allows the acceptance of “[a]nything for which the Member, . . . officer, or employee of the House pays the market value. . . . ” (clause 5(a)(3)(A)). The rule further provides (in clause 5(f)) that this Committee has sole authority to interpret the rule.

The Committee’s Ruling, and the Reasons for It. As stated above, the Committee is now announcing that it interprets the current gift rule – and specifically the rule’s “market value” provision quoted above – to allow the acceptance of loans from persons other than financial institutions, provided that they are on terms which satisfy the requirements which the Committee had previously utilized in evaluating loans: that is, the terms are commercially reasonable, including requirements for repayment and a reasonable rate of interest. Put another way, while the current gift rule clearly allows the acceptance of loans from financial institutions (on terms generally available to the public), the rule does not prohibit Members and staff from accepting loans from anyone other than a financial institution. The reasons that the Committee has decided to interpret the rule in this manner are as follows.

The plain meaning of the gift rule provision on loans – clause 5(a)(3)(R)(v), quoted above – is not that a loan is acceptable only if it is from a financial institution, but rather that a loan from such an institution is acceptable if on terms generally available to the public. The provision does not define the universe of acceptable loans.

Indeed, there are a number of other gift rule provisions under which Members and staff may conceivably accept a loan or other extension of credit, including the provisions allowing acceptance of things of value from relatives and personal friends (clause 5(a)(3)(C), (D)), and the provisions allowing acceptance of benefits offered to the public, or to a group or class in which membership is unrelated to congressional employment, or to members of an organization such as a credit union (clause 5(a) (3)(R)(i)-(iii)). Because the rule does not limit Members and staff to accepting loans from financial institutions, they may likewise accept a loan where they satisfy the requirement of clause 5(a)(3)(A) of the gift rule: that is, they pay “market value” for the funds borrowed.

The Committee also reviewed the legislative history of the current gift rule, and consistent with the above review of the rule’s terms, the Committee found nothing indicating an intent to restrict the source of loans to financial institutions. Furthermore, as noted above, as of the time the current gift rule was approved, the standard allowing acceptance of loans from persons other than financial institutions, on proper terms, had been a longstanding one in the House.[3] Thus to prohibit Members and staff from accepting loans from anyone other than a financial institution would be a major change in the governing standard, and the Committee is reluctant to effect such a significant change absent an indication that the change was intended.

In this regard, the Committee also notes that the provision of the current gift rule on loans from financial institutions – like a number of other provisions of the current rule – was drawn almost verbatim from the Executive Branch gift regulations. Thus it appears that this provision was included in the gift rule as a drafting convenience, and was not the result of a conscious effort to change the prior House practice regarding loans. It is also noteworthy that for the Committee to interpret the gift rule differently, so as to limit the source of loans to financial institutions, could have absurd results, such as that Members and staff could not accept loans from relatives (although, pursuant to the rule, they clearly may accept gifts from relatives), or could not utilize a credit card issued by a department store or gas station.

Finally, in the Committee’s view, where a loan to a Member, officer, or employee is made on commercially reasonable terms, and those terms are adhered to, he or she pays “market value” for the funds borrowed, and hence the loan is permissible under clause 5(a)(3)(A) of the gift rule. As the Office of Government Ethics observed recently with regard to the Executive Branch gift standards, “While the term ‘gift’ is broadly defined in the Standards . . . the term ought not to be understood as encompassing items or services for which the employee ‘pays the fair value.’”

The Need for Caution in Accepting Loans from Persons Other Than Financial Institutions. Whether a loan proposed to be made to a Member, officer, or employee is on terms that are “commercially reasonable” – and hence acceptable under the interpretation announced here – will depend on a number of facts and circumstances. Thus before entering into any loan arrangement with a person other than a financial institution, Members and staff should contact the Committee for a review of the proposed terms, and a determination by the Committee on whether the loan is acceptable under the gift rule. Those who accept such a loan without prior Committee consideration run a risk of being found in violation of the gift rule, and possibly other provisions of law as well.

It also bears noting that merely because a proposed loan would be from a financial institution does not necessarily mean that it is acceptable under the gift rule. A loan from a financial institution must be on terms generally available to the public in order to be acceptable under clause 5(a)(3)(R)(v) of the rule. However, loans from relatives (as defined in the Ethics in Government Act), as well as extensions of credit from credit card issuers on terms generally available to the public, are clearly permissible under other provisions of the gift rule and require no Committee review.

Any questions on this matter, as well as questions regarding any other provision of the gift rule, should be directed to the Committee’s Office of Advice and Education at 5-7103.