Sheila Bair, one of the chief regulators overseeing Bank of
America's federal rescue, took out two mortgages worth more than $1
million from the banking giant last summer during ongoing negotiations
about the bank's bailout and its repayment.
In the weeks between the closings on her two mortgage loans, Bair
met with Bank of America's chief negotiator in the bailout talks.
To avoid conflicts of interest, the Federal Deposit Insurance Corp.,
which Bair heads, prohibits employees from participating in "any
particular matter" involving a bank from which they are seeking a loan.
Bair did not seek or receive an exemption until last week, when her
agency gave her a retroactive waiver from the rules after an inquiry by
the Huffington Post Investigative Fund.
FDIC officials said there was no link between Bair's duties and her
mortgages. They also contend that even without the waiver Bair violated
no ethics rules. Moreover, the FDIC said, Bair received no preferential
treatment for either loan, paying interest rates at or above the
However, the circumstances surrounding the mortgage on Bair's house
in Amherst, Mass., raise questions about whether she and her husband
should have qualified for the terms they received.
Bair was teaching financial regulatory policy at the University of
Massachusetts in Amherst when President Bush appointed her to head the
FDIC in 2006. Her family rented a house in Washington until they
borrowed $898,000 from Bank of America in July 2009 to buy a $1.1
million six-bedroom home in the Maryland suburbs. Seven weeks later,
they borrowed $204,000 from Bank of America to refinance the
Massachusetts house as a second home.
Mortgage documents for that 14-room home include a provision, known
as a second-home rider, stating that Bair and her husband must keep the
house for their "exclusive use and enjoyment" and may not use it as a
rental or timeshare.
Yet the couple has been renting out part of the house since they
left for Washington, with Bair listing income from the "rental
property" in Amherst as between $15,000 and $50,000 a year on her most
recent financial disclosure form as head of the FDIC.
Banks generally consider loans on rental properties to be riskier
and charge more for them than for loans on second homes. For a $204,000
loan, according to Bank of America rate sheets examined by the
Investigative Fund with the help of a mortgage broker, closing costs on
a rental property could be $4,000 higher and the interest rate could
rise by a half-point.
Bair declined a request for an interview. Asked about the
second-home rider, Andrew Gray, Bair's spokesman, said that the fact
that Bair had renters at her Massachusetts home was "generally known"
and that the couple had disclosed it to Bank of America. [Read FDIC statement].
Gray said that after reviewing the mortgage documents, "Our legal
counsel does not believe it prohibits the rental arrangement in place
and which was disclosed to Bank of America. Chairman Bair's family have
used retained space in the house repeatedly for family visits and
In its official guide for lenders, Fannie Mae, the government-owned
corporation that buys mortgages and establishes underwriting
standards, states that second-home mortgages must be restricted to
"one-unit dwellings" and "must not be rental property." Bair's home is
listed by the Amherst town assessor as a duplex and is zoned as a
"It should have been refinanced as an investment property, not as a
second home, unless somebody really screwed up from an underwriter
standpoint," said Bonnie Hild, an underwriter who was given details of
the loan. Hild trains other underwriters and is a member of the
advisory board of the National Association of Mortgage Processors.
At the request of the Investigative Fund, a mortgage broker asked
two loan officers working at Bank of America if a borrower could
qualify for a second-home loan with a renter, using similar details as
Bair's loan involving a separate living quarters for the renters. Both
bank representatives said no. The loan would have to be priced higher
because it would be an investment property, they said.
Michael Bradfield, the FDIC's general counsel, said the discrepency
was not Bair's fault. "It may be a simple mistake by a local
representative of Bank of America," Bradfield said.
FDIC officials said Bair and her husband received a 30-year loan
from Bank of America at 5.62 percent, compared with what they said was
an average of 5.26 percent for all types of 30-year loans. They used
the loan to pay off a 15-year mortgage at 5.75 percent from a small
local institution, Florence Savings Bank.
The mortgage on the couple's primary residence in Chevy Chase, Md.,
was a jumbo loan, meaning it exceeded the $729,750 limit on home loans
that Freddie Mac and Fannie Mae will buy from lenders. The FDIC said
the 30-year loan came with a fixed rate of 6 percent, compared with a
national average at the time of 6.02 percent.
With tightened credit, there are few if any investors to buy jumbo
loans from banks, so the institutions have to hold onto the mortgages
themselves, tying up their cash. Several banking analysts said that
last summer Bank of America was one of a small group of lenders making
jumbo mortgages with only a 20 percent down payment.
On the Amherst loan, FDIC officials said Bair and her husband
received a 30-year mortgage at 5.62 percent, compared with what they
said was an average of 5.26 percent for all types of 30-year loans. The
couple used the loan to pay off a 15-year mortgage at 5.75 percent from
a small local institution, Florence Savings Bank.
Bank of America declined to discuss the second-home provision, the
jumbo loan or any aspect of the mortgages. "We do not comment on
anything involving individual customer information," said Dan Frahm, a
senior vice president at the bank's corporate headquarters.
A Role in the Bailout
A day after being contacted about the loans last week, Robert Fagan,
the FDIC's ethics officer, said he had done a review and - without Bair
asking - granted her a waiver from the rules retroactive to March 1,
2009. He said he chose that date as his best estimate of the earliest
point that Bair began seeking a loan. Her failure to request a waiver
last year was "probably a harmless error," Fagan said.
Fagan said that the waiver was likely unnecessary anyway, because he
now has reviewed Bair's record and determined that her activities
relating to Bank of America did not conflict with the ethics rules.
The rules state that "No FDIC employee may participate in an
examination, audit, visitation, review, or investigation, or any other
particular matter involving an FDIC-insured institution, subsidiary or
other person with whom the employee has an outstanding extension of
Fagan said he limited his review to "official action" taken by Bair
as chair of the FDIC's board. "We have discerned that she has not
participated in a particular matter involving Bank of America at the
time that she was negotiating a loan," Fagan said.
However, a review of congressional testimony, documents and news
accounts show that Bair and the FDIC played a significant ongoing role
last year in discussions and decisions involving the bank's financial
Bank of America, among the world's largest financial institutions,
received $45 billion in federal bailout money, the second-most among
banks. Its primary federal regulator is the Office of the Comptroller
of the Currency. The FDIC, which insures billions of dollars of its
depositary accounts, is a backup regulator that maintains full-time
examiners assigned to the bank.
Bair, a lawyer who formerly worked for the Treasury Department and
lobbied for the New York Stock exchange, has been a prominent player
among top officials dealing with the financial crisis. Last year she
shared the John F. Kennedy Profile in Courage award for her "early
warnings about the subprime lending crisis and for her dogged criticism
of both Wall Street's and the government's management of the subsequent
financial meltdown." At congressional hearings last week, she blamed
the Federal Reserve for failing to stop the predatory lending that
inflated the housing bubble.
In testimony to Congress last month, Bair recounted her role in
supporting federal assistance to Bank of America beginning in late 2008.
Beside the $45 billion in aid from the Troubled Asset Relief
Program, or TARP, the FDIC board voted in January 2009 to guarantee
more than $100 billion in risky assets held by the bank, she said. In
exchange the FDIC was to receive $1 billion in preferred stock.
In May, Bank of America asked to be released from the guarantee
program. After months of negotiations, the FDIC consented to terminate
its assistance in exchange for $92 million for the help it had already
provided. Bair's deputy signed the agreement on Sept. 21, 2009, records
Throughout much of last year the banking giant also was operating
under a private memorandum of understanding with regulators because of
concerns about the bank's leadership and its ability to manage risk,
according to a Wall Street Journal report. The arrangement began last
May and the bank had to meet conditions set by regulators, with
deadlines in July and August, the Journal reported. The FDIC would not
comment on whether it had a role in that arrangement.
By the summer, Bank of America also began pushing for the right to
pay back the TARP money and thus free itself from federal oversight of
executive pay and other matters. At one point Bair opposed the payback
because she said she didn't think the bank was healthy enough, the New
York Times reported. Other regulators disagreed, and the bank was
allowed to repay the money in December.
A ‘Meet and Greet'
On Aug. 11, 2009, between the closings on her two loans, Bair met
with Gregory Curl, then chief risk officer for Bank of America, the
FDIC confirmed. Curl was the key bank official in talks with the
government over the bailout and its repayment.
In response to a public records request, the FDIC redacted a
reference to the meeting from Bair's calendar, saying that matters
involving examination, operating or condition reports on a bank are
exempt by law from public disclosure. But Bair spokesman Gray said last
week that the meeting was only an "informal meet and greet."
Added Gray: "It is improper and wrong to suggest even the appearance
that this had anything to do with Chairman Bair's mortgages."
Frahm, the Bank of America vice president, declined to answer
questions about the meeting. "We do not comment publicly on our
interactions with regulators," he said.
FDIC ethics officer Fagan said he didn't know about Bair's meeting
with Curl. He said informal meetings do not fall under the ethics law.
In his initial interview with the Investigative Fund, Fagan was
asked in general about the agency's ethics rules. He said that any
members of the FDIC board -- including a chairman -- who applied for a
mortgage loan from Bank of America would have to disqualify themselves
from any particular matters involving that bank. Failure to do so could
lead to disciplinary action, he said.
When later asked specifically about Bair's loans, Fagan said she
could be involved in a range of activities involving Bank of America
without violating the rules.
For example, he said, Bair's testimony before Congress about the
FDIC's role in Bank of America's bailout does not qualify as a
"particular matter" involving the bank, because Bair was compelled to
In addition, he said, any advice or opinions she might have offered
to President Obama, Treasury Secretary Timothy Geithner or Fed Chairman
Ben Bernanke about issues affecting Bank of America would not violate
the ethics rules. Nor, Fagan said, would talking to staff members about
those issues or holding "meet and greets" with Bank of America
"I was asked if I would -- had I known she was applying for a loan
-- if I would have granted her a waiver in July. The answer was
absolutely yes," Fagan said. He said the waiver will be good "for the
remainder of her current career."