FDIC Chief Got Bank of America Loans While Working on Its Rescue

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. [Editor's Note: The FDIC also responded to this story in a Jan. 22 statement.]

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.