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 national average.
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 vacations."
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 two-family unit.
"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 credit."
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 health.
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 show.
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 testify.
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 executives.
"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."
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