Tapping States for Backchannel Budget

Scofflaw U.S. Agency Taps States For Its Backchannel Budget

VENTURA, Calif. (February 4, 2022) – History is replete with cautionary tales about federal government enterprises with unchecked funding sources – that is, those outside the annual congressional appropriations process.

One alternately funded enterprise was nicknamed “The Little Green House on ‘K’ Street.” Harry Daugherty, President Harding’s attorney general, set up the organization to accomplish ad hoc goals. It became a den of corruption that led to the Teapot Dome scandal. A half-century later, H. R. “Bob” Haldeman, President Nixon’s chief of staff, set up a similar off-the-books enterprise called the “Townhouse Operation” – it set the stage for another notable off-the-books group called “The Plumbers.” It led to Watergate and the resignation of a president. A decade later, National Security Adviser Robert McFarlane set up an ad hoc enterprise funded by an adversary of the United States. It came to be called the Iran-Contra Affair.

It’s a sad fact – given time, government budgets hidden from congressional oversight invariably turn into slush funds; rogue enterprises become avenues for corruption.

Now, one more chimera can be added to the list. It was created back when the No. 1 program on television was “The Cosby Show.”

In 1989, in the wake of the Savings & Loan Crisis, Congress hastily passed a statute that spawned an enterprise known by the torturous name the Appraisal Subcommittee of the Federal Financial Institutions Examination Council. The federal agency’s mission would be to police the states as they policed local real estate appraisers through state occupational licensing.

But Congress gave the blob no federal funding, other than an initial federal outlay. Instead, it directed the tiny entity to commandeer state agencies for its annual budget. The thinking was that the states would dun occupational licensees for an extra fee to be passed back to the federal agency for its use. It proved to be a fatal flaw. The money has become a slush fund, and the agency has gone rogue.

It’s why the Spending Clause of the Constitution does not permit the practice of federal entities pressing states for their budgets. Congress alone controls the federal government’s purse strings. But, like Daugherty’s Little Green House on “K” Street, this particular entity relies on a different purse – one with no accountability.

The closest thing to a check on this organization is an annual report it must send to Congress telling the deliberative body what it has done the year before. This hasn’t been enough to keep the agency honest, and the reports are marvels of mendacity – comedy gold.

Consider:

• The federal agency is required by law to provide an annual grant to a private Beltway publisher – another chimera spawned by the statute – to defray costs in producing a code of conduct for real estate appraisers, but the amount is left vague in the statute. This vague wording has set the stage for abuse. The federal agency has provided more than $1 million in grants some years to the 14-employee 501(c)(3) publisher. Its long-tenured chief executive and a group of favored trustees then travel the world on junkets and host foreign delegations back in Washington. The publisher’s IRS filings show that during a recent eight-year period, it received $6.5 million in federal grants and parlayed that into $27.6 million in publishing revenue thanks to its unique franchise.

• For nearly a decade, the federal agency diverted $2.7 million in state grant money to the same publisher. This violated 12 U.S. Code § 3338. The money went to promote the publisher’s copyrighted standards via all-expense-paid trips for state workers to attend courses. Some of the diverted grant money and things of value were provided to vendors, cronies and other private persons. While receiving the diverted funds, the nonprofit publisher accumulated nearly $8 million in cash and publicly traded securities, its IRS filings show.

•  The U.S. agency has enforced 24 different versions of the private publisher’s copyrighted standards on the states while violating a key federal regulation, 1 CFR 51.1(f), and two federal statutes, 12 U.S. Code § 3336 and 5 U.S. Code § 553. The neglect has provided a monetary benefit for the tiny publisher for whom the federal agency’s executive director once worked as an employee. The executive director and deputy executive director then join the publisher’s trustees at weeklong retreats in winter playgrounds like Palm Beach, Florida; Pasadena, California; and Scottsdale, Arizona. Here is an example of how the federal agency pressures states to adopt always the most recent version of the private standards – in this document, it’s called the “2020-2021 edition of USPAP.” The agency references sections of the U.S. Code it violates and hopes the states won’t ask any questions. The open-ended enforcement paves the way for the publisher to sell rolling versions of its standards to state licensees at monopoly pricing.

• The agency recently handed $1 million to a course provider based in Lexington, Kentucky. It is run by a man whose LinkedIn page shows he is based in the United Kingdom. The group announced it would provide a portion of the proceeds to an organization that co-owns course materials with the Washington, D.C., publisher and promotes the publisher’s copyrighted standards.

• Representatives of the federal agency hold regular, closed-door meetings with industry officials and other private persons. These meetings are in violation of a federal open-meetings statute known as the Federal Advisory Committee Act.

• The anti-commandeering doctrine, reaffirmed by the U.S. Supreme Court in New York v. United States and Printz v. United States, prohibits a federal agency from commandeering state agencies, more specifically, from imposing targeted, coercive duties upon state officials.

• The federal agency’s coercion of state agencies has, in turn, led to scofflaw activities at the state level. It has put Washington State, California, Texas, West Virginia, Tennessee, South Carolina and others in a situation in which they must decide whether to comply with the federal agency’s demands or with their respective state laws. Those state agencies now openly violate their respective administrative procedure statutes.

Here’s how you can help.

Please forward this email to the Honorable Eugene Dodaro, Comptroller General of the United States and head of the U.S. Government Accountability Office, at dodarog@gao.gov. Urge him to initiate an investigation into the manner in which this scofflaw federal entity – the Appraisal Subcommittee of the Federal Financial Institutions Examination Council – neglects to perform its NPRM rulemaking duties pursuant to the Administrative Procedure Act and the Code of Federal Regulations, providing a benefit to a tiny Washington, D.C., publisher at the expense of a class of citizens. Also, please put the Legal Division of the Office of the Federal Register on notice by copying fedreg.legal@nara.gov.

Also, please forward this email to your U.S. representative to Congress and your two U.S. Senators.

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Jeremy Bagott

Certified General Real Estate Appraiser at Bender Rosenthal Inc

Jeremy Bagott is a real estate appraiser and former newspaperman. His most recent book, “The Ichthyologist’s Guide to the Subprime Meltdown,” is a concise almanac that distills the cataclysmic financial crisis of 2007-2008 to its essence. This pithy guide to the upheaval includes essays, chronologies, roundups and key lists, weaving together the stories of the politics-infused Freddie and Fannie; the doomed Wall Street investment banks Lehman and Bear Stearns; the dereliction of duty by the Big Three credit-rating services; the mayhem caused by the shadowy nonbank lenders; and the massive government bailouts. It provides a rapid-fire succession of “ah-hah” moments as it lays out the meltdown, convulsion by convulsion.

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